Michael Rubinger, CEO of the Local Initiatives Support Corporation, issues the following rebuttal to the Wall Street Journal's 9/22/08 editorial blaming CRA for the subprime meltdown.
In the finger-pointing race that has accompanied debate about the economic rescue plan, everything from short-selling to monetary policy has been held culpable. Your editorial, “The Mortgage Fable” (September 22, 2008), would like to do the same with the Community Reinvestment Act (CRA). Unfortunately, the facts just don’t support it.
To be sure CRA is not perfect. We think it could be more flexible in some ways, just as some banks do. But it is by no means the enveloping black cloud that has shrouded the credit market. Indeed, your analysis ignores CRA’s significant and far-reaching value in order to make it a scapegoat for broader economic excess.
First, your basic characterization of CRA is fundamentally flawed. CRA does not compel banks to lend to poor borrowers who have little ability to pay back those loans. That would benefit no one. It does, however, require them to lend and invest in the communities in which they take deposits. As such, it has helped to remedy a long-standing problem in which qualified borrowers in low-income areas had no access to credit.
Over the last 20 years, that approach has clearly been successful. It has helped tens of thousands of low- and moderate-income Americans find affordable homes to buy and rent, and in the process proved that the vast majority are perfectly reasonable credit risks. Consider, for instance, the city of New York’s New Housing Marketplace Plan, designed to help low- and moderate-income residents buy their own homes. The Local Initiatives Support Corporation (LISC) has been a key partner with the City to help more than 17,000 families take advantage of it. Guess how many of those loans have ended up in foreclosure? Five. That’s right. Five. As it turns out, when you underwrite appropriately—and better still, offer first-time homebuyers adequate financial counseling so they understand the terms to which they are committing—they do quite well.
Second, your editorial fails to mention that affordable housing has over the years been a profitable line of business for most lenders, even beyond subprime. It’s tough to rail against CRA for driving losses in lower income communities when so many institutions have long made money in those same areas. The current meltdown is not a verdict on the efficacy of lending to qualified low- and moderate-income borrowers. It’s a reflection of the decisions some financial institutions made to maximize gains at the expense of sensible risk management.
And third, let’s not kid ourselves: CRA has never been the driving force behind subprime lending. In fact, most subprime loans were not made by CRA-regulated organizations. Subprime exists largely because of the significant profit margins those loans once generated. There are plenty of more conventional ways for banks to meet their CRA goals and support the homeownership aspirations of qualified low-income borrowers. They have never needed subprime to do that.
From a press release from the organization today.
What CRA has done over the last three decades is help remedy a long-standing problem in which qualified borrowers in low- and moderate-income communities had little access to credit. It has helped tens of thousands of lower income residents find homes to buy and rent, and in the process proved that the vast majority of them are perfectly reasonable credit risks.
Consider, as example, New York City’s New Housing Marketplace Plan, designed to help low- and moderate-income residents buy their own homes. LISC has been a key partner with the City to help more than 17,000 families take advantage of it. “Guess how many of those 17,000 loans have ended up in foreclosure?” Rubinger asked. “Five. That’s right. Five. As it turns out, when you underwrite appropriately—and better still, offer first-time homebuyers adequate financial counseling so they understand the terms to which they are committing—they do quite well.”
CRA has been safe, sound and profitable for the financial institutions involved. “To assert otherwise is just patently false,” Rubinger said.