ACORN and housing
In the comments on yesterday’s post, Sue asked about the claim "that ACORN had been part of some issues with the subprime mortage crisis." The short answer is no, not really. But the full answer is important, so I’m giving it its own post.
Promoting homeownership for low-income families is certainly one of the things that ACORN has worked on over the years. They’ve done this both through legislative work, primarily the passage of the Community Reinvestment Act (CRA), and through direct work with families. Let’s look at both of these.
CRA was a response to many banks’ historic practice of redlining — of refusing to make ANY home loans within certain areas, defined both on the basis of income and of race. I’m not 100 percent clear on the exact requirements, but the intent was to force banks that wanted things from the government (mostly approvals of mergers and acquisitions) to meet standards with respect to the number (or share?) of loans made in low-income and underserved communities. And from 1977, when it was passed, to the early 2000s, it caused a slow and steady increase in such loans.
Banks objected to the CRA, because they believed that they couldn’t possibly make money by issuing home loans in low-income areas. But CRA forced them to look at their criteria and do their best to distinguish between moderate-income people who were bad credit risks and ones who were actually pretty good. This is where the second part of ACORN’s work came in. They did a lot of financial education for their members, and negotiated with deals with banks where they’d provide reduced points, or other lower fees, for people who completed these courses. The banks benefited because it helped them make loans that met their CRA requirements, and because the people who were willing to complete the courses were in fact better risks than similar people who didn’t. ACORN benefited because these courses were a way to recruit members. And the low-income people benefited, because they were able to buy homes.
So, what happened in the 2000s? For one thing, people were convinced that home prices were only going to go up. So it didn’t really matter if people were bad credit risks, because if they defaulted, the banks thought they’d get houses that were worth more than they had loaned. For another thing, banks had come up with all these fancy ways to resell the mortgages they made, so they believed that they had made the risk go away. Suddenly, there was a ton of money to be made making loans to poor people. And lots of institutions rushed in — including things that weren’t "banks" and so weren’t subject to CRA.
My sense is that ACORN had pretty mixed feelings about this. On the plus side, lots of people were able to buy houses. But on the negative side, they could see that a lot of people were being given crappy high cost loans. But as a little nonprofit — and one that made people jump through hoops before helping them get loans — they had a lot of trouble competing with the sleazy mortgage brokers who were promising people easy loans and low monthly payments.
So, in the sense that banks experience under CRA taught them that it was possible to make loans to low-income people without losing money, I suppose you could argue that it "contributed" to the subprime mess. But that’s like saying if agriculture had never been invented, we wouldn’t have to worry about the spread of obesity.
But don’t take my word for it. Here’s Ellen Seidman’s explanation of why CRA isn’t the cause of the subprime mess. She ran the Office of Thrift Supervision under the Clinton Administration, among other things.