Local Initiatives Support Corporation (LISC) Toledo, a community development group, is defending the Community Reinvestment Act (CRA), a 30-year-old program to assist low- and moderate-income home buyers, which many are blaming for the mortgage meltdown.

CRA opponents, such as Loyola College professor of economics Thomas DiLorenzo, label CRA and other government-intervention efforts as accomplices in the recent financial debacle. Common among their claims is pressure to lend to unqualified buyers at subprime rates without adequate down payment or collateral.

DiLorenzo, a senior faculty member for the Ludwig Von Mises Institute, wrote an April 30 article titled, “The CRA Scam and its Defenders,” stating, “The myth that the CRA would not be harmful to bank-industry profits was hidden for years by the Fed-created housing bubble, which allowed for easy refinancing of all the bad debt.”

LISC Toledo senior executive director High Grefe, however, said CRA has been wrongly targeted and that subprime loans were also authorized by banks not covered by CRA.

The program merely requires certain lending institutions to make credit and other financial products available to consumers within communities where they take deposits.

“CRA says you can’t be discriminatory any longer in your lending practices, and it was passed at [about] the same time as the Home Mortgage Disclosure Act,” Grefe said. “The reason was a long-standing practice of systemically redlining, and redlining describes the activity of denying poor folks and people of color by virtue of their race and ethnicity access to credit, access to insurance and a whole host of things.”

Lending institutions complied, earning them favorable ratings by the Fed that facilitated future expansion, mergers and acquisitions. Banks also solicited existing home

owners to refinance through home equity loans at lower rates than their original mortgages.

As a result, according to an Oct. 3 article by Stan J. Liebowitz, research fellow at The Independent Institute, titled, “Anatomy of a Train Wreck, Causes of the Mortgage Meltdown,” government programs such as CRA that intended to boost home ownership, especially for minorities and low-income families, actually contributed to the meltdown of the housing-finance market.

“Although a seemingly noble goal,” he wrote, “the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise: intentional weakening of the traditional mortgage-lending standards.”

Yet Jerry Rubinger, LISC president and CEO, disagreed with the notion that CRA-inspired loans created a house-of-cards situation in the mortgage industry. He said lending institutions began offering “exotic” products, such as loans with no down payment or income verification required as well as “outrageously low” teaser rates that later “jumped” abruptly.

He equated pointing fingers at CRA to blaming the victim rather than the Fed, regulators and “unscrupulous mortgage lenders” knowingly lending to more-affluent homeowners living beyond their means.

“If you look around, the places that have the most extreme problem with defaults and foreclosures are places like California and Arizona and Florida,” Rubinger added, “And to a great extent, we’re not talking about low-income neighborhoods; we’re talking about subdivisions in areas outside of Phoenix and places like that, condos in Miami.

“I think there’s a great deal of evidence that CRA has been a very positive force in terms of the work that we do at LISC.”

This entry was posted on Thursday, November 6th, 2008 at 10:45 pm and is filed under Community.
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