Yes, the Community Reinvestment Act Really Did Help Cause the Housing Crisis

How the CRA pushes good bankers get pushed to make bad loans.

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There has been a lot of push back against the idea that the Community Reinvestment Act nudged banks to give mortgages to people who should have not gotten them. But then here comes this fantastic story, courtesy of the Boston Business Journal, about East Bridgewater Savings in Boston:

Bad or delinquent loans? Zero. Foreclosures? None. Money set aside in 2008 for anticipated loan losses? Nothing. ...  The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts. “We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

Yet the FDIC has turned up the heat on Petrucelli's bank, giving it an apparently rare "needs to improve rating," for not making more risky loans under the Community Reinvestment Act. Here is how the FDIC puts it: “There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area. The FDIC examiners also faulted East Bridgewater "for not advertising and marketing its loan products enough. The bank, which does not have a Web site, offers fixed-rate mortgages."

Me: How many East Bridgewaters are out there that knuckled under to the pressure and started handing out mortgages to whomever? I am not saying that CRA is the only factor here. There is plenty of blame to go around, regulators, Alan Greenspan, derivatives desks on Wall Street.  But to let CRA and its enablers off the hook is ridiculous.

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