By Sally Duros
Chicago Sun-Times Real Estate Editor
MARCH 30, 2007 â€” If the meltdown in the subprime mortgage market is the perfect storm where lenders looking for profits are converging with borrowers stretching too far to afford a home, then the eye of the storm is the Community Reinvestment Act (CRA).
The CRA was crafted 30 years ago this month, March 1977, as a federal antidote to redlining, which was a bank practice of withholding home loans or insurance from neighborhoods considered poor economic risks. The CRA requires a bank or thrift to lend throughout its entire market area, and to be evaluated to determine
if it has met the credit needs of its entire community. The bank’s records on its CRA-related activity are reported to financial regulators, who have the power to stop a bank from expanding or even shut it down if its CRA grade is poor.
On paper at least, the CRA is a powerful stick for keeping banks in line. But what could not have been anticipated 30 years ago is that CRA credits — in a hot, technology-ridden lending market — could
become an even more powerful carrot.
Chicago banks worked hard to abide by the letter and spirit of the CRA. They brought bank resources, people and cash into schools and other agencies to strengthen the economic backbone of Chicago’s less prosperous neighborhoods.
Here in Chicago — and in general — as bank ownership shifted from local banks to multinational banks to megabanks, the nature of CRA compliance changed. And federally regulated banks have found it harder and harder to lend in CRA- qualified zip codes.
“This is where you will see the difference between what banks will say in public versus what they say in private,” says Robin S. Coffey, senior vice president of community affairs at Harris Bank, who will be leaving her job later this spring. “Internally, banks
question whether there really is a market among low- and moderate-income families for their homeownership products. There is also a lot of turmoil inside the bank because the product-development teams are asking why we’re spending all this time making a product we won’t make any money on.”
That’s where the unregulated mortgage lender comes in. Its lending practices are not subject to the intense federal scrutiny that a bank like Harris faces. Unregulated lenders also are willing to take on the greater risk of lending in an economically disadvantaged neighborhood through their loose network of brokers.
Sometimes the only avenue for a bank like Harris to meet its CRA goal was to buy loans from low- and moderate-income census tracts, and as we are now learning, there was really no way to know whether
those bundles contained subprime, even predatory, loans.
Coffey says, “Even though the banks were pretty good about saying ‘no’ to buying loans for CRA credit, when the regulators would come in, they would look at bank numbers and look at mortgage-broker numbers and say ‘Hey! You are doing less than the mortgage
“Well yeah, but we’re doing responsible lending and they are not,” she says.
Jim Capraro of the Greater Southwest Development Corp., who was doing community development work when the CRA was created, says, “(Federally chartered banks) are buying dots on the map. The dots are conveniently originated by someone else, so they don’t get the
originating cost. They are packaged up by the New Centuries of the world and then they are underwritten by the Lehman Brothers of the world. Then they are put into tranches so the bad loans are spread out with the good, so that ultimately the cost to the investor is
The way the portfolios of loans are passed down the line from bank to bank means that the dots would far outnumber the houses because the CRA credit from one mortgage can be shared by many banks.
“Unfortunately,” Capraro says, “the victimization is not minimal at all. The cost to the borrower is not minimal at all. Neither is the cost to the neighborhoods around them.”
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