The Congressional Record is a unique source of public documentation. It started in 1873, documenting nearly all the major and minor policies being discussed and debated.
“PREDATORY MORTGAGES AND FORECLOSURES” mentioning the Federal Reserve System was published in the House of Representatives section on pages H5286-H5293 on May 6, 2009.
The publication is reproduced in full below:
PREDATORY MORTGAGES AND FORECLOSURES
The SPEAKER pro tempore. Under the Speaker's announced policy of January 6, 2009, the gentleman from Missouri (Mr. Cleaver) is recognized for 60 minutes as the designee of the majority leader.
Mr. CLEAVER. Mr. Speaker, when Barack Obama was sworn in as the 44th President of the United States, there were a number of statements that were subliminally made to the Nation and, indeed, to the world. And one of the statements was that we, as a Nation, had moved significantly from the days of not only chattel slavery but even the days of Jim Crow and the bitter segregation that enveloped the entire United States.
I can remember growing up in Texas, in Wichita Falls, Texas, and my father purchased a home in what was then, very clearly, what was known as a white neighborhood. And when my father purchased the home across the street from, I think, a shopping center that was going to be built, a strip shopping center, he had to move the home from its location to the east side of the tracks, where the African American community lived.
He purchased the home, hired a moving company that moved homes, and the home in which my father lives in today, the home in which I and my three sisters grew up in now stands at 818 Gerald Street in Wichita Falls, Texas, and it has been moved, probably, 8 miles from where it was built, because in those days African Americans could not live on the other side of the tracks.
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Now while I speak very clearly and experientially about Wichita Falls, Texas, please understand that was the case all over the length and breadth of the United States. We had problems where the banks would not lend money to purchase homes in certain neighborhoods. It was called ``red-lining,'' where if a white homebuyer wanted a home, it was clear that the banks would not sell them a home or would not finance the home in certain areas, and they would only finance homes in certain areas for African Americans and to some degree to Hispanics. And this went on in our country for years and years and then decades and decades.
And then, finally, as our Nation began to experience what I like to call the ``Great Awakening,'' we found that Martin Luther King, Jr. and Whitney Young really began to change things. And things began to change, really, in the 1950s with Brown v. Topeka Board of Education. And then with the movement, the Southern Christian Leadership Conference, Martin Luther King, Jr., when you look at what was going on with the NAACP, the Urban League, and I think a beginning of an awakening by all of the country, things began to change, albeit very slowly. And we had the Voting Rights Act approved. We had the Civil Rights Act of 1964, 1965.
And then by the 1970s, there was, for the first time, a very clear movement of the United States Congress toward creating some kind of a society that would allow all Americans to enjoy the benefits of America. And so, in 1977, the Congress of the United States put in place something called the Community Reinvestment Act. It is called CRA. And in this act, there was an attempt by Congress to address discrimination in loans made to individuals and businesses from low to moderate income neighborhoods.
Now, this is important because finally in 1977--and I know probably for young people who may be watching this broadcast on C-SPAN, they probably are having difficulty even grasping the fact that in 1977 the Congress of the United States had to pass a law that would stop the redlining that pretty much pushed African Americans and Hispanics in certain neighborhoods. They don't see that as much today, although we are still, unfortunately, still bitterly segregated in terms of housing. But in 1975, to reduce discrimination, Congress moved to pass the Community Reinvestment Act. That was a major piece of legislation.
And while many Americans probably don't even know what CRA is, this is an opportunity for you to understand what began to change the whole housing drama in the United States of America, the Community Reinvestment Act.
This act began to cancel out, to erase, the practice known as ``red-
lining.'' And in this Community Reinvestment Act, it required that appropriate Federal financial supervisory agencies would regulate financial institutions to meet the credit needs of the local community in which they were chartered, consistent with, I might add, safe and sound operations. And that is important, and I will get to that in just a moment.
The agencies that have been commissioned with the responsibility for regulating these agencies, I think most people would know who they are. They would be the FDIC, they would be the Federal Reserve, they would be the Office of the Comptroller of the Currency, the OCC, and the Office of Thrift Supervision, the OTS. And those agencies would have the responsibility to monitor what banks in the United States did to make sure that they did not arbitrarily and capriciously exclude entire segments of cities for loans both in terms of residential homes and in terms of businesses. And therein, Mr. Speaker, we began a new chapter in the United States.
At this time, Mr. Speaker, I would like to yield time to my friend and colleague from Houston, Congressman Al Green.
Mr. AL GREEN of Texas. Thank you so much, Congressman Cleaver. I greatly appreciate the history that you have afforded us. It is meaningful for us to understand history, because in understanding history, we can understand the benefits that have been accorded by way of the CRA. The CRA has clearly been of great benefit to all Americans, because when you help some Americans, you really do help all Americans. Dr. King reminded us that ``life is an inescapable network of mutuality tied to a single garment of destiny.'' Whatever impacts one directly impacts all indirectly. So by directly helping some, we have indirectly helped all Americans.
And I regret that there are many who contend that the current credit crisis is based upon some of the actions that the CRA might have mandated, which is totally not true. It really is not. And there does come a time, there really does come a time when every woman and every man must on truth stand. So tonight, I appreciate what you have said because I think we have to take the ax of truth and slam it into the tree of circumstance. And we just have to let the chips fall wherever they may, because there really is some truth in the notion that the truth will set you free. So let us see if we can free some souls as it relates to the CRA and its benefits to all Americans.
You see, the truth is that the Community Reinvestment Act that Congressman Cleaver has given us a great recitation of its history, of the history of the act itself, the Community Reinvestment Act did not cause the current credit crisis. Now if you don't believe me, perhaps you will believe the Honorable Mark Morial. I have in my hand a copy of his testimony before the Senate Banking Committee on Thursday, October 16, 2008. In his testimony, he indicates that the CRA is not the cause of the current crisis. This may not be enough for some people. If you don't believe Mark Morial and you don't believe me, then maybe you will believe the Honorable Ben Bernanke, who is, of course, the head of the Fed. He has a letter that he has written to the Honorable Robert Menendez, who is a member of the United States Senate. And he indicates that the CRA is not the cause of the crisis and that there is no evidence to support this.
And if this is not enough, then perhaps a summary from the analysts over at the Board of Governors of the Federal Reserve system. They have indicated by way of a report that the CRA is not at the root of the current crisis.
So the truth, you see, is this, that the CRA has been of great benefit, that it does not regulate lending, that it does not legislate and that it does not mandate. The CRA does not even apply to all financial institutions. And I can really understand how some people might conclude, based on some of the propaganda that I have heard, that the CRA regulates lending worldwide. But it really does not. It doesn't apply to all institutions within this country. For example, it doesn't apply to financial institutions like the defunct Countrywide, which at one time was one of the largest lending institutions with reference to mortgages in this country. It does not apply to financial institutions like the ruined Bear Stearns. It doesn't apply to AIG. It did not apply to Lehman's.
The CRA has been an institution and, if you will, it requires lending institutions to lend money into areas that had been redlined, as you indicated, and had literally been locked out of receiving the financial bootstraps that many communities receive so as to lift themselves out of poverty by way of wealth building through home purchases, as well as some other things that transform houses into worthwhile neighborhoods to live in.
Approximately 70 percent of the foreclosure filings from January 6 to September 8 took place in middle to high income, non-CRA-related neighborhoods. Now it is important to note that the CRA, while it does encourage lending, it doesn't mandate it. And the lending that did take place with reference to foreclosures, 70 percent of this lending that took place between September of 2008 and January of 2006 was in higher income neighborhoods, income neighborhoods that the CRA did not address. I will call them non-CRA neighborhoods.
The CRA doesn't regulate. It simply says that banking institutions are encouraged to cover and relate to and lend to all segments of the communities that they serve. And they are to do so without goals, they are to do so without targets, they are to do so without quotas. The CRA doesn't encourage bad lending. It doesn't mandate bad lending. It doesn't condone bad lending. It doesn't generate any loans. The CRA does not regulate nor does it create any of these exotic loans that we are aware of. And many of them are at the root of this subprime crisis.
So I'm honored to tell you, Mr. Cleaver, and I thank you for your history, that the CRA has been of great benefit to us. And I regret that there is a distortion of the facts that relate to the CRA and what it has meant to us. I think that we have an opportunity tonight to clear up some of the confusion and to make clear what the benefits of the CRA are and to also talk about some of the areas wherein the other institutions, other than the CRA--and I call it an institution, it is really an act of Congress--but wherein other institutions have created products that have created a lot of the subprime crisis that we suffer from today.
So I will yield back to you and trust that as we go through this process tonight, we can talk about some of these products. And I'm prepared to talk about a few of them. I will go ahead and talk about just a couple if I may.
I will talk about the exploding ARMs that were not created by the CRA and not regulated by the CRA. You're aware of them, the 327s and the 228s wherein persons literally had 2 years of a fixed rate and 28 years of a variable rate. They had a teaser rate that would, at the end of 2 years, an entry level rate that was usually low, at the end of 2 years would increase to sometimes 30 to 40 percent of what that teaser rate was. And there were many other products like this that the CRA had nothing at all to do with that have helped to create this crisis that we have to contend with.
Mr. CLEAVER. Would the gentleman yield?
Congressman, it may be of some value for you to share with us the yield spread premium, which is one of the critical developments that we find that people suffer as they are losing their homes. And what has happened over the past year is that in the middle of a tidal wave of foreclosures, people have sought to place the blame on somebody or somebodies. And tragically and painfully, it has fallen on the poor and the minorities. They are being blamed for the crisis.
One of the people I really liked a lot, and we had a very good relationship, was former Congressman Jack Kemp, the former Secretary of the Department of Housing and Urban Development. He, of course, died, and I think all of Capitol Hill is mourning Jack Kemp. He was a former quarterback in the NFL, and he was a great guy.
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He wrote a book where he talked about what happens to the poor and how the poor get blamed. I have that autographed book in my office in my basement in Kansas City. He lays out clearly how the poor always seem to get the blame. When we say that CRA caused this tidal wave of foreclosures, it is a way of blaming poor people because what that means is when the government passed the Community Reinvestment Act and said you cannot discriminate any more, what is being suggested from Capitol Hill, and you can hear it at night on the television and radio talk shows, is that banks and Fannie Mae and Freddie Mac were forced to make bad loans, and there were a lot of bad things happening, including the yield spread premium.
Mr. AL GREEN of Texas. You are exactly correct. Poor people did not create this crisis, and people living in areas covered by the CRA did not create this crisis. Let us take a look at the yield spread premium. The yield spread premium says that if you are a seeker of a loan for a home mortgage and your originator can qualify you for a 5 percent loan, by way of example, if that originator can get you to take a loan for 8 percent when you qualified for 5 percent, that originator will get a lawful kickback by causing you to go into a higher mortgage than you qualified for, and never have to tell you that you qualified for the 5 percent premium.
That premium that is paid to the originator is a part of this process which we now call the yield spread premium.
This was invidious, and it did cause a lot of persons to take out loans that were much higher than the loans that they qualified for. But to further evidence the fact that poor people didn't create this problem, negative amortization, many people received loans that were negative in the sense that you could pay your principal, pay your interest, but if you didn't pay enough interest, you would find that that which you didn't pay would be tacked on to your principal.
So you had a loan where your principal was growing, and it was growing such that you could literally never pay for the loan and always owe more than you actually decided that you wanted to have as a mortgage amount.
We also had the situation with the no-document loans. Poor people didn't get a lot of no-document loans, loans wherein you didn't have to prove that you were working. Usually these were persons said to be associated with some sort of business and they had difficulty verifying income, but no-document loans were made and they were usually in the subprime market, they were either the Alt-A loans or subprime because they were said to be riskier. But these loans were not originated because of the CRA. They loans were not mandated because of the CRA.
I would also call to your attention prepayment penalties. There were loans that had prepayment penalties that coincided with these teaser rates. None of this was mandated by the CRA. The CRA did not require teaser rates. It did not require loans to have prepayment penalties at all. When these prepayment penalties coincided with the teaser rate, it simply meant that the person who wanted to refinance the loan when you were getting to that period or that time when the loan would adjust, would have to pay a large penalty just to get out of the loan into another loan. These teaser rates and prepayment penalties became a detriment to many people who were locked into these 327s and 228s.
I would call to your attention also the fact that there were loans that were interest only. The CRA did not mandate interest-only loans. These loans were loans created by mortgage companies. They were loans that were originated by entities that were not covered by the CRA for the most part. And these loans, if they were covered by the CRA, institutions that were regulated by the CRA, the CRA did not mandate an interest-only loan which means you would simply pay interest, not pay the principal and you would continually owe after some period of time what you started out with as your loan amount.
The CRA did not require credit default swaps wherein one party would agree to pay a second party if a third party defaulted. This is what AIG was infamous for, these notorious credit default swaps, not mandated by the CRA.
The CRA did not cause us to conclude that hedging was a good means of managing risk. The CRA didn't have any mandates with reference to hedging and hedge funds.
It did not require outsourcing as a risk management means.
Some of these large institutions were literally allowing credit rating agencies to manage their risk because they would ask a credit rating agency to give them an opinion about a certain instrument, and they were relying on that as their risk management tool. The CRA did not mandate any of this.
One really important thing, CRA did not create the circumstance wherein the lender was no longer concerned about whether the borrower could repay his or her loan. This was not in any way mandated by the CRA. It wasn't regulated by the CRA. It had nothing to do with the CRA. When this occurred, lenders no longer had to concern themselves with the liability associated with the loan if there was a default.
So originators started simply originating loans so they could put them in the secondary market, and by getting them out in that market, they would get payment for the loan itself. Somebody else was now responsible for the loans, and the loans were bundled. The CRA did not mandate nor did it require that these loans be placed in these bundles called securities and sold to investors. The CRA had nothing to do with any of these things. The CRA simply said if you are a lending institution covered by the CRA, you must lend to all persons within your area of influence.
And thank God the CRA did this because there are many persons who but for the CRA wouldn't have homes. There are many communities that would not have been revitalized by dollars that were actually made available to communities to revitalize them. Nursing homes received CRA moneys by way of loan, and the elderly, homes for the elderly received CRA moneys. The CRA has been a benefit to all Americans, and I just regret there is this notion afoot by many that the CRA somehow created a crisis that it had absolutely nothing to do with. The empirical evidence is completely contrary to this notion that the CRA created the crisis.
Mr. CLEAVER. Mr. Speaker and Mr. Green, I flew into Washington on Monday of this week and sat next to a gentleman who serves on a board of a bank. When he found out that I was on the Financial Services Committee, we began to talk about the crisis, and I am sure that happens to you and all of us who end up on this committee at this particular time in history.
During the conversation he said to me that at a recent bank board meeting, one of his colleagues on the bank board said to him: CRA is going to ruin this bank. It is forcing us to give loans to people who don't qualify.
And he said no matter how he argued, the man would not release the notion that somehow the requirement that is placed on institutions to be fair caused the financial crisis.
I think that the Members of Congress in 1977 who had the vision of creating or beginning the task of creating an America where people could live where they wanted would be pleased today to know that we have made significant progress. We have not made the ultimate progress, but we have made significant progress.
Imagine this, Minneapolis, Minnesota, having an entire section of the city where banks are not making loans. And then as that city goes into decay, people would drive back and say, You know, poor people don't take care of their property. See what is going on over there, not understanding that banks were not making loans to that area. That was supposed to stop in 1977.
Now there are banks in my hometown who are very active in making loans in the urban core. There are other banks that I think are prodded by the passage and the enforcement of the CRA.
I did not have this on the airplane, but I wanted to bring it here tonight. This comes from chapter 20 of the Community Reinvestment Act, section 2901, Congressional Findings and Statement of Purpose. It reads: ``It is the purpose of this chapter to require each appropriate Federal financial supervisory agency,'' those are the agencies that I mentioned earlier, ``to use its authority when examining financial institutions to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.''
This is in the language of the law. And in spite of the clarity of this statement, there are people, even unfortunate and tragically who are part of this body, who are still going around on TV shows saying that CRA caused the financial crisis.
I would yield to my colleague Keith Ellison from Minnesota.
Mr. ELLISON. Mr. Speaker, what else are these purveyors of confusion supposed to say?
They have had an opportunity to spread deregulation all over. They have declined the opportunity for many years to pass an antipredatory lending bill. They have promoted tax breaks for the wealthiest among us. And now that they have had the opportunity to have a House and a Senate in which their particular caucus was in the majority, they have had a full opportunity to manifest their economic ideas, and what those ideas have come to has been the largest foreclosure crisis since the Great Depression. What these economic ideas that the poor have too much and the rich don't have enough is that we have had serious unemployment spikes higher than any that we have seen since the early eighties, which was the Reagan recession. What we have seen is record lows in consumer confidence.
The fact is you can't expect the people who are purveying confusion regarding the CRA to come clean because then they would have to admit that it is their economic policies that have brought forth the economic malaise that America is in now.
In fact, the Community Reinvestment Act is good economics. The Community Reinvestment Act says that what we are going to do is we are going to ask banks who draw deposits from neighborhoods to also loan to that neighborhood.
The Community Reinvestment Act came about based on statistically documentable evidence of red-lining, which is a process whereby lenders and sometimes insurance companies systematically denied credit to certain communities, particularly low-income and minority communities. Importantly, the Community Reinvestment Act does not prescribe minimum targets nor dictate specific underwriting policies. It doesn't even set goals for lending or investment. Instead, it gives considerable discretion to bank regulators and examiners, and ensures that loans are made in a manner consistent, as you pointed out, Congressman Cleaver, with safe and sound banking practices.
Let me just quote from somebody who ought to know a little bit about banking and the financial markets, and that is Fed Governor Elizabeth Duke. Fed Governor Elizabeth Duke is a person with a Ph.D. in economics who studied these issues, is not known for wild statements, and is essentially a paragon of reliability and stability.
Here is her analysis. She says that the claim that the CRA, the Community Reinvestment Act, caused the current crisis is a
``misperception promulgated by many who either do not know much about the law or don't like it.''
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That's what Fed Governor Elizabeth Duke had to say.
Finally, Federal Reserve Chairman Ben Bernanke has indicated, ``Our own experience with the CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that the CRA was at the root of or otherwise contributed to in any substantive way the current mortgage difficulties.''
So I have more to say, Congressman Cleaver, but let me share the mic with others who have much more to say as well. Thank you.
Mr. AL GREEN of Texas. Thank you. I ask that you yield to me.
Mr. ELLISON. I will certainly yield to the gentleman from Texas, Congressman Al Green, who is a stalwart advocate of consumers, investors, and all Americans.
Mr. AL GREEN of Texas. Well, I thank you, my friend. I will pick up where you left off because I happen to have a copy of the letter that Chairman Bernanke sent to the Honorable Robert Menendez. This ties into what you said as well, Congressman Cleaver.
In this letter he indicates, ``A recent board staff analysis of the Home Mortgage Disclosure Act and data sources does not find evidence that CRA caused high default levels in the subprime market.''
He also goes on to say, ``The CRA statute and regulations have always emphasized that these lending activities be consistent with safe and sound operation of the banking institutions,'' clearly indicating that the CRA is not at fault.
I would like to do this just for a moment and then we will come back to more of why it's not at fault. But I'd just like to say this. Assume for just a moment for the sake of wholesome argument and helpful debate that the CRA is at fault, just for a moment.
Then we have to ask ourselves: As those who, by the way, have been saying and continue to say that it's at fault, we would have to ask ourselves if they had control of the U.S. House of Representatives, the U.S. Senate. They had control of the executive branch of the government, even had control of the Supreme Court, and they had all of this at the same time. If the CRA posed the hazard that they contend it poses, and they said that they made statements at the time that the CRA was not functioning as it should, then why didn't they do something when they had control of the House, the Senate, the executive branch of government as well as the Supreme Court?
It would have been easy to generate legislation that could have gone from one House to the other. It would have been very easy to get the President, who apparently would have been in agreement, to sign it. But the truth is that the CRA was functioning well and has functioned well.
In times of crisis, it is very unfortunate that the least among us will sometimes be blamed for what others have done. This is not the time to blame the CRA or the persons that the CRA might benefit for what has happened. Why? Because if we do this, we will allow ourselves to be distracted from the real causes--these exotic products.
And not all exotic products are bad, but many of them are harmful and hurtful. These exotic products like these 3/27s and 2/28s that we talk about, exotic products that allowed people to get into homes, but it didn't enure to their becoming homeowners.
We developed a society wherein people became homebuyers such that they could simply get into a home with no assurance that they could pay for the loan that they were purchasing.
So we cannot allow ourselves to be distracted with this CRA stalking horse, if you will. We must focus on the real causes so that we can come up with real solutions.
I would yield to you, Mr. Cleaver.
Mr. CLEAVER. Thank you, Mr. Green. I think that those forward-
thinking Members of this body who in 1977 approved the Community Reinvestment Act did a tremendous service for all of us. It provided us with opportunities to buy homes--and our children.
It is refreshing for me to know that the young pages who work here in the Capitol--we have two helping us tonight, Raven Tarrance and Jasmine Jennings. These pages will not have to suffer what my father had to experience and what our parents and grandparents had to experience because, in part, the Community Reinvestment Act will not allow banks to take deposits from people and then not make loans to them. And it's really so ludicrous that we have to argue this point because the law is so clear.
I just added another section of the law here with us. The bill text of section 2903, Financial Institutions Evaluation, reads thusly: ``A, in general, in connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall, one, assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods consistent with the safe and sound operation of such institutions.''
Now, according to recent data, we found out that 75 percent of the higher-priced loans during the peak years of the subprime boom were made by independent mortgage companies not operating under CRA, which means that it is absolutely ridiculous to blame CRA for the crisis when the institutions that ignited the crisis were not operating under CRA.
It is so sad that a Nation that is moving in many ways far beyond where most of us thought it would move, at least at this moment in time in history, is still, in part, dealing with those who are spreading divisive messages that CRA, or poor people, caused this crisis.
When you read about the Great Depression or when you read about recessions even in foreign countries, for some perverted reason, and maybe it's a part of human nature, people always look for a villain instead of us saying that we had a problem.
Housing prices in the United States rose precipitously for a 50-year period. There was not one year during the 50-year period that the housing prices did not rise. There was no way that they could continue to go as such. And so eventually they were ballooned, and the balloon burst, and what we have here is a result of creating a housing market that was never real.
In Washington, D.C., if you walk within a couple of blocks of our offices, you will find homes at $450,000 to $500,000. You go to California, we have the jumbo loans out there, with $750,000 homes that would probably cost, in the Midwest, $200,000 or less.
And so we had this explosion of growth and everybody was getting their little piece. Everybody participated in it. People were making bad loans because money was plentiful and victims were plentiful. There were a lot of people who were steered into getting these loans. All of us had people in our own congressional district to tell us horror stories about how they ended up in a home underwater, where the mortgage owed on the home is far greater than the value.
What we find right now is that those mortgages, as my colleague Mr. Green mentioned, have been bundled, securitized, and then sold on Wall Street. When we passed the Toxic Asset Removal Program, known as TARP, it was designed to remove the toxic assets, mainly mortgages, bad mortgages. Toxic assets were bad mortgages. If we could move those out of the market, then there would be a higher level of confidence on the part of investors to invest their money. Unfortunately, at the time, Hank Paulson and President Bush used the money for something else.
It gives me an opportunity to say at this time, Mr. Speaker, that I spoke to a group of students in an MBA program from the University of Missouri-Kansas City a couple of hours ago on Capitol Hill. I asked them to raise their hands if they believed that the Congress had approved money to give to the banks. Two-thirds of the people raised their hands. I think the rest believed that they thought they might get a bad grade or something, or congressional punishment, if they raised their hands, so they didn't raise their hands. But probably most of the people looking at this program believed that we voted to give the money to the banks.
I would remind the public that we voted to approve the Toxic Asset Removal Program to buy the toxic assets. It was the Secretary of the Treasury, acting with the President of the United States, without consulting Congress, who decided to move the money from its intended purpose that was approved right here in this Chamber and give it to banks.
I think that they have been able to do that pretty much with impunity because most of the country probably still believes that we sat in here and voted to give the money to the banks. But the purpose of that was to remove the bad mortgages, and the bad mortgages did not come as a result of the Community Reinvestment Act.
I yield back to the gentleman from Minnesota.
Mr. ELLISON. Congressman and Mr. Speaker, let me just point out for our listeners that, today, about 30 percent of all homeowners are underwater. About 30 percent are underwater. That means that the value of their home is lower than the debt owed on their home.
This is a very serious and catastrophic situation and obviously causing a tremendous amount of angst, consternation, fear, and frustration among people across our country. Obviously, when your house is underwater, it might be easier for you to just leave the keys and walk away. We urge people to try to work things out with their lending institution.
But there's no doubting that the American Congress must be attune to the tremendous pain, difficulty, and frustration people are facing. When people are suffering from frustration, sometimes what they need is people who are in leadership to help clarify what is really going on as opposed to people in leadership confusing what is really going on. Confusing the issue is a very dangerous thing to do.
I would submit to you that America that has done so much to overcome racial division and may be one of the only countries in the world to go from a slaveholding society to a society where a person who, based on color, would have been a slave himself but is now President, a person who would have been denied a cup of coffee 50 years before he became sworn in to be President, is President.
This is a tremendous thing and a great thing for America. The credit goes to people of all colors: black, white, red, yellow, brown, everybody. But at times like this, it's important to also not allow the racial progress America has made to slip back by allowing some people to use code language and say that people of color, poor whites, are responsible for the problem.
When people are frustrated, they need answers. When they need answers, they need clarity, not confusion from leaders, not fear-
mongering tactics assigning blame that is not there. And I would submit to you that all of us, people of all colors, need to stand together to clarify what is really going on with the CRA because, in my opinion, people who say that the CRA is to blame, Fannie and Freddie are only to blame--of course, they do have some fault on them, but they are not, by any stretch of the imagination, the only one. I think it is very important that we say together as a unified racial community that we will not allow racial stereotyping as it relates to what caused this housing crisis.
In my opinion, saying that it's because of the CRA, knowing that the CRA was designed to promote racial harmony and opportunity, is a way of blaming people of color for the financial crisis. Now we can debate this issue, but I guarantee you, if you were to say, ``What does the CRA do?'' and you say, ``It was in response to redlining, that's why it was passed,'' so the question you might ask, ``Well, you mean so it was to try to stop racism or antidiscrimination?''
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And the answer would have to be yes, that is what it is for.
Mr. CLEAVER. I am so glad that you brought that issue up because, as I mentioned at the beginning, how I think this Nation is maturing with regard to the issue of race. It is unsettling then to see how there have been people--and I am not sure all the motivation and I am not sure it is important at this point, why they would continue to say day after day after day after day that CRA caused the crisis. It boggles the mind. Our colleague, Mr. Green from Texas, had mentioned earlier that the chairman of the Federal Reserve found it necessary to come out and declare that this was not a fact.
Sandra Bernstein, the director of the Federal Reserve's Consumer and Community Affairs Division, stated at a hearing before our committee,
``I can state very definitely that, from research we have done, the Community Reinvestment Act is not one of the causes of the current crisis.''
And then Alan Greenspan, the former Chair of the Fed, pointedly did not blame the Community Reinvestment Act or low-income borrowers. In fact, his statement was, ``The evidence strongly suggests that without the excess demand for securitizers, subprime mortgage originators''--
undeniably the original source of the crisis--``would have been far smaller and defaults accordingly far lower.'' Only 25 percent of these subprime loans were made by CRA regulated banks.
I yield to the gentleman from Minnesota.
Mr. ELLISON. So it sounds like, according to Mr. Greenspan, that he is saying that it was this excessive demand for collateralized debt obligations, for the credit default swaps, which a lot of people would take on more risk than they were able to really absorb. These things really accelerated the financial crisis, according to the experts. Is that right?
Mr. AL GREEN of Texas. Let me say, before I make my comment, Mr. Ellison, I want to give you a note of appreciation for some legislation that you have recently introduced to help us cope with some of the problems that we are contending with as a result of this crisis, some of your work in the area with tenants and helping tenants who are being evicted, rent paid but still being evicted because a person who purchased property is in default. You are to be highly commended for the efforts that you are making to help out these tenants.
But I wanted to make this comment with reference to the evidence that is out there. The empirical evidence all supports the notion that the CRA is not at fault. It is unfortunate, as has been indicated, that there are many who would contend that the CRA is at fault; that the CRA ought to somehow now be eliminated because it is at fault.
I think that what we should be doing, in addition to pointing this out, we should also point out that the banks that have been good stewards, that have been making good, decent loans using sound banking policies in areas where persons traditionally could not acquire loans, these banks ought to be commended. We should not allow the distractions from the other side to prevent us from giving kudos when they are deserved.
So to all of the banks, those who have been making these loans and doing so with a good degree of safety and soundness, we want to compliment you.
But we also have to remember as we do this that, in addition to making some of these loans, we had other things that were happening that were not in the best interest of good banking, and these are the things that the legislation that we passed today out of the House, or that we put before the House today, is going to address this predatory lending that took place. It was the predatory lending that was a part of the problem, people having to get the loans that they did not want. Because no one wants a 9 percent loan if you qualified for 7 percent or 5 percent. You want the loan that you are qualified for. Steering people into the higher loans, higher interest rates, so as to make more money for the originator. These are the kinds of things that we have to deplore. These are the kinds of things that happened chiefly with originators that were not regulated by the CRA.
I will yield back to the gentleman, and thank him again for yielding to me.
Mr. ELLISON. Certainly. And I just want to raise this issue, if either gentleman would care to comment. While it is obviously true that the CRA did not cause this financial crisis, I hope you don't fault me too much for straying away and talking about what I think did cause the crisis.
And what I think caused the crisis, clearly, when you have a mortgage originator--and many mortgage originators are good, and I thank the gentleman for pointing out that we are not here to indict an entire industry. But we are saying that the bad actors, there was no cop on the beat here for the people who would transgress. That when mortgage originators were given additional money in order to steer a homebuyer who was seeking a mortgage to a higher priced loan, that is the kind of thing that would get people into a whole lot of trouble, particularly when that same mortgage originator would say, ``Oh, we'll just do stated income.''
``Oh, you don't have to verify income.''
``We're just going to underwrite your mortgage during the teaser rate period and not during the entire length of the loan.''
These are the kind of things that got people in trouble. There is one of our colleagues that is fond of saying: Oh, predatory lending, predatory lending. What about predatory borrowing? Have you heard this term before?
Well, predatory borrowing, what happened is that people would get a financial incentive to steer you away from that lower interest rate loan to that higher interest rate loan and keep the cream, yield spread premium. This is what got people steered to the higher priced loans. So that is part of the problem.
The next part of the problem is that when those mortgage originators did that loan, they could sell it on the secondary market where it was almost never scrutinized as whether it was a good loan or bad, that it would just be sucked up and it would be packaged up into a mortgage-
backed security. And those mortgage-backed securities would be packaged up into collateralized debt obligations. And some of these loans that were nonperforming, and there were large numbers of them, people would go out and buy insurance or, quote-unquote, insurance on these securities, but they were never required with these swaps to have enough money to cover if in fact the value of the security went down. So when they started going down and people said ``pay me,'' the companies that wrote these swap agreements weren't able to cover; and when they couldn't cover, then some of them started going under.
Mr. AL GREEN of Texas. It is important to point out, also, that this credit default swap market was not regulated; that AIG had about $440 billion plus of credit default swaps.
It is also important to point out that the AIGs of the world, in an effort to cover themselves, would go to bond rating agencies and they were paying those agencies to rate these bonds. And, in so doing, they were getting products that were not totally reliable because of the way the payment system was working.
Mr. ELLSWORTH. So you mean to say, Congressman, that rating agencies would say that this is a AAA product, when in fact there were a lot of problems with the product. Is that right?
Mr. AL GREEN of Texas. That is exactly right.
It also promoted, as a result of this, this new industry that AIG became sort of the father of, in a sense, or at least the biggest benefactor of this credit default swap industry, such that they could capitalize on what became a form of gambling, if you want to know the truth. It really was a means by which one person was willing to bet that a default wouldn't take place on something that a third party was ultimately going to have to pay for at some point in time. It really was a lot of confusion that was created.
I would like to say this and digress for just a moment, because I think it is important. Our chairperson, the Honorable Barney Frank, has been wrongfully accused in this process. And I want to stand and say before the world that this is absolutely untrue that he is in any way associated with the ills that we find ourselves having to cope with.
I say this because at the time when all of this was taking place, the persons across the aisle who had the opportunity to do something about it, they had the House, they had the Senate, they had the Supreme Court, they had the executive branch of government, yet they didn't do anything about it. But now that the Honorable Barney Frank happens to have some influence because he is the chairperson of Financial Services, but all of this took place before he became chairperson and, as a result, he is trying to clean up something that took place on someone else's watch.
He is dutiful and mindful of his watch, and I think we ought to let the world know that he has been a fine chairperson who has tried to clean up the problems that have been created.
Mr. CLEAVER. The three of us serve together on the Financial Services Committee with our chairman, Barney Frank, who has been roundly beaten about the face and head by some of our colleagues and as well as some of the talk show folk around the Nation, and I think it is important to mention at this time that he is an unbending advocate for the Community Reinvestment Act. I also take a great deal of joy in saying that as a very clear sign that we are in fact moving in the right direction on issues of race in this country.
When you look at Barney Frank, who is not, as the three of us, African American, and who has been as strong an advocate for equality of lending as I have ever seen in my life, and I count myself fortunate to have had the opportunity to serve with him. But I think it might be of some value for me to mention, and I think the two of you mentioned earlier, that Barney Frank has been chair 2 years and a little more than 100 days, and so all of a sudden the blame has been pushed on him, and secondarily us, for causing a crisis and blaming a bill that was actually passed in 1977.
The truth of the matter is many people believed, and they were led to believe, that these were new homebuyers rushing out to buy homes. From 1998 to 2007, 50 percent of the subprime loans were refinancings. They were people who simply refinanced their homes and fell victim to an exotic product. So these are people who already had loans and there were crooks out there ready to take advantage.
By the way, the three of us were in a hearing today trying to stop another problem from arising. There is no lack of ingenuity for wrongdoers, and there are people now ready to take advantage of people trying to get their mortgages modified and they are doing all kinds of tricks.
So I am pleased that we have this opportunity to stand before our colleagues and you, Mr. Speaker, to try to clear up the problems that have been created by people who have given the wrong information about the Community Reinvestment Act.
Testimony of Hon. Marc H. Morial, President and CEO, National Urban
League, October 16, 2008
Chairman Dodd, Ranking Member Shelby, thank you for this opportunity to testify today to set the record straight about what I call the Financial Weapon of Mass Deception: the ugly and insidious and concerted effort to blame minority borrowers for the nation's current economic straits.
This Financial Weapon of Mass Deception--as false and outrageous as it is--has taken hold, thanks to constant and organized repetition and dissemination throughout the media and political circles.
This is not a harmless lie, an innocuous stretching of the truth for some fleeting political advantage. It is an enormously damaging and far-reaching smear designed to shift the blame for this crisis from Wall Street and Washington, where it belongs, onto middle class families on Main Street and Martin Luther King Boulevard who are most victimized by their excesses.
For years, the National Urban League and others in the civil rights community have raised the red flag and urged Congress and the Administration to address the predatory lending practices that were plaguing our communities. For example, in March of 2007, I issued the Homebuyers Bill of Rights in which I called upon government to clamp down on predatory lending and other practices that were undermining minority homebuyer. Unfortunately, my call went unheeded until disaster struck.
Now that disaster has struck, many of those who caused it are trying to blame the minority community and measures that helped to clear the way for qualified minorities to purchase homes--most notably the Community Reinvestment Act (CRA). In fact, it was the failure of regulatory policy and oversight that led to this debacle.
Let's start with the plain and simple facts:
1. Wall Street investors--not Fannie Mae and Freddie Mac--were the major purchasers/investors of subprime loans between 2004 and 2007, the period for which this data is available.
2. While minorities and low-income borrowers received a disproportionate share of subprime loans, the vast majority of subprime loans went to white and middle and upper income borrowers. The true racial dimensions of the housing crisis have been reported in a number of outlets, including the New York Times.
3. African-Americans and Hispanics were given subprime loans disproportionately compared to whites, according to ComplianceTech, leading experts in lending to financial services companies. Also, African-American borrowers are more than twice as likely to receive subprime loans as white borrowers.
Furthermore, according to a detailed analysis by ComplianceTech:
In each year between 2004-2007, non-Hispanic whites had more subprime rate loans than all minorities combined;
In 2007, 37.3% of African American borrowers were given subprime loans, versus 14.21% of whites, according to ComplianceTech. More than 53% of African-American borrowers were given subprime loans compared with 21% of whites, according to the National Urban League's Equality Index published in our 2008 State of Black America report;
The vast majority of subprime rate loans were originated in largely white census tracts, i.e., census tracts less than 30% minority;
The volume of subprime rate loans made to non-Hispanic whites dwarfs the volume of subprime rate loans made to minorities;
In each year, the white proportion of subprime rate loans was lower than all minorities, except Asians;
Upper income borrowers had the highest share of subprime rate loans during each year except 2004, where middle income borrowers had the highest share;
Contrary to popular belief, low income borrowers had the lowest share of subprime rate loans;
It is becoming clearer everyday that a large number of people who ended up with subprime loans could have qualified for a prime loan. That's where the abuse lies;
Non-CRA financial services companies were major originators of subprime loans between 2004 and 2007, the period for which data is available.
These facts are unequivocal. They are clear. They are indisputable.
Yet these facts are being buried in an avalanche of false accusations, scapegoating and downright lies being spread by the purveyors of the Financial Weapon of Mass Deception. Conservative commentators from Fox News commentator Neil Cavuto to ABC News analyst George Will to Washington Post columnist Charles Krauthammer have fanned out across the airwaves, talking points in hand, telling the world that this crisis is NOT the result of a failure of regulation but the fault of minority borrowers who bit off more than they could chew.
Charles Krauthammer tells us that ``[f]or decades, starting with Jimmy Carter's Community Reinvestment Act of 1977 . . . led to tremendous pressure 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.''
George Will tells us that regulation: ``criminalize[d] as racism and discrimination if you didn't lend to unproductive borrowers. Fannie Mae and Freddie Mac existed to gibber--to rig the housing market because the market would not have put people into homes they could not afford.''
And even right here in the halls of Congress, echoes this same, false refrain, as we heard from Rep. Michele Bachmann of Minnesota (R-Minn), who added Congressional weight to this myth when she quoted an Investor's Business Daily article from the floor of the House that said banks made loans ``on the basis of race and little else.''
As seen in the attached internet blogs from highly trafficked sites, this baseless blame game has turned into vicious attacks on African-Americans, Hispanics, Jews and Gays and Lesbians.
In the last few weeks, I have undertaken an aggressive campaign directed at the nation's financial leaders to dispel this myth. In letters to Treasury Secretary Henry Paulson and Federal Reserve Chairman, Benjamin Bernanke, I have asked that they both publicly refute claims by some conservative pundits and politicians that most of the defaulted subprime loans at the root of the crisis were made to African-Americans, Hispanics and other so-called ``unproductive borrowers.''
On the basis of hearsay, rumors and misinformation, seeds of division are being sown all across the United States in a volatile political environment where Americans are terrified by the economic situation. History provides too many lessons on the consequences of singling out only certain segments of the population as culprits for a country's woes for us not to do all within our power to stop this ugly and insidious smear campaign in its tracks.
I urge you, in the strongest possible terms, to join me in standing up to this big lie, this Financial Weapon of Mass Deception. It is your duty to stop the precious waste of time and energy being spent on blaming the victims and force a healthy debate on what must be done to curb too much Wall Street greed and too little Washington oversight. This hearing is an important step toward that end and I applaud you for holding it.
I call upon you to join with me to ensure that innocent people in our community who look to you for protection are not further scapegoated, victimized and exploited by unscrupulous and greedy players and those who do their bidding.
I call upon you to not allow yourselves to be distracted by the attempts to undercut the Community Reinvestment Act and undermine regulatory reform.
I call upon you to stay focused and to take strong and positive steps to strengthen our communities and the nation's financial foundation through regulatory reform.
I call upon you to do your part to disarm this false and dangerous Financial Weapon of Mass Deception.
In this time of global crisis, we must bring Americans together and not continue to divide ourselves with false racial arguments.
Please enter my testimony into the record.
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Board of Governors of the Federal Reserve System
division of research and statistics
Date: November 21, 2008.To: Sandra Braunstein, Director, Consumer & Community Affairs
Division.From: Glenn Canner and Neil Bhutta.Subject: Staff Analysis of the Relationship between the CRA and the Subprime Crisis.
Summary: As the financial crisis has unfolded, an argument that the Community Reinvestment Act (CRA) is at its root has gained a foothold. This argument draws on the fact that the CRA encourages commercial banks and savings institutions
(banking institutions) to help meet the credit needs of lower-income borrowers and borrowers in lower-income neighborhoods. Critics of the CRA contend that the law pushed banking institutions to undertake high risk mortgage lending.
In this memorandum, we discuss key features of the CRA and present results from our analysis of several data sources regarding the volume and performance of CRA-related mortgage lending. In the end, our analysis on balance runs counter to the contention that the CRA contributed in any substantive way to the current crisis.
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Board of Governors of the Federal Reserve System,
Washington, DC, November 25, 2008.Hon. Robert Menendez,U.S. Senate,Washington, DC.
Dear Senator: Thank you for your letter of October 24, 2008, requesting the Board's view on claims that the Community Reinvestment Act (CRA) is to blame for the subprime meltdown and current mortgage foreclosure situation. We are aware of such claims but have not seen any empirical evidence presented to support them. Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties.
The CRA was enacted in 1977 in response to widespread concerns that discriminatory and often arbitrary limitations on mortgage credit availability were contributing to the deteriorating condition of America's cities, particularly lower-income neighborhoods. The law directs the four federal banking agencies to use their supervisory authority to encourage insured depository institutions--commercial banks and thrift institutions that take deposits--to help meet the credit needs of their local communities including low- and moderate-income areas. The CRA statute and regulations have always emphasized that these lending activities be
``consistent with safe and sound operation'' of the banking institutions. The Federal Reserve's own research suggests that CRA covered depository institutions have been able to lend profitably to lower-income households and communities and that the performance of these loans is comparable to other loan activity.
Further, a recent Board staff analysis of the Home Mortgage Disclosure Act and other data sources does not find evidence that CRA caused high default levels in the subprime market. A staff memorandum discussing the results of this analysis is included as an enclosure.
As the financial crisis has unfolded, many factors have been suggested as contributing to the current mortgage market difficulties. Among these are declining home values, incentives for originators to place loan quantity over quality, and inadequate risk management of complex financial instruments. The available evidence to date, however, does not lend support to the argument that CRA is to blame for causing the subprime loan crisis.
Sincerely,
Ben Bernanke.
Mr. Speaker, I yield back the balance of my time.
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