Fact Checking Conservative Tabloid Media

Media Matters - Media conservatives baselessly blame Community Reinvestment Act for foreclosure spike:

An excerpt from the The O'Reilly Factor:

"...They say, 'Well, this is a failure of the markets. Oh, this is about greed on Wall Street.' And Bill, the problem here is government intervention in the free markets. 1995, when Bill Clinton decide to tell, you know, [then-Treasury Secretary] Robert Rubin to rewrite the rules that govern the Community Reinvestment Act and push all these institutions to lend to minority communities, many were very risky loans. That was a noble idea, perhaps, but that certainly wasn't following free-market principles. This big pressure on institutions to dole out money and these risky loans started this whole ball rolling at Fannie and Freddie..."

Eric Boehlert and Jamison Foser who collectively make up the County Fair Blog on Media Matters respond:

"...In fact, the federal Community Reinvestment Act -- enacted in 1977 -- applies only to depository institutions, such as banks and savings and loan associations. In testimony before the House Financial Services Committee, Michigan law professor Michael Barr stated that while problems in the subprime lending industry were a driving force behind the housing crisis, he estimated that only 20 percent of subprime mortgages were issued by depository institutions under the CRA..."

As a former credit analyst and mortgage counselor my understanding of the credit crisis is that during the early to mid nineties banking executives realized that they had essentially run out of new customers for their loan products. Their response to this scenario was two fold.

1. They aggressively begin to push refinancing and home equity lines to consumers with marginal credit. Mortgage brokers and mortgage bankers became the foot soldiers of this strategy targeting consumers that they felt would fall for such offers. Oftentimes, the victims were elderly home owners either with no debt on their homes or who were a few years away from paying off their mortgages. So what would happen is that some elderly person on a fixed budget who'd always wanted to get the hole in the roof repaired but never had the extra money to do it would get a letter in the mail from abc contractors. The letter would read something like, "we can fix your roof and on top of that we can get you some cash back." When the homeowner called that contracting company they ended up taking out a high interest rate loan against the house to pay for the inflated repair bill. Two years later the same mortgage broker that dealt with that homeowner's contractor calls to say, "guess what? We can lower your mortgage rate!" But what they dont tell the homeowner is that the back end fees on the loan will eat up most or all of the equity. Now the homeowner has refinanced themselves into a new loan that might now be greater than the amount of the home's actual appraisal value.
   
2. In order to continue financing this risky industry what the banking industry did was almost ingenuous. They got together with the actuaries, number crunchers, and statisticians to devise a way to show that these loans actually represented "good paper". They succeeded in doing this by pooling tons of mortgage notes together-such that you had loans of all credit grades mixed together, with only slightly more good credit loans than bad credit loans. Then they said that because of this plus the fact that the loans were secured by real property that each pool of loans could therefore be "rated" as A paper or A+ or whatever. This looked like easy money to be made on the part of the institutional investors, municipalities, educational funds, and overseas governments that bought the loans.

That is my very generalized explanation of what happened. Of course, once the distressed homeowners started defaulting in masse, America's home values slowly began to drop. Meaning that the investors who'd bought the securitized loan pools ended up finding that their security had dropped in value to less than what they purchased the loans for. Then they stopped buying the paper, while simultaneously demanding their money back.