President Trump is considering ending the CRA.
The CRA, or Community Reinvestment Act, is a piece of Jimmy Carter-Era legislation, passed by a Democrat-majority Congress, and later doubled-down upon by none other than Bill Clinton.
At the core of the CRA is a Democrat-pushed policy to “end lending discrimination”. Sounds egalitarian. How is it done? It’s done by forcing banks to lend to inner-city minorities and other residents, who normally couldn’t or can’t afford to borrow money. Of course, banks weren’t lending to those people, not because of “redlining” as race-baiting Democrats are fond of accusing, but because they often had bad credit or didn’t have sufficient income to qualify for a loan. They didn’t pay their bills and nobody wanted to lend them money. Pretty simple.
So Democrats found a way to buy votes by claiming credit scores are discriminatory. So are IQ tests, apparently. And scarce in Congress.
The CRA changed all that in 1974 by forcing the banks to lend and thereby bend their strict credit policies. The banks balked at the idea, Democrats came to the rescue and used the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Company (Freddie Mac)as a taxpayer-funded repositories to buy bad loans off the banks’ books. Banks got the money back and lent it again for more lending fees. That debt was then rubber-stamped as being “AAA” by the rating agencies (Moody’s and Standard and Poor’s), since the loans were now being repackaged and offered by the government agency. Fannie and Freddie took fees for re-originating and securitizing the mortgage pools as securities offered by Wall Street to investors. Investors, mutual funds, pensions, and governments clamored for these bonds, as they were rated “AAA”—the highest safety and quality rating available.
But of course those pools of mortgages that backed the bonds had lots of problems. Many of the homeowner-borrowers didn’t have the money to pay back the loans. Many of the borrowers didn’t care to pay the loans and walked away.
But for a while, as long as real estate prices kept climbing, and credit was available, that was ok. The trouble was masked for a period of time during the Reagan economic boom— which lasted 30 years—because in a rising real estate market, people could keep refinancing and take money out.
But as the economy slowed down at the end of the cycle and employment contracted, and as unemployment numbers grew, it became apparent that the Emporer had no clothes. The music was stopping on this Democrat-devised game of easy money musical chairs and it became increasingly clear not everyone would find a place to sit.
The CRA first destroyed our Savings and Loans while scamming S&L cronies like Lincoln Savings and Loan (affiliated with John McCain) got bailed out. Congress created the Resolution Trust Corporation with taxpayer money and auctioned off the very valuable assets of our many Savings and Loan institutions to a few well-heeled and lucky low-balling bidders.
The flawed legislation remained largely intact, but the economy recovered, and Bill Clinton actually expanded the CRA, allowing banks to make loans with no downpayment, no paperwork, no credit scores, no proven ability to pay, and they could now lend more than the property was worth. What could possibly go wrong?
Some members of Congress and some smart people on Wall Street saw the handwriting on the wall and vegans to sound a warning. Rep. Richard Baker of Louisiana convened a panel of experts (of which I was one) in NY to determine what legislation they could create to prevent total collapse of our banking system. The panel advised Baker to write and pass a rule calling for the audit and possible liquidation of Fannie Mae and Freddie Mac. Baker proposed the legislation in the House and Elizabeth Dole proposed it in the Senate. George Bush indicates he would sign it if passed. Both were blocked from a vote by Democrat Barney Frank in the House and Democrat Chris Dodd in the Senate. That was in 2002.
Finally, six years later, in 2008, the chickens all came home to roost. All those bad loans created under the CRA nearly wiped out all the National Banks and Federally-guaranteed depository institutions, along with wiping out many large, mid-size, small, and boutique brokerage and lending firms, and taking some pensions and state and local governments with them.
Democrat cronies got very, very rich in the process, as the TARP money found its way into private hands while taxpayers and private
investors suffered, and banks became bigger and more centralized, as politicians picked and chose exactly who would survive and rule.
They pulled it off, made billions, and the US taxpayer paid for the bailouts.
Now Trump is pulling the plug so it doesn’t happen again. Bravo.