The scuttlebutt amongst conservatives since the beginning of the subprime mortgage mess has been that the Community Reinvestment Act (conveniently expanded during the Clinton years) was the source of the troubles in the capital markets. Being a housing economist with a fiscally conservative disposition (although not a registered republican or democrat) I always found this hard to swallow. Particularly because having been in the mortgage finance arena for over a decade, I knew intimately how the secondary market worked. Subprime mortgages are not purchased by Fannie Mae and Freddie Mac–although they DO have an expanded approval program that could be considered “subprime”. Now, admittedly the world of mortgage backed securities, collateralized debt obligations and credit default swaps is highly convoluted. Exactly where certain traunches are housed can be very difficult to untangle. But just looking at my company’s own numbers, we never had a statistically significant difference between default rates on our “low income” mortgages and our “prime” mortgages.
Turns out, that hunch proved to be right. Yesterday, John C. Dugan–the comptroller of the currency appointed by President Bush (hardly a patsy for the dems) released a statement that categorically disagrees with the argument that the CRA is at least partly to blame for the ongoing credit crisis. In fact, during the second quarter of 2008 loans offered in partnership with NeighborWorks Organizations actually have a lower default rate than even conventional conforming mortgages. “Foreclosure rates within the NeighborWorks network were just 0.21 percent in the second quarter of this year, compared to 4.26 percent of subprime loans and 0.61 percent for conventional conforming mortgages,” said Dugan.
The fact of the matter is that affordable housing is a good thing. It helps lift communities all over America and for real estate investors who ethically focus on Section 8 properties, affordable housing multifamily developments and low income housing, it can be quite profitable. Many of my own clients are some of the most successful residential and commercial real estate investors in the world. Almost without exception, they all have at least a portion of their real estate portfolio allocated towards affordable housing. Programs like the CRA are a wonderful example of public-private partnerships.
Photo Credit: George the Geek