CRA, Pro-Housing Government Programs, And The Housing Crisis

This post is a response to and rant based on commentary by Barry Ritholtz, sampled below:

Numerous conservative commentators previously have sought to blame the credit crisis and housing collapse in part on the Community Reinvestment Act, a relatively small program that had nothing to do with the abdication of good lending practices amongst financial institutions. Now, we see an attempt to paint HUD as the villain.

My problem with this meme is one of context: It ignores the reality of lending practices that had nothing to do with either the CRA or HUD at all. For example, the following loan types are independent of HUD, and were the primary cause of the current foreclosure wave and the root of the current credit crisis.

My problem with Ritholtz's problem of context... is one of context. Ritholtz looks at the CRA in isolation (perhaps those he criticizes are guilty of doing the same), but there is a wider problem here of extreme relevance: the CRA was just one of many hundreds of policy decisions and facilities that created a massive artificial bias towards home ownership.

The CRA itself is likely not a miniscule influence, though probably not directly, and in a way that is difficult to measure. Since the CRA involved punitive damages to violators guilty of "redlining" -- in a vague, quasi-judicial sort of manner, and penalties were indeed handed out -- it is likely that lenders began erring on the side of giving out additional loans they never would have made freely. Since money was easy, this was a no-brainer option. And to cover their butts, they charged higher interest rates -- sometimes punitively high, of course. I'm not saying it was ethical -- but certainly inevitable.

There is more than one imploded lender on the implode-o-meter list that was once sanctioned by HUD for redlining, only to quickly switch the other way and engage in subprime (or other forms of) "reverse" redlining.

But I do think the CRA hs to be taken in context. Here's just a sampling of some of the policies that the CRA combines with in a toxic brew. All of these are recent additions, so it shows that we've learned nothing and the trend hasn't changed:

• 120% refinancing and $15k personal-guarantee loans made to distressed borrowers at the GSEs
• 100% seller-financing at the FHA
• Reserve requirements at the GSEs lowered from 30% to 20%
• GSE portfolio caps lifted
• Conforming loan limits raised; applied to FHA as well as the GSEs
• PMI made deductible
• "FHAsecure"

Of course these are on top of the very existence of the GSEs and FHA and longstanding policies like deductible mortgage interest and the housing capital gains tax shelter.

If you don't think this is a "bias" and is necessary to "build and preserve wealth", try comparing it with gold ownership, the most reliable means of wealth preservation in history. In the US, gold is taxed even higher than the normal capital gains tax rate, at 28%. It is classified as a "collectible" (and houses and stocks aren't??) Yet since gold historically only holds its value in real terms, a gain in gold price is really just a sign of inflation. So the government taxes "gains" on no true increase in value for the most proven "investment" form of all time, but treats houses specially by exempting them from this inflation tax.

The bias here is pretty obvious.

In sum, with the housing complex, the government has put most people in a position where they are unlikely to preserve any wealth -- let alone increase it -- unless they put it in housing form.

And now even that has failed.