Dems still don't understand how they screwed up housing

Byron York:

With all the attention paid to the health care battle, Association of Community Organizations for Reform Now, and the president's "Full Ginsburg" appearances on five Sunday talk shows, few people noticed a hearing with an exceedingly boring title -- "Proposals to Enhance the Community Reinvestment Act" -- held last week in the House Financial Services Committee. But the session marked a key moment in the ongoing battle between Republicans and Democrats over what caused our current financial woes -- and how we might best avoid getting into the same trouble again.

At the hearing, and in others across Capitol Hill, Democratic majorities are pressing hard to expand some of the very policies that led to the reckless home lending that in turn helped lead to the great financial meltdown. If Chairman Barney Frank and his fellow Democrats have their way, we'll do it all again -- and more.

At issue last week was H.R. 1479, the Community Reinvestment Modernization Act of 2009, sponsored by Democratic Rep. Eddie Bernice Johnson. It would expand and strengthen the 1977 Community Reinvestment Act, which required banks to make loans in low-income areas that many lenders had traditionally shunned.

After the meltdown, some conservatives blamed the CRA for almost solely causing the crisis by requiring banks to make risky loans to unqualified borrowers. It was an unfair charge. "CRA had at best an incremental role in the U.S. housing debacle," says J.D. Foster, an economist at the Heritage Foundation. But CRA did help create the conditions in which disaster could occur.

The problems began in the 1990s, when Congress made it harder for lenders to do business if they had not passed the CRA "exam" -- that is, if they had not met the government-imposed standards for loans to low- and moderate-income borrowers.

"From 1995 on, there was an incredible push by the Clinton and Bush administrations in every way they could -- CRA, Fannie Mae, Freddie Mac, and other ways -- to increase the homeownership rate," says Russell Roberts, a professor of economics at George Mason University. "What that did was to push up the price of housing, and that made it imaginable to lend money to people you never would have lent money to, on terms you wouldn't have done before."

...

There is more.

The Democrats wanted to blame the financial markets and the broker dealers for the credit debacle. They did play a part, but the primary problem was still the bad loans that the Democrats were pushing on the mortgage lending market. The financial companies who were packaging loans into the mortgage backed securities market attempted to deal with the problem through a flawed risk analysis process. When they discovered too late that their risk analysis was bad, the markets seized up. The resulting drop in the prices of housing had a cascading effect on the credit markets and the housing markets. The Democrats appear poised to repeat that mistake.

Part of the problem is that Democrats never take responsibility for their screw ups. They would prefer to push all responsibility on the Bush administration and Wall Street. It is time for more responsible people to step up and stop this policy before we have a repeat.