O.C. Register: Feds Didn't Coerce Banks into Subprime Lending

I know I’d like to believe that the federal government was at the heart of the subprime mess, through its social mandates, such as the Community Reinvestment Act, which require banks lend to minorities and low-income households.

See! It wasn’t the lenders’ fault at all! It was the government that made ‘em do it! Highly reassuring--except for one little issue:

Did a 31-year-old law giving poor people a break at the bank accidentally break the bank? 

A lot of opinion leaders think so. From the editorial pages of The Wall Street Journal to talk shows to the op-ed page of The Register, people are charging that the Community Reinvestment Act of 1977 forced banks to make bad loans, leading to financial Armageddon.

There's just one problem: It isn't true. 

A Register analysis of more than 12 million subprime mortgages worth nearly $2 trillion shows that most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market – after smaller, unregulated players showed there was money to be made. [Emph. added]

In fact, 75% of subprime originations were made by lenders that were exempt from the CRA, the Register reports. And some of the lenders that were subject to it, notably Bank of America (BAC), seemed to do their level best (lucky them) to ignore it. All this squares totally with my recollection of the rush into subprime lending that occurred during the final days of the housing boom. I don’t remember the people at Merrill Lynch (MER) complaining that the feds had put a gun to their heads and forced them to buy First Franklin, for instance. .