Subprime Scandal: The Financial Crisis Inquiry Commission was set up to sort out the mortgage mess. But it's merely setting us up for another disaster by circling the wagons around the culprits.
The Democrat-led panel has put out a preliminary staff report defending the Community Reinvestment Act against charges the banking rule encouraged risky lending to boost homeownership in communities of color. But the studies the report cites are howlingly flawed and biased.
One is by a couple of Fed economists who argue that only 6% of subprime mortgages in 2006 were made to CRA-qualified borrowers or neighborhoods by CRA-regulated banks.
But that stat is misleading, since it doesn't include subprime loans - or securities - bought by CRA-covered banks. Mortgages originated by independent mortgage companies can be bought by banks to get CRA credit. Nor does the study include the billions in public commitments big banks made to lend to low-income and minority households to buy off Acorn and other CRA lobbyists.
The commission cites a report by CRA booster Center for Responsible Lending as evidence. And the center is hardly an impartial observer.
"The foreclosure crisis - and the resulting economic crisis - was caused by reckless and predatory lending practices and toxic financial products, not by the Community Reinvestment Act, Fannie Mae and Freddie Mac, or any other policy goal aimed at increasing homeownership," the center argues in testimony before the commission. The crisis "occurred for one reason and one reason only: for mortgage brokers, lenders and investors to make money."
In other words, the private sector is to blame - which seems to be the commission's premeditated conclusion.
Yet buried inside the center's own biased report is the admission that delinquency rates on loans to CRA's uncreditworthy borrowers were "slightly higher" than loans to prime borrowers with good credit.
Then there's the study submitted by UC-Berkeley economist Dwight Jaffee, a friend of Commission Chairman Phil Angelides, former head of the California Democrat Party. Predictably, his 25-page paper concludes that the CRA had no real role in the crisis, even though the anti-bank redlining regulation was strengthened and enforced like never before starting in 1995.
"I find no evidence that CRA incentives played a significant role in expanding high-risk lending during the housing bubble," Jaffee asserts. What about the affordable-housing quotas HUD slapped on Fannie Mae and Freddie Mac? They were "secondary to profits" as a factor motivating their investments in high-risk mortgages, Jaffee advised the panel, which will use his study as a baseline for future discussion and findings.
Nowhere in the report does he address the key underlying cause of the easy subprime credit bubble: government pressure to bend underwriting rules. This was central to both the Clinton and Bush administrations' campaigns to boost minority homeownership.
"Flexible underwriting" was codified as part of the new CRA mandates. Banks that didn't bend their rules to qualify poor and minority loan applicants with bad credit didn't pass the stricter CRA lending test enforced by bank examiners. Flexible lending soon became the industrywide norm, adopted by CRA-covered banks and non-covered independent mortgage companies alike. Fannie and Freddie became models of underwriting "flexibility."
This is intellectual dishonesty at its worst. The evidence is clear the subprime bubble was fueled by government-mandated overinvestment in high-risk, low-income areas greenlined by Washington social engineers and bank regulators. We will never solve any problems if we can't - or won't - see what the problems are.
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