Here’s what Paul Krugman had to say about the role the Community Reinvestment Act played in encouraging reckless lending by Countrywide Financial:
As others have pointed out, Fannie and Freddie actually accounted for a sharply reduced share of the home lending market as a whole during the peak years of the bubble. To the extent that they did purchase dubious home loans, they were in pursuit of profit, not social objectives—in effect, they were trying to catch up with private lenders. Meanwhile, few of the institutions engaged in subprime lending—such as Countrywide Financial—were commercial banks subject to the Community Reinvestment Act.
I’m in no position to judge the accuracy of that statement, as mortgage banking is far from my area of expertise. However a commenter named Patrick Sullivan sent me the following link from 1994, which casts a very different light on the relationship between Countrywide and the CRA. It is from a ABA Banking Journal article written by Steve Cocheo:
A group of lenders not subject to CRA–and more directly under HUD’s purview–are the nation’s mortgage banks. In mid-September, the Mortgage Bankers Association of America-whose membership includes many bank-owned mortgage companies, signed a three-year master best-practices agreement with HUD. The agreement consisted of two parts: MBA’s agreement to work on fair-lending issues in consultation with HUD and a model best-practices agreement that individual mortgage banks could use to devise their own agreements with HUD. The first such agreement, signed by Countrywide Funding Corp., the nation’s largest mortgage bank, is summarized on this page. Many have seen the MBA agreement as a preemptive strike against congressional murmurings that mortgage banks should be pulled under the umbrella of the CRA.
Read the entire link, it is quite interesting. I still think the GSEs were a far bigger problem than the CRA. But as we saw in the previous post, Krugman also seems to have underestimated the role of the GSEs.