Housing advocates rushed this week to the defense of the Community Reinvestment Act (CRA).
Conservative commentators from columnist Ann Coulter to economist Stan Liebowitz have blamed the home loan foreclosure crisis on big government programs like the CRA, a federal law that calls on banks to meet the needs of the communities in which they operate, including low- and moderate-income neighborhoods.
However, the CRA requires home loans made in these neighborhoods to be “consistent with safe and sound banking operations,” according to the Federal Financial Institutions Examination Council, which oversees the CRA.
“Safe and sound” is hardly the description of a subprime adjustable-rate mortgage. Three-quarters of all subprime home loans were made by institutions like Countrywide Financial and Ameriquest Mortgage Co., which had no obligations under the CRA, according to analysis from the National Community Reinvestment Coalition (NCRC).
“People are using the opportunity to attack a law that works quite well,” said NCRC President and CEO John Taylor.
The latest attacks on the CRA are worrisome to affordable housing advocates—in particular for developers that build affordable rental apartments using federal low-income housing tax credits (LIHTCs).
The banks that invest in LIHTCs to meet the requirements of the CRA are some of the few buyers left. As the country slides toward recession, few companies have dependable profits that they need to offset with tax credits. Also, the mission-oriented investors that once bought more than a third of the available LIHTCs—Fannie Mae and Freddie Mac—have left the market.
For now, even with the capital markets nearly frozen, banking institutions continue to make investments to meet the requirements of the CRA, which they need to do in order to merge with other banks or open new branches.
“You kind of expect a certain amount of absurd political finger-pointing,” said Gene Sperling, senior fellow for the Center for American Progress Action Fund, during a conference call with reporters. Sperling served in the Clinton administration as national economic adviser and director of the National Economic Council.
He called it wrong and “most offensive” to blame the financial crisis on low-income Americans who wanted a chance of homeownership.
Sperling and other CRA defenders said the financial mess is the result of recklessness on the part of financial institutions and a philosophy of deregulation.