Don't Blame the Victims

Folks, I try not to get strident. I try not to YELL! I try to remain calm.

No more my friends.

There is a move, among certain circles, to lay blame for the credit crunch and the $700 billion bailout at the feet of African Americans and other minorities who have been given home loans over the past few years. Most of it based on a program started more than 30 years ago called the Community Reinvestment Act (CRA). It's one of the most disgusting and reprehensible things I've ever heard coming out of Washington. And as we all know, there have been a lot of disgusting and reprehensible things coming out of Washington. So the bar is pretty high.

But Congressperson Michele Bachmann of Minnesota managed to clear that bar last week with room to spare. "The Clinton administration turned Freddie and Fannie into a “semi-nationalized monopoly,” Bachmann argued.

Specifically, that administration decided to make loans through the Community Reinvestment Act “on the basis of race and often on little else.” Bachmann also took the time to read into the congressional record an over the top screed written by Terry Jones of Investor's Business Daily that advances the notion that this whole thing is the fault of poor and minority home buyers.

As the kids say, OMG.

Look, I'm a mortgage guy. I think we should all be turning heaven and earth to make sure that everyone who can own a home owns a home. There I said it. Sue me.

Expanding loan programs aimed at assisting low and moderate income home buyers is a good thing. Blaming the CRA for the current mess we're in is racist and dumb. Business Week's Aaron Pressman does a much better job than I explaining just how silly it is to lay this on the CRA. And with a lot less yelling.

The fictional President Jed Bartlet of television's "The West Wing" used to say, "Show me numbers". Okay, here are some numbers. 80% of those loans that are going bad were originated by mortgage lenders not covered by the CRA. So I guess we can say that bad CRA loans make up a small fraction of the problem, but I even think that's a stretch.

While we're at it, can we stop turning Fannie and Freddie in to the fall guys for all this? Yes they made mistakes. They reached above and beyond their original charter. But they aren't all bad. How about we do away with Fannie and Freddie, get rid of our mortgage backed securities (MBS) markets. Just don't come complaining to me when fixed rates go from their current levels of around 6% to 8%.

And for the record, most of those loans that are going bad? They aren't the standard documentation, prime mortgages that make up the overwhelming bulk of Fannie and Freddie's portfolio. The loans that are going bad are Option ARMs and sub-prime deals that Fannie and Freddie are nowhere near. Just look at the write downs that JPMorgan Chase did when they bought Washington Mutual. WAMU's $60 Billion prime portfolio, tiny write downs. WAMU's $60 Billion Option ARM portfolio? Huge write downs. Rant over.