Rates too low to cover risk

Published Jan 13, 2013 at 04:00AM / Updated Nov 19, 2013 at 12:31AM

The Bulletin’s Jan. 6 commentary section included a piece by E. Thomas McClanahan, “Feeding the housing bubble after the fact.” McClanahan quotes a recent study about the Community Reinvestment Act (CRA) that concludes “... adherence to the act led to riskier lending by banks.” So far, so good. Unfortunately, McClanahan then makes the very common mistake of confusing CRA lending with subprime lending. He then asserts that this proves that CRA “helped push mortgage lending into excess.” The research piece that he quotes makes no such connection. The vast majority of subprime lending abuse had nothing to do with affordable housing. Most subprime loans were loans to risky borrowers with income levels above, often far above, those that meet CRA limits.

The story is much simpler than most people want to believe. Greedy senior executives at commercial, investment and mortgage banks lent other people’s money at rates too low to cover the risk. The lenders then convinced rating agencies that securities backed by these loans could be low risk. They then sold these loans, mostly via securities, to greedy investors (including Fannie and Freddie, but these were not the only victims) who deluded themselves perhaps and others certainly that these too-good-to-be-true loans were smart investments. As we all know, house prices turned down and finger-pointing soon followed.

People aren’t perfect, and neither are markets. Blaming government policy for human greed wastes time that could be better spent fixing this problem.

Steve Phillips