Yesterday, Archpundit offered his own explanation of why conservatives' attempts to blame the economic crisis on the Community Reinvestment Act (CRA) is bunk. He made two crucial points: 1) the truly problematic subprime loans came from independent mortgage providers unregulated by the CRA, and 2) Fannie Mae and Freddie Mac collapsed because they began playing with mortgage backed securities built on the backs of bad loans.
From his post:
The fundamental problem is that in a zeal to deregulate everything possible, the Republican congress with some Democratic accomplices passed bills to allow the connection between lender and long term health of a loan to be completely separated encouraging loan originators to make bad loans and sell them off. CRA does the opposite by tying business to the local community’s health. It’s largely successful and a strategy very similiar to such tactics has led to State Farm increasing it’s profits by insuring lown income zip codes that many competitors will not insure. [...]
It’s absolutely true that Fannie and Freddie had lax oversight and should have been forced to have greater reserves and been watched more closely, but their loans originated under their guidelines weren’t the problem. The problem is they played in the securities market trying to boost investor return beyond their basic mission and bought a whole hell of a lot of stupid paper.
For even more on the issue, check out this Business Week piece, as well as Adam's post from yesterday.
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