In a penetrating article in Real Clear Markets, Steven Malanga exposes the long history of strong arm tactics, threats, and extortion since the 1977 Community Reinvestment Act became law under President Jimmy Carter.
Acorn found its way into the mortgage business through the Community Reinvestment Act, the 1977 legislation that community groups have used as a cudgel to force lenders to lower their mortgage underwriting standards in order to make more loans in low-income communities. Often the groups, after making protests under CRA, were then rewarded by banks with contracts to act as mortgage counselors in low-income areas in return for dropping their protests against the banks. In one particularly lucrative deal, 14 major banks eager to put CRA protests behind them in 1993 signed an agreement to have Acorn administer a $55 million, 11-city lending program. It was precisely such agreements that helped turn Acorn from a network of small local groups into a national player. And Acorn hasn't been alone. A U.S. senate subcommittee once estimated that CRA-related deals between banks and community groups have pumped nearly $10 billion into the nonprofit sector.Read the whole story, Acorn's a Creature of the CRA.
Congress passed CRA in 1977 as legislation designed to prompt banks to lend more in lower income areas which advocates claimed were being ignored. Gradually over time community groups learned they could use the law as leverage to negotiate new inner-city lending programs with banks based on lower underwriting standards, which the groups demanded when banks complained that one reason they weren't doing more lending in some neighborhoods was because few applicants in those areas qualified for loans under traditional criteria.
Acorn led the way in this movement. In 1986, for instance, it protested a potential acquisition by Louisiana Bancshares, a Southern institution, until the bank agreed to new, "flexible credit and underwriting standards" for minority borrowers which included counting public assistance and food stamps as income in mortgage applications.
Acorn also put pressure on the two quasi-government purchasers of mortgages, Fannie Mae and Freddie Mac, to lower their standards, complaining that they were "strictly by-the-book interpreters" who stood in the way of new lending programs. Under pressure both organizations committed to backing billions of dollars in affordable housing loans under so-called "alternative qualifying" programs which approved loans to individuals who didn't qualify under traditional standards, including those who agreed to go to mortgage counseling classes run by community groups like Acorn.
The threat of CRA proved an effective tool in gathering non-bank lenders into this affordable lending maelstrom, too. In late 1993 President Clinton's Secretary of Housing and Urban Development, Henry Cisneros, announced a plan to boost homeownership in the U.S. through a series of government initiatives, including having government subsidize mortgages that required no down payments. To produce more of these new, riskier loans Cisneros proposed expanding CRA to cover mortgage lenders and other financial institutions that were not chartered banks. In Congress Rep. Maxine Waters dubbed mortgage companies "egregious redliners" who needed to be corralled by CRA.
Under pressure from these threats, the trade group that represented mortgage bankers announced an agreement with HUD to sharply boost lending in low-income areas. These mortgage bankers, the so-called non-bank lenders, agreed to "voluntarily" help develop new mortgage products with laxer underwriting standards. The first member of the trade group to sign onto the new program was Countrywide Financial, which partnered with Fannie Mae to commit to $2.5 billion in lending in minority communities under new, lower standards.
Over time, the mortgage industry not only developed new products based on these lower underwriting standards but eventually allowed many borrowers to qualify for such loans under the reasonable assumption that if they were "safe" for low-income borrowers they were certainly safe for middle and upper income borrowers, too.
The life of Indigo Red is full of adventure. Tune in next time for the Further Adventures of Indigo Red.