- The Washington Times - Monday, September 19, 2011

When the government is directly responsible for irresponsible behavior, should it then sue over the consequences?

A decade ago, Sen. Phil Gramm, chairman of the Senate Banking Committee, called the Community Reinvestment Act (CRA) “a vast extortion scheme against the nation’s banks.” Signed into law by President Carter in 1977 in response to complaints that banks were “redlining” inner-city neighborhoods, the CRA morphed into a hammer to coerce lenders to make risky loans to borrowers who were not creditworthy. It was instrumental in creating a vast housing bubble that would lead to an economic collapse.

Ignoring the culpability of the CRA, Fannie Mae and Freddy Mac in the subprime mortgage crisis, the federal government is suing financial institutions, including 17 large banks, for up to $30 billion in an attempt to recover money lost in the collapse of the housing market. This ranks as the ultimate hypocrisy. Government policy was at the root of the problem, and a lawsuit shaking down the banks will only further weaken fragile institutions.

The Community Reinvestment Act was responsible for the creation of lax lending standards or “subprime” loans. The risky standards began in targeted neighborhoods and income levels, as Congress legislated. However, those new guidelines spread throughout the mortgage market, making easy credit available to both modest homebuyers and those upgrading to “McMansions.”

The CRA was relatively benign under the Reagan administration, which did not implement it with a heavy hand. Banks just needed to demonstrate that they were making an effort to meet the needs of underserved communities to get a satisfactory CRA rating. However, the Clinton administration, promoting a policy that “every American should own a home,” dramatically changed the regulations, coercing lenders into achieving mandated numerical targets. Banks were rated on outcomes; how successfully they achieved the lending goals of the CRA became a criteria in granting requests for new branches and bank mergers.

The Clinton administration also encouraged community-activist groups to provide the government with “comments” that would influence a bank’s CRA rating. The intervention in the CRA review process - or even the threat of it - led banks to commit huge amounts of money to groups such as ACORN (Association of Community Organizations for Reform Now) to parcel out to mortgage seekers. ACORN protesters showed up at banks and at bankers’ homes, using intimidation tactics to force credit standards to be lowered for low-income and minority customers.

Pushed by the CRA, banks arranged with these community groups to accept no-down-payment loans to overextended buyers, who were required to provide little or no documentation of creditworthiness or ability to pay. These banks expanded their lending from “redlined” neighborhoods, as intended by the original law, to low-income people anywhere.

Bankers recognized that they were assuming higher risk. But who among them would be willing to expose their families to ACORN protesters on their front lawns or their institutions to the wrath of regulators who controlled their ability to expand by protesting the effects of legislation that purported to address civil rights?

Throughout the 1980s, Fannie Mae and Freddie Mac were reluctant to securitize high-risk loans. However, faced with the charge from ACORN and the Clinton administration that Fannie’s and Freddie’s high lending standards stood in the way of the new lending programs, the two government-sponsored enterprises agreed to back billions (and ultimately trillions) of dollars’ worth of “affordable” mortgages granted to individuals who didn’t qualify under traditional standards. The risk and ramifications of nonperforming loans shifted from the mortgage underwriters to the government and, ultimately, to private investors and the taxpayers.

The New York Times reported that with Fannie’s move toward the subprime market, “[It] is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings-and-loan industry in the 1980s.”

The government should be held accountable for pushing financial institutions to lower their credit standards and make high-risk loans that ultimately led to default. It also should be held accountable for lowering the standards of Fannie Mae and Freddie Mac and virtually eliminating the fiduciary duty or risk to loan originators.

While profit-motivated financial institutions certainly became willing accomplices, legislative, executive and administrative decisions were the enablers encouraging irresponsible lending. It is absurd for the government perpetrators to sue the banks for the mess government itself initiated.

Ellen Sauerbrey was minority leader of the Maryland General Assembly and a two-time Republican nominee for governor.