Some conservatives have been blasting Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act, as the source of the mortgage crisis and subsequent financial meltdown. On Tuesday, October 7, Daniel Gross wrote a commentary on Slate titled Subprime Suspects in which he names (with quotations so they can’t claim otherwise) some of the people responsible for this: John McCain, Charles Krouthammer of the Washington Post, and Neil Cavuto of Fox Business. Gross’ proposition in his Slate piece is that, when Cavuto says “Loaning to minorities and risky folks is a disaster.”, Cavuto is blaming the poor and brown among us for the financial meltdown. And if that’s not racism, Gross doesn’t know what else it is.
Unfortunately, the general tone of Gross’ commentary is a bit too confrontational in order to convince most non-liberals that he’s right (even though, if you can get past the tone, he clearly is). That’s where a new piece (Private sector loans, not Fannie or Freddie, triggered crisis) out of McClatchy comes in.
Federal Reserve Board data show that:
- More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
- Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
- Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.
That law would be the aforementioned Community Reinvestment Act (CRA).
Furthermore, the article goes on to show that, while Fannie and Freddie were a small part of the problem, the mortgage failure actually happened as Fannie and Freddie were reducing their holdings of subprime mortgages by a factor of 2, from 48% to 24% between 2004 and 2006. In fact, in 2005 and 2006, private investment banks stopped using Fannie and Freddie for 2/3rds of all the mortgages they initiated, preferring instead to package them into questionable mortgage-backed securities. And now about 70% of all mortgages are in this secondary, non-Fannie or Freddie market.
Furthermore, the article shows that not only were Fannie and Freddie not pressuring banks, they were prevented from their regulator, the Office of Federal Housing Enterprise Oversight (part of the Executive Branch), from effectively competing against the private securities.
As far as conservative attacks on the CRA, those hold even less water than the attacks on Fannie and Freddie. The article points out that private investment banks, non-bank lenders, and the mortgage brokers who originated the subprime loans aren’t subject to the CRA rules – only commercial and thrift banks are. Instead, state regulators were responsible for monitoring mortgage brokers and, in states with extremely lax regulation like Colorado, huge numbers of subprime loans were originated. And two members of the Federal Reserve have found that CRA loans were very responsible loans that commercial banks made money off of, not lost money.
Daniel Gross calls the conservative attack on Fannie, Freddie, and the CRA racist and wrong. McClatchy calls the charges lies. While the McClatchy approach will probably win more converts, it’s clear that bigots like Rush Limbaugh are using racist language in an attempt to win political points. Real conservatives who don’t want to become extraneous should step forward and call for a stop to the lies and race baiting.