NEW YORK - A 31-year-old law

designed to put an end to "redlining" and other restrictive practices

that effectively shut poor and minority families out of home-ownership

and neighbourhood development is being attacked by conservative

commentators as a major cause of today's sub-prime mortgage mess.

The charge is being incessantly repeated by some of the so-called mainstream media as well as by right-wing bloggers.

For many years, local and regional banks were happy to take deposits

from people who lived in deprived neighbourhoods. A large proportion of

these depositors were members of racial minority groups.

But the banks did not extend credit to these depositors. Small

businesses did not receive finance. Mortgage loans were not made.

Supermarkets and other shops were not built, forcing residents to

travel miles for their household needs. Local jobs dwindled. Crime

rose. Riots broke out in some cities in the U.S. Whole neighbourhoods

fell apart.

Then, in 1977, when Jimmy Carter was president of the U.S.,

Congress passed the Community Reinvestment Act (CRA). The Act required

federally regulated and insured financial institutions to show that

they were lending and investing in their communities.

Initially, some local and regional banks opposed the measure.

To these, it represented unnecessary government interference in the

private sector and mired them in what they saw as a sea of additional

paperwork.

But over the years, these banks have largely become adjusted

to the requirements of the CRA. Today, most regard it as normal "cost

of doing business".

The key words here are "federally regulated and insured

financial institutions" -- which means commercial banks and thrift

organisations.

Not included were investment banks, mortgage brokers, and the

now-bankrupt non-bank lenders such as New Century Financial Corp. and

Ameriquest that underwrote most of the subprime loans that we now know

were so toxic.

The reason is that these private non-bank lenders were

regulated by 50 different state banking supervisors instead of the

federal government -- which effectively meant they were not regulated

at all.

And those who champion the CRA point out that the default rate

on CRA mortgages is far below the national average and many times lower

than the sub-prime mortgages written by unsupervised lenders.

Ellen Seidman, director of the U.S. Office of Thrift

Supervision under President George H.W. Bush (the current president's

father) and now an official at the New America Foundation, told IPS,

"In the 30 years since its enactment, CRA has generated major changes

in the manner in which banks and thrifts view and serve low- and

moderate-income communities and consumers."

Federal housing data shows it was the unregulated private

sector -- not the government or government-backed companies -- that was

responsible for the explosion of subprime lending at the core of the

crisis. According to the Federal Reserve Board, more than 84 percent of

the subprime mortgages in 2006 were issued by private unregulated

lending institutions and private firms made nearly 83 percent of the

subprime loans to low- and moderate-income borrowers that year.

SCROLL TO CONTINUE WITH CONTENT Never Miss a Beat. Get our best delivered to your inbox.







Nor does the timing correspond. Subprime lending offered

high-cost loans to the weakest borrowers during the housing boom that

lasted from 2001 to 2007. Subprime lending was at its height from 2004

to 2006.

Conservative critics of the CRA also claim that the Bill

Clinton administration pushed industry giants Fannie Mae and Freddy Mac

to purchase risky sub-prime mortgage loans made to people with known

poor credit histories.

These entities have operated since 1968 as government

sponsored enterprises (GSEs). This means that, although the two

companies are privately owned and operated by shareholders, they were

assumed to be protected financially by the support of the federal

government -- and now, both have been taken over by the government.

Fannie Mae was created in 1938 as part of President Franklin Delano

Roosevelt's New Deal. The collapse of the national housing market in

the wake of the Great Depression discouraged private lenders from

investing in home loans. Fannie Mae was established in order to provide

local banks with federal money to finance home mortgages in an attempt

to raise levels of home ownership and the availability of affordable

housing.

But Fannie and Freddie aren't lenders, to minorities or anyone else.

They purchase loans from private lenders who actually underwrite the

loans. In an effort to promote affordable home ownership for minorities

and rural whites, the Department of Housing and Urban Development (HUD)

set targets for Fannie and Freddie in 1992 to purchase low-income loans

for sale into the secondary market that eventually reached 52 percent

of loans given to low-to moderate-income families.

But these loans, and those to low- and moderate-income

families, represent a small proportion of overall lending. Between 2004

and 2006, when subprime lending was exploding, Fannie and Freddie went

from holding 48 percent of the subprime loans to holding about 24

percent. Among the reasons is that Fannie and Freddie were supervised

by far more robust standards than most of the unregulated players in

the private sector. Most of these unregulated players have now gone

bankrupt or are in serious legal trouble.

During the same three-year period, these same unregulated

private investment banks dominated the mortgage loans that were

packaged and sold into the secondary mortgage market. According to

McClatchy News Service, in 2005 and 2006, the private sector

securitised almost two-thirds of all U.S. mortgages, supplanting Fannie

and Freddie.

Ellen Seidman, who successfully presided over the thrift

crisis in the 1980s and 1990s -- the failure of 2412 savings and loan

associations -- testified to Congress that "Billions, perhaps

trillions, of dollars of credit and investment has come into these

communities spurred, incented, or directed by the Act and collateral

laws such as the Home Mortgage Disclosure Act (HMDA), various

anti-discrimination statutes, and obligations placed on Fannie Mae and

Freddie Mac. And while there was a time when those subject to CRA

complained bitterly about it, in general that time has passed."

But despite a substantial body of evidence to the contrary,

conservative critics of the CRA continue to blame it for the nation's

economic woes.

Conservative columnist Charles Krauthammer wrote recently that while

the goal of the CRA was admirable, "it led to tremendous pressure on

Fannie Mae and Freddie Mac -- who in turn pressured banks and other

lenders -- to extend mortgages to people who were borrowing over their

heads. That's called subprime lending. It lies at the root of our

current calamity."

And on FOX News, commentator Neil Cavuto remarked, "I don't

remember a clarion call that said Fannie and Freddie are a disaster.

Loaning to minorities and risky folks is a disaster."