Magazine article American Banker

Letter to the Editor: Keep Government out of Lending

Magazine article American Banker

Letter to the Editor: Keep Government out of Lending

Article excerpt

Byline: Eric Grover

To the Editor:

In "How to Shape the Next Version of CRA" [Oct. 31, page 11], Jennifer Tescher argues for expanding the government's role in credit allocation.

Whoa! The government caused the gutting of mortgage credit standards and housing inflation, which were behind the huge increase in borrowers unwilling or unable to meet their payments. That precipitated the credit crisis.

By buying subprime mortgages on a massive scale, the government-sponsored enterprises Fannie Mae and Freddie Mac facilitated banks' meeting CRA bogeys and purposefully eviscerated credit standards. Moreover, if Fannie and Freddie had not had implicit (and now explicit) government backing, they would never have been able to acquire millions of subprime mortgages.

The CRA was intended to push banks to make loans to the poor and minorities they otherwise wouldn't. The Clinton administration gave teeth to banks' affirmative obligation to lend to high-risk borrowers. If they didn't kowtow to community organizers in making risky loans, new branches and M&A would be blocked. Former Senate Banking Committee Chairman Phil Gramm observed that the Clinton administration turned the CRA into a vast extortion scheme against America's banks.

However, notwithstanding these efforts, more non-CRA than CRA lenders' mortgages were to low-income borrowers.

The government's assault on credit standards picked up steam in the 2000s. Fannie's and Freddie's acquisition of subprime, alt-doc loans and home equity lines increased from 15% of mortgages in 2001 to 37% in 2004. Securities collateralized by subprime mortgages soared from $18.5 billion in 1995 to $507.9 billion in 2005.

In 2004, Congressman Barney Frank dismissed suggestions that a problem was brewing in Fannie and Freddie. Instead, he worried they weren't being loose enough. …

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