What Caused the Crisis? Financial Deregulation and Exotic Products vs. CRA-driven Homeownership to Poor Americans

The debate is heating up on the role of CRA (and its, ahem, "neo-Marxist" supporters like ACORN) vs. the role of Phil Gramm's Commodities Future Modernization Act, which helped grow the market in credit default swap from $900 billion in 2000 to $62 trillion market today.  (The chat over at Business Week is interesting, as is this exchange between Matt Taibbi of Rolling Stone and Byron York of National Review in NY Magazine.) [H/t: Mark Blyth and James Leighton, respectively.]  Ellen Seidman over at The New America Foundation:

The sub-prime debacle has many causes, including greed, lack of and ineffective regulation, failures of risk assessment and management, and misplaced optimism. But CRA is not to blame.

First, the timing is all wrong. CRA was enacted in 1977, its companion disclosure statute, the Home Mortgage Disclosure Act (HMDA) in 1975. While many of us warned against bad subprime lending before the turn of the millennium, the massive breakdown of underwriting and extension of risky products far down the income scale-without bothering to even check on income-was primarily a post-2003 phenomenon. To blame a statute enacted in 1977 for something that happened 25 years later takes a fair amount of chutzpah.

It's even more outrageous because of the good CRA clearly did in between. The 1990s were the heyday of CRA enforcement-for a variety of reasons including the raft of mergers and acquisitions that followed the 1994 Riegle-Neal Interstate Banking and Branching Act, increased scrutiny of lending practices by the media and activism by housing advocacy groups and tougher enforcement by the Clinton Administration.That period saw increased home mortgage lending to lower income households and in lower income communities by the banks and thrifts covered by CRA, and a steady increase in the homeownership rate, especially for lower income and minority families. (See The Joint Center for Housing Studies). In addition, there was significant investment in affordable rental housing, community facilities and broader community economic development, directly by banks and thrifts earning investment credit under CRA or indirectly through bank investment in Community Development Financial Institutions and other community-based organizations.