[Congressional Record Volume 155, Number 69 (Wednesday, May 6, 2009)]
[House]
[Pages H5286-H5293]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
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,
[[Page H5287]]
because in those days African Americans could not live on the other
side of the tracks.
{time} 1745
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
[[Page H5288]]
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.
{time} 1800
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
[[Page H5289]]
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.''
{time} 1815
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
[[Page H5290]]
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
[[Page H5291]]
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?''
{time} 1830
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,
[[Page H5292]]
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.
[[Page H5293]]
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.
____
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.
____
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.
____________________