There has been a lot of talk recently about subprime mortgages and the thought occurred to me that something had to happen in the financial market to make subprime mortgages so attractive for companies to offer.. First is this tidbit from the USA Today, in 2004.

Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages. The industry accounted for about $330 billion, or 9%, of U.S. mortgages in 2003, up from $35 billion a decade earlier.

Where did this come from? It’s not as if subprime mortgages were brand new things in 1994. They’ve existed for quite a long time, but mortgage companies didn’t offer them very often. Something had to happen to generate such a marked increase. Financial markets don’t just shift to a new lending practice without a darned good reason. For there to be a tenfold increase in subprime mortgages means that something dramatic had to happen. So what was it?

In this case, it was the Clinton administration.

In 1994, the administration pushed through some fundamental changes to the Community Reinvestment Act of 1977. The goal of these changes was to make sure that banks were “serving low and moderate income geographies” and making sure that these banks “economically empowered persons of low and moderate income”. Regulators were then given more power to punish banks that did not comply with the new rules These changes led directly, I believe, to the explosion of subprime mortgages and contributed heavily to our current financial debacle.

The changes did two basic things. First, the government changed the measure by which the regulators decided whether a bank was in compliance with the act or not. Prior to 1994, the ratings were determined in large part by what efforts banks were taking to reach into these neighborhoods - what advertising they were doing, how many bank branches they opened, what sort of outreach they made into offering loans and mortgages. The new rules made the rating dependent on outcome-based numbers - how many mortgages were signed, how much money was loaned, and so on. Those numbers were broken down on racial lines, as well as by neighborhood, and by financial status. In other words, for a bank to get a good rating under the CRA it had to actually start writing mortgages to low-income lenders instead of simply offering mortgages and advertising its services. This was not merely a matter of paperwork. As the Comtroller said in 1994, non compliance would bring out “the full panoply of all our enforcement armorarium”. In other words, the government had a couple brand-new hammers and they intended to use them if banks didn’t make low-income loans.

The second thing that happened is that the Clinton administration made it easier for groups to make complaints against banks for perceived under-performance. That put an immense amount of pressure on banks to cut deals with largely left-wing political groups who them turned that money toward more advocacy and dodgy loans. As a rather prescient article in the City Paper put it:

Crucially, the new CRA regulations also instructed bank examiners to take into account how well banks responded to complaints. The old CRA evaluation process had allowed advocacy groups a chance to express their views on individual banks, and publicly available data on the lending patterns of individual banks allowed activist groups to target institutions considered vulnerable to protest. But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition—a foundation-funded umbrella group for community activist groups that profit from the CRA—issued a clarion call to its members in a leaflet entitled “The New CRA Regulations: How Community Groups Can Get Involved.” “Timely comments,” the NCRC observed with a certain understatement, “can have a strong influence on a bank’s CRA rating.”

The Clinton administration’s get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. “To avoid the possibility of a denied or delayed application,” advises the NCRC in its deadpan tone, “lending institutions have an incentive to make formal agreements with community organizations.” By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, “CRA is the backbone of everything we do.”

It’s not a real mystery to see what happened next. Lending institutions, under the gun to give out loans, started extending loans to people who would not have qualified for them otherwise. Those loans, called subprime because they are made to people who are not prime credit risks, carried higher interest rates (because the lender needs to make sure that it makes money out of a loan that is far more likely to go into default) and other costly attachments that mitigated the risk to the lender and the people whose money the lender was using for these loans (i.e. folks like you and me). The more pressure that was put on banks from these advocacy groups and government regulators, the more subprime mortgages they issued to keep their CRA score high enough to remain in compliance.

Now, the Clinton administration is not solely responsible for our current financial woes, but it did contribute greatly to the explosion of subprime mortgages, which helped drive us to where we are now. If we’re going to eventually untangle this mess, the CRA and Clinton’s 1994 regulation expansion is a good place to start.

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15 Responses to “The Roots of the Subprime Mortgage Mess Have Clinton All Over Them”

  1. Penny Amos says:


  2. Missing post - says:

    [...] didn’t see that post but there are all kinds of info out there about this subject: The Roots of the Subprime Mortgage Mess Have Clinton All Over Them | The Sundries Shack The Dems and the Pubes both bear responsibility for this mess by reversing Depression Era [...]

  3. The 95% Illusion: Obama's Promise of Tax Cuts - Page 3 - Super Off Topic Syndicate says:

    [...] The Roots of the Subprime Mortgage Mess Have Clinton All Over Them | The Sundries Shack 1994, the administration pushed through some fundamental changes to the Community Reinvestment [...]

  4. Scott Dangerfield says:

    The incentive for banks and other lenders to lend subprime was financial. By grouping thousands of mortgages together into mass bundles their value was rendered enigmatic. That is, it became impossible for financial institutions to know their constituency's susceptibility to default. Furthermore, many of them didn't have to worry about that susceptibility. With institutions like AIG insuring these blocks of subprime mortgages lenders were free to lend without repercussion. They simply sought a signature so they could then turn around and immediately replenish their capital by selling their mortgages to securitized pools. Companies were making record profits from lending subprime; That is why a bubble emerged. If the cause were the CRA profits would not have been initially made and a bubble would not have arisen, companies would have just sustained losses. However the opposite happened. A bubble emerged and record profits were reported by financial institutions until that bubble could no longer be sustained and the crisis began. I assume you are a Republican as I am and recommend you read the following article before pointing fingers for political purposes:…

    • Jimmie says:

      Scott, your theory would work except that subprime mortgage insurance came well after subprime mortgages started their rapidly-upward swing in use. That's because banks found themselves in need of some assurance that the mortgages that the government said they had to issue would not blow up in their faces (even though they were issuing mortgages that would give them as much as possible up front to help offset the chance that they would default later)

      The bundling came later as well and the leading body doing the bundling was…the government! Fannie Mae and Freddie Mac still holds the largest number of subprime mortgages in the country. They bought them to push capital back out to the banks then bought the new mortgages the banks sold with their new capital. This was all encouraged or ordered by the government, particularly the Clinton administration and it was part of that administration's new approach to the CRA.

      I assume you are a Democrat and recommend you get your financial information from other sources than a newspaper that's worth less than the property it owns.

  5. Mr. Science Guy says:

    Scott Dangerfield said:

    I assume you are a Republican as I am

    Jimmie said:

    I assume you are a Democrat

    Hmm. Missed a bit there, didn't you? ;-)

  6. mark says:

    Jimmy go play in the sandbox. Your mom will call you when dinner is ready. Thanks for nothing useful in this discussion.

  7. ed says:

    CRA may have created an atmosphere where banks felt pressure to make subprime loans, but they were never forced to engage in practices that didn't make sound financial sense such as offering second mortgages to cover down-payments or using irrational "teaser" loan rates. It makes little sense to say that just because the banks were being told to make more loans in low-income areas that they had to make unsafe or excessively large loans. Furthermore the majority of subprime loans were not made in urban areas at all.

    According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.

    • Jimmie says:

      You are factually incorrect about whether banks were forced to make riskier loans. New CRA enforcement, as my post ably indicates, forced then upon pain of punishment, to do so. Additionally, the federal government required the GSE's to take out more subprime mortgages, to the point where they held about half of all subprime paper in the country.

      Sorry, but the CRA and the Clinton administration are firmly on the hook here.

  8. Oneauta says:

    Jimmie, you're right when you say "I beleive" but you're wrong in your assessment. While the CRA may have encouraged Bankers to abandon their "redlineing" it did not have any impact on non-bank lenders who were too willing to utilize "new" security instruments as investment opportunities.

    And the question that begs to be answered is if this was Bill Clinton's baby why didn't the Republicans correct this "horrendous" defect when they came into power with their "Contract With Amemrica"? A Clinton veto? Not after 2001, from that date forward it's all Republican Administration, and Legislation.

  9. How Did GW Bush Cause Our Current Economic Problems? - Politics and Other Controversies -Democrats, Republicans, Libertarians, Conservatives, Liberals, Third Parties, Left-Wing, Right-Wing, Congress, President - Page 17 - City-Data Forum says:

    [...] [...]

  10. Is it STILL Bush's fault? - Politics and Other Controversies -Democrats, Republicans, Libertarians, Conservatives, Liberals, Third Parties, Left-Wing, Right-Wing, Congress, President - City-Data Forum says:

    [...] in Subprime Meltdown Clinton's China Two-Step - Carnegie Endowment for International Peace The Roots of the Subprime Mortgage Mess Have Clinton All Over Them Of course, he had a lot of help… YouTube - Barney Frank in 2005: What Housing Bubble? [...]

  11. greg says:

    I bought a home in late 94, a real nice place, I was earning 7.25 an hour and had no money to put down. The whole thing was wierd and totally unbelievable, we went into debt trying to keep it because we just didn't earn enough, plan and simple. I remember Clinton starting this and was excited about having a place of my own, but it was a stupid mistake for me to think I could efford it. In 96 I filed for bankruptcy because the mortgage was just too much, in 97 the property was foreclosed. 7 years later a shady realtor talked me into buying another place which was even more crazy than before, 300000. loan with a 2nd balloon. had it for 4 years and it happened again, I ended up trying to put myself back together financially for the last 2 years. Yes it was clinton, I was there.

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