The Big Lie: The Poor Caused the Financial Crisis

One of the biggest canards about the financial crisis of 2008 is that government-mandated mortgage lending to low-income and minority home buyers caused it.

With conservative talk radio leading the charge, Congress in general - and Congressional Democrats in particular - are portrayed as forcing banks to commit financial suicide by lending money to poor, unqualified borrowers as a form of affirmative action (these are the same people who, more recently, have offered up the myth of the $70 an hour auto worker). The quasi-governmental institutions Fannie Mae and Freddie Mac are fingered as the leading culprits in this mortgage crisis. The fact that until the mid-term elections of 2006, Republicans held the majority in Congress for the previous 12 years, is conveniently ignored. Even the usually sensible Lawrence Kudlow, former Reagan administration official and current cable news economics commentator, has bought into this line. According to Kudlow, major banks and subprime lenders such as Countrywide, were cowed by Congress, with accusations of financial racism, into making home loans to unqualified borrowers.

This would be an example of outrageous government intrusion into market activities, except for one thing: it's not true.

Did some home buyers with less than ideal credit ratings receive loans on which they subsequently defaulted? Of course. So did some high-income borrowers who bought second and third homes, or vacation homes. So did many of the so-called "house flippers." To blame a worldwide financial crisis on the poor, who have low rates of home ownership, is laughable.

A 2008 study by the New York law firm of Traiger and Hinckley looked at the performance of banks covered by the Community Reinvestment Act (CRA). Passed by Congress in 1977, CRA requires banks to meet the credit needs of their local communities, including low- and moderate-income people. The study found that banks covered by CRA were less likely than other, unregulated lenders to engage in the kind of risky home loans that helped trigger the mortgage crisis and subsequent global credit crunch. Further, the banks covered by this federal law, that was intended to help low-income communities, were far more likely to keep the loans they wrote rather than selling them off as so many other mortgage lenders did. Much of the subprime lending occurred among independent, unregulated mortgage brokers who gave loans not only to poor borrowers, but also to middle-class and affluent borrowers looking for second homes or to "flip" houses, fixing them up and then reselling them for profit. These risky loans were then packaged as mortgage-backed securities, which Wall Street investment firms sold to banks around the world. Thus, the seeds for a crisis were planted.

Did some low-income borrowers default, thereby contributing to the present situation? Yes. But that is quite different from saying they are the sole, or even the principal, cause of all this.