At the Root of the Subprime Mess
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In his Sept. 26 op-ed column, Charles Krauthammer blamed the Community Reinvestment Act (CRA), the 1977 federal law that has facilitated the flow of more than $1.5 trillion in private capital to underserved communities in the United States, for pressuring Fannie Mae, Freddie Mac, banks and other lenders to offer mortgages "to people who were borrowing over their heads."
It's Mr. Krauthammer's logic that is underwater here.
It wasn't the CRA that created the subprime mess but the proliferation of unregulated mortgage originators during the housing boom, financed in part by the government-sponsored enterprises Fannie Mae and Freddie Mac. As House Financial Services Committee Chairman Barney Frank (D-Mass.) stated, "Most high-cost loans were originated by lenders that did not have a CRA obligation and lacked federal regulatory oversight."
CRA lending by leading national banks involves loans that help people with low or moderate incomes buy homes of high quality and lasting value, homes that remain affordable.
By contrast, Fannie and Freddie didn't have to be led to the water to drink; they ran. The two were determined to thwart the spirit, if not the letter, of a 1992 federal law that permitted them to take "less than the return earned on other activities" to assist "mortgages on housing for low- and moderate-income families."
Instead of taking less of a return, Fannie Mae and Freddie Mac decided to take more of a return on affordable housing by issuing more than $400 billion in debt to finance higher-cost, higher-yield subprime mortgages, helping to fuel the subprime feeding frenzy.
Ironically, Fannie Mae and Freddie Mac were rewarded for their efforts by a lax regulator. The Department of Housing and Urban Development, which oversaw Fannie and Freddie's annual affordable-housing goals, allowed them to count triple-A-rated securities backed by higher cost, subprime loans, as meeting their "affordable housing" goals.
The CRA isn't the problem. It's been a critical part of the community and economic development solution for 31 years.
JUDITH A. KENNEDY
President and Chief Executive
National Association of
Affordable Housing Lenders
Washington
