I hate to be harping on something, but I can’t help but notice a theme in the government reaction to the fiscal crisis.  We have seen the Federal Reserve act quickly and authoritatively when it comes to addressing a problem on Wall Street.  We have already witnessed a $700 billion stimulus package.  We had an emergency equity injection.  Not so far back, the government backed up JPM’s acquisition of Bear Stearns. Now there is talk that another stimulus is needed.

All of this is in relief to the limited efforts that have taken place to help homeowners.  The centerpiece of our foreclosure policy is the Neighborhood Stabilization Program.  That provides about $4 billion for communities – just a drop in the bucket compared to the Wall Street outreach.

[polldaddy poll=1025729]My thought is not that leaders are wrong for addressing challenges on Wall Street.  Rather, they seem to be applying a much higher barrier to the concerns for regular families.

The situation is getting worse.  Homes that a few months ago were merely sporting delinquencies are now in foreclosure court.  A court in Chicago is having to increase the number of judges dedicated full-time to foreclosures.

What’s more, the cost of lending is not going down.  The TED spread remains high.  LIBOr is high.  The banks are not using their new equity to make more loans.  They are hoarding their funds for a rainy day.

And, there are no provisions to make sure that this equity injection is not just a subsidy for shareholders.  I like that taking the funds has an impact on CEO pay, but that is more an exercise in political symbolism than in impactful policy.  It is worth asking if these banks should be allowed to take equity and still pay out dividends.  Some of the dividend payouts are now exceeding earnings.  Are tax payer funds being used just to protect payouts that need to be reduced?

Guest Editorial by Peter Skillern

In a steady drumbeat from conservative activists like Rush Limbaugh, the Community Reinvestment Act is being blamed for the banking crisis.  According to their line of argument federal laws and regulation passed by liberals forced banks to make bad loans to minorities and low-income people.  These borrowers defaulted, causing the credit crisis on Wall Street.  To assign blame and prevent future problems, they argue that Congress should repeal this law.  This is a false and cynical attack that assigns blame based on race and class and does not help the credit markets.  For these critics, the mortgage crisis is an opportunity to repeal an important fair lending law.

The Community Reinvestment Act (CRA) passed in 1977 is part of other civil rights legislation to address discrimination in lending.  It states in part, “regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.”  Nowhere in the law or regulations are banks instructed or encouraged to make unsafe or unsound loans.  CRA evaluations by regulators are to look for and penalize risky and reckless lending.

CRA Not The Cause
CRA advocates, such as the Community Reinvestment Association of North Carolina, have pushed hard for banks to be inclusive of minority and low-income families for banking services and loans.  We have also loudly opposed unfair, unsafe, subprime and predatory lending practices.  Responsible banks such as BB&T have an outstanding CRA rating, but did not make subprime loans.  BB&T’s stock price is also doing well.  CRA does not encourage banks to make bad loans or cause them to collapse.

To argue that Bears Stearns, Lehman Brothers and AIG Insurance Company failed because of CRA fails to recognize that this law does not cover these firms in any shape, form or fashion.

Likewise Fannie Mae and Freddie Mac are not subject to CRA.  They do have goals established by Congress to serve low and middle income households. But there is no mandate to buy subprime loans which do not have common sense underwriting such as a requirement to document borrower income.

Wachovia Bank and Washington Mutual were covered by CRA.  It was not CRA loans that caused these banks to crash, but adjustable rate mortgages made on over-inflated home prices with out sound underwriting.

CRA is not the common link among these financial institutions failures.  Management that chose profits in the short term rather than safety and soundness in the long term caused this meltdown.  It was not regulation that caused banks to make bad loans, but the lack of regulatory enforcement that allowed irresponsible lending.

Borrowers of All Colors
To blame minorities and poor people for the mortgage crisis feeds a false stereotype that they are undeserving and untrustworthy.  African-American and low-income borrowers disproportionately received high cost, subprime and predatory loans.  Correspondingly, they also are disproportionately represented in foreclosures nationwide.  Poorer neighborhoods will be hardest hit.  Yet they remain a minority.

The majority of subprime loans and foreclosures involve households that are white and middle to upper income.  To blame people of color is to scapegoat based on racial bias rather than the facts that people of all color and income have been hurt by mortgage loans that no one should have made or taken.

Rather than repeal the Community Reinvestment Act, it should be expanded in the regulatory reform expected next year.  If financial institutions of all stripes and types are to benefit from a taxpayer bailout, then all should have an affirmative obligation to responsibly and safely provide quality financial services to Americans regardless of their race and class.

Peter Skillern is Executive Director of the Community Reinvestment Association of North Carolina a nonprofit bank watchdog agency. www.cra-nc.org

The $700 billion set aside for the acquisition of distressed properties — will it apply to mobile home parks? Many communities might have a stake in the answer.  It certainly would not appear that such a use is going to develop.  Nonetheless, many parks are in financial trouble.  I spoke with a park owner in Harnett County, North Carolina who was struggling.  He owned two parks that were both at about 50 percent occupancy.  He was hoping for the days when dealers paid down on a spot in his park so that they would have an edge in selling the next home out on 15-501.

It is only worth mentioning because there is no doubt that both the park owners and park residents will be contributing to the costs for the creation of this fund.  $700 billion!  That’s a lot of money.  That’s about one-quarter of the sum of the Federal budget in a year.  Its almost twice the amount that the government (federal) spends on all of its discretionary programs — housing, nutrition, education, et al (not defense, social security, medicare, interest payments).

The Troubled Assets Relief Program (TARP), as the bailout bill is formally known, is a threat to the order of our constitution.  Consider this one sentence:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency…”

This bill would eliminate oversight options, once enacted, that would give Treasury unfettered control.  Its a huge grab of power.

This is one more reason why lawmakers cannot accept the bailout bill in its present form.

Right now, there are plenty of odd alliances.  To hear Jim Bunning, a conservative Senator from Kentucky, express outrage against the same bill that community advocates are finding reprehensible, is a real bit of entertainment.

Except it’s not funny.

With the news on Friday that the Treasury may buy distressed mortgage assets, all American taxpayers should become interested participants in the regulation of our housing finance.  On Friday, Treasury announced that it wanted to set aside as much as $700 billion.  In a separate but related move, it put about 800 financial stocks on a list protecting their shares from short sellers.

Today, Stephen Davidoff reveals some details.  One startling fact is that the total sum of purchases may go well beyond $700 billion.  As proposed, the Treasury would have that amount to spend at any one time. Upon selling assets, they could take the proceeds and buy more mortgages.

Just as stunning was the possibilty that assets will be purchased at net present value, and not at market value.  This means that potentially banks will find a buyer in the Treasury willing to pay cash, right away, at prices far above prevailing market conditions.

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Some have proposed that a bailout of this size requires some regulatory changes, too.  The logic, by these groups, follows that a remedy which does nothing to treat the underying illness is merely a type of cosmetic surgery.

I hear these voices.  I understand the anger people feel about high executive pay.  That is a problem, but I am not sure that focusing on that issue (CEO pay) will be the lance that heals this wound.

No, I wonder if instead the issue has to focus on the arcane details of safe and sound underwriting.  We know that stated-income, option-ARM mortgage loans are a problem.   We know that making loans to people who are now saddled with debt service that takes 48 percent of their monthly income is a problem.  We know that originating negative amortizing loans leads to trouble, especially if housing prices do not go up.

The regulators have known for some time that underwriting standards were slipping.  Its time for them to do their job.