Posted on May - 08 - 2010
Fed economist says revise Community Reinvestment Act to alleviate foreclosures
In the latest issue of Forefront, the Federal Reserve Bank of Cleveland’s magazine about economic policy, the Cleveland Fed puts forth a proposal that argues for using the Community Reinvestment Act to fight vacancies and home abandonments.
Now, the article says, banks are rewarded with high CRA rankings if they make lending available in the neighborhoods they serve. The proposal would make it possible for banks to earn “outstanding” ratings for rehabilitating and disposing of foreclosed properties in any low-income area in the country.
The change would give banks bonus points for lessening the vacancy problem — the Fed said in Cuyahoga County alone, banks owned 1,500 foreclosed-upon properties in 2009 — thus allowing them to earn the highest score based on rehabilitation efforts, even if other efforts remain satisfactory.
“You could just change the test so that banks increase their REO (real estate owned property) activities along with everything else they were doing before,” wrote Emre Ergungor, senior research economist with the Cleveland Fed, in the article. “But I think we can achieve a path of least resistance if we do not increase the burden on banks.”
The changes only would remain in place until the number of foreclosed properties sinks below a pre-determined threshold. If that threshold is again breached, the rules would go back in place.
Banks still would be able to earn outstanding ratings under the old rules, the proposal noted. In 2009, only 7% of banks were rated at that level.
The proposal seeks to “modernize” CRA compliance, the Fed said.
“To banks, CRA compliance can seem like trying to solve a puzzle: to obtain a high rating, they must place many different pieces in just the right spots,” the article stated. “On top of its complexity, compliance is seen as a burden: Some banks complain that CRA activities are unprofitable, or less profitable than other activities they could be pursuing.”
New rules would allow banks to work in communities where they don’t have branches, but where they have underwritten a lot of mortgages, the Fed said.
The Fed is seeking feedback on the proposal.
“While we don’t expect our proposal to single-handedly solve the vacancy and abandonment problem, we do think it could have a material impact,” Mr. Ergungor wrote in the article.
Forefront also made note of the success of the Cuyahoga County Land Bank and wrote about small business credit and whether a stock option can predict financial system chaos.
To read the entire 32-page issue, see www.clevelandfed.org/Forefront/.
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