Yet Again, It Wasn't the Community Reinvestment Act...

Another attempt to blame the Community Reinvestment Act for the subprime crisis. Don't believe a word of it:

Don't Blame the Markets, by Jerry Bowyer, Commentary, NY Sun: The government compels banks to make loans in poor neighborhoods even if the applicants are not considered prime borrowers. You may not know about that because the Community Reinvestment Act is not exactly a household ... name.

But the commercial banks do know about it. ... They get a CRA rating. They know that the way to get a high CRA rating is to make loans to poor applicants or in poor urban neighborhoods regardless of the financial prudence of the loans.

They know that if they don't do this, they will be punished severely by the regulators... So, they grit their teeth and stamp a big inky "yes" on an application which they know, according to traditional financial standards, deserves a "no."

Up until 1995 the Community Reinvestment Act was largely a requirement to support "community groups" in poor neighborhoods. ... But after 1995 the scope of the law was dramatically increased.

Over the strenuous objections of the banks themselves and some Republicans in Congress, CRA was renewed and modified in such a way that it gave far more power to the federal government to punish banks for not lending more widely in poor neighborhoods. The classic "fair housing" laws from the Martin Luther King Jr. era of civil rights were deemed insufficient. ... Subprime loans to minority applicants exploded ten fold in the mid-1990s as a result. ...

Under New Deal-era regulatory rules of Glass-Steagall, commercial banks and investment banks were separated. When that act was repealed as part of banking deregulation in 1999, commercial banks and investment banks were able to merge, subject to approval by regulators.

However, the banks' CRA rating was taken into account in the decision. This meant that a high CRA rating became an important prerequisite for mergers, which increased the pressure on the banks to make these risky loans. The banks also were given permission to put these loans into packages of securities that could then be sold into investment markets.

Last week, a front page Wall Street Journal article set off a national debate about the legacy of Alan Greenspan. ... But it is not Mr. Greenspan's fault that Congress substituted identity politics for financial prudence...

The fault lies with the small army of hard left political hustlers who spent the early 1990s pushing risky mortgages on home lenders. And the fault lies especially with the legislators that gave them the power to do it.

As noted below, what a load of crap (which is the null hypothesis, or better, the exceptionally strong prior, whenever you see anything with byline on the article above). Here's Ezra Klein:

The new line we're hearing is that the financial meltdown was really the product of the Community Reinvestment Act, a piece of legislation from the late-70s that required federally-insured banks to lend throughout the areas from which they take deposits, including poor neighborhoods, which were being systematically excluded from credit. The legislation, by all accounts, worked. Now, however, conservatives are trying to argue that it's behind the crisis: If the CRA hadn't been pushing these banks to make all these unsafe loans, then the birds would still sing...

As Robert Gordon shows, however, this is crap. First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA -- and after that (though not, presumably, because of it), bubble lending really took off. Further, CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure. For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms. Which basically leaves a stake in the heart of this particular theory. Indeed, until now, some conservatives have been moaning that no one is talking about the CRA part because it's so racially charged. Poppycock. It's just a false charge...

Ezra didn't cover the change in 1995, except indirectly by noting the timing of the crisis, but for completeness, here's Robert Gordon. He also covers why the merger argument is flawed:

In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened...

The real agenda behind this shameless push to blame the CRA is evident.

Update: See here too.

Comments

[ken melvin]

Kinda like blaming the unemployed for being unemployed.

[SKG]

Also, equating "sub-prime" with "poor" neighborhoods is somewhat questionable.

Those $500,000 loans in California were made to people with bad credit histories and few assets, but there have been lots of stories about families make $100,000 a year in a sub-prime mortgage.

It's mostly about the debt ratios and the credit scores, which are not related to income, per se.

[richard]

South Shore bank made good money by reinvesting in the neighborhood where the bank resides, a neighborhood which for a while fell on hard times. During that same time period, U.S. banks were writing off losses from loans in South America.

CRA is a useful diversifier for most banks, and not a loss leader.

[Eric Dewey, Portland OR]

Having worked with bankers for too long now, I'm reasonably sure that some of them are planting this idea in the heads of willing journalists.

CRA did force bankers to think about how to make profitable loans in economically disadvantaged zip codes. Once they started, some of them began to realize that these loans were often much more profitable than prime loans, because of fees - subprime generates millions of dollars in late fees alone.

Loan sharks have always known that; but historically bankers since the Renaissance have tried to maintain a veneer of respectability (real bankers, anyway - investment bankers have always been far more like loan sharks).

Once they decided it was more profitable to be sharks, they did what all sharks do - converged in a frenzy at the smell of blood. Now they're starting to eat their own young, so in time the financial oceans will be somewhat less dangerous for the smaller fishes...

[Patricia Shannon]

Once they decided it was more profitable to be sharks, they did what all sharks do - converged in a frenzy at the smell of blood.

Sounds like an accurate description of a conservative!

[kthomas]

ouch

[david]

We need newer and better numbers, but ShoreBank has been doing better than the big banks on loans to poorer people -- better diligence, better technical assistance, all 30 year fixed. Community banks should be getting a lot more notice than they are for their ability to sell good products to people who need them, without wanking on about financial innovation, carping about big bad CRA, or blowing up into a thousand bits.

says...

From what I can tell, the CRA thesis is being used by conservatives to argue that it was government intervention/regulation that caused the mortgage mess, and therefore additional regulation is no solution to the problem; only less regulation will help.

This is laughable. Was the CRA responsible for housing bubbles in other countries, too? Did it cause the run on Northern Rock Bank? Did it pump cash into Treasury bills, keeping interest rates low? And did it somehow give bankers the brilliant idea to roll all those new mortgages into derivatives like CDOs and SIVs and sell them into financial markets eager for exotic new products?

[Holly W.]

That was me above!

[Eric Dewey, Portland OR]

Patricia, good point on the definition of a conservative.

However, many conservatives would and have argued that by exchanging "money" for "political incorrectness" one arrives at the definition of a liberal.

Different type of "profit" but the same concept...

[anne]

There is an undercurrent, which is to slyly blame our housing problems on poorer homeowners or especially on African American homeowners since African Americans were long sold needlessly high cost mortgages. An express problem however from the beginning of the housing surge was that African Americans were being sold high cost mortgages though they were otherwise qualified.

Th has nothing to do with the old or new Community Reinvestment Act, the point of which was to insure that that would be development financing available in lower income neighborhoods, especially in Afrcian American neighborhoods, that were highly profitable for financial companies and warranted a return.

[Patricia Shannon]

Eric Dewey, Portland OR says...

Patricia, good point on the definition of a conservative.

However, many conservatives would and have argued that by exchanging "money" for "political incorrectness" one arrives at the definition of a liberal.

Different type of "profit" but the same concept...

I can't dispute that liberals can be sharks about "political correctness", but that's also true of conservatives. Eg., I got called a communist by Republican aero-space engineer co-workers in Huntsville, AL because I was a member of the Sierra Club!

[Patricia Shannon]

Liberals and conservatives are both into political correctness, they just differ on what is "correct".

[Eric Dewey, Portland OR]

Yup - I'm with you on that one, Patricia. Just moved back to PDX from Richmond, VA, which unfortunately is still the Capital of the Confederacy.

We try to stay just slightly left of center, but in Richmond we were raving liberals. Now that we're back in Portland, I'm feeling like Jim Jeffords.

Anne, you're right on target with your point about trying to blame the poor and the minorities. One of the points of the CRA was to encourage banks to offer basic banking services in minority areas. That hasn't really happened much, because branches are expensive to operate and don't generate much income unless there's a lot of commercial activity. Also, banks were able to get CRA credit for making donations of money, and a lot of them simply went that route because it made them look good to announce such gifts.

One of the primary challenges for regulators is to get lenders to impose stronger controls over loan origination WITHOUT cutting back on loans to those who are called "subprime" (which is all too often a codeword for minority).

Two things I've been watching for a while that are interesting as they have the potential to grow into macro forces:

1) Microlending - this is not only happening in the third world. Some US non-profit groups are engaging in domestic microlending. I haven't yet seen any number on how it's working, and there are some scary stories about for-profit groups moving in and changing the game in some bad ways. An E-Bay founder, Pierre Omidyar, is funding some very interesting ideas on that. Find them at www.nextbillion.net

2) P2P lending - www.Prosper.com is the only US group I'm aware of, although I think others are starting to jump in. The idea of lending funds directly to someone whose bona fides have been checked by Prosper could potentially reduce the influence of banks on consumer lending. The legal/regulatory model does rely on securitization, but it's an interesting twist that, if Prosper survives and is profitable, will likely grow.

On "correctness" I agree again. Ultimately, what I'm seeing is that whatever consensus may have previously existed (from the Eisenhower era?) broke down over the past 50 years, and we are slowly struggling to arrive at a new consensus.

Compounding the challenge is the fact that "we" no longer means only the USA, but now includes most of the rest of the world thanks to the internet and financial markets (and yes, those awful multinationals we all love to hate).

Growing pains are difficult...but one cannot truly understand joy without having experienced anguish.

(I do hope that Mother Teresa found peace in the end)

[Jim]

Do not blame the financially uninformed for the missteps of the greedy.
Jim

[a]

"First, there's the timing. CRA came in 1977. The crisis came in 2007."

Well, just to be the Devil's Advocate here, I'm not sure what this proves. Maybe the problem has been a long-time in coming.

One (and I do just mean one) behind the American housing problem is securitization, which allowed a hitherto impossible amount of leverage. Before securitization the mortgage process was basically one where a local lender would pass judgment on a borrower, where this judgment included an appraisal of character. Well, people being people, and bankers being bankers, and bankers being people, this "appraisal of character" was sometimes (often?) an excuse for prejudices against the poor or blacks or others. Bankers didn't lend if, to oversimply, they didn't like you.

I will confess I don't know the history that far back. (Tanta at Calculated Risk sounds like she might just have the historical memory.) But it seems possible that the CRA was a cause for downgrading and then eliminating this "appraisal of character." Sure, this ensured that there was no discrimination, but it also meant that there had to be some other way of deciding the credit-worthiness of a borrower. Hence - I think - the turn towards the use of statistical measurements, such as FICO scores. And once you use statistical measurements, mortgages are not unique (they are not dependent on a unique person or person with unique characters) but they become more-or-less fungible. Securitization here we come!

I think there *is* a choice to be made between securitization and character-based lending. Now I am a pretty big opponent of securitization; I think the bank which made the loan for a house should not be able to sell it on but instead have to carry it on its books. Selling it on means information is lost, which eventually leads to less care in making the loan. So I do prefer a return to bankers having not just the possibility but the obligation of judging the character of the borrower.

Tanta of CR would call this the bad old days and say, I think, that there will be a return to discrimination. Well, I think the proper model is the job market, where character is obviously still used as a basis for hiring, but companies still have obligations versus discrimination. It's not perfect, but it's about the best that can be hoped for.

So, to make a long story short, conservatives may be correct in their causal analysis. Causally, we may well have had CRA leading to statistical measures leading to securitization leading to big housing mess. (As I said, I don't know the history; and, not knowing the history, I have to admit the possibility.) But even if that is the way things actually happened, it's not important, since that causal chain wasn't necessary, but was taken from a bad choice at the beginning (if indeed this is the way it happened), by using CRA to end character appraisals. You can have both, CRA *and* character appraisals.

[OhNoNotAgain]

"Well, just to be the Devil's Advocate here, I'm not sure what this proves. Maybe the problem has been a long-time in coming."

Your whole post reeks of you being an apologist for the racist lending actions of the past. The point of anti-discrimination laws in terms of employement and lending is very straight-forward. You simply cannot make a decision regarding a loan or giving someone a job based upon their race, creed, sexual orientation, etc.

You seem to be trying to say in some weird, round-about-way, that this is still some sort of cause and effect with the current situation. And frankly, it's pretty disgusting that anyone would try to argue such a thing. The one has nothing to do with the other, apart from the fact that they occurred over a period of time in a serial fashion. It's like arguing that the Civil War caused the Vietnam War because you can trace a lineage of events from one to the other.

Anti-discrimination laws *help* our economy by preventing emotional and biased thinking from infecting our economic decisions. They keep the pertinent information visible, and the non-pertinent information hidden. And we wonder why our country is in such a mess. Every time the truth about something comes out, there's always someone more than happy to obfuscate the issue in order to provide cover for the current failed system. And they always seem to pick something that has actually *helped* people and try to make it the culprit.

[Tom 'Dallas Mortgage' Burris]

CRA loans are a burden on banks. Many lenders are forced to lose money on CRA loans to avoid hefty fines.
A cost of doing business when the Gov't gets involved.

[Noah]

Don't Blame the Markets, by Jerry Bowyer

Hmmm....Jerry Bowyer. Why does that name sound familiar? Oh yeah, he's the unbiased buy with all the well-deserved credibility from his assessment of Bush's economic accomplishments.

[anne]

"Many lenders are forced to lose money on Community Reinvestment Act loans to avoid hefty fines."

Care to document this, since I say "nonsense?"

The point is that lenders enjoy the business of middle and lower income communities while wanting to do as little business in those communites as possible, especially so when those communities have been communities of color.

[capitalist]

Hey, banks that operate in "urban" neighborhoods provide a service: a rate of return (albeit small) to depositors, along with protection of asset capital, etc. They should not have to lend to those that live there, any more than the potential borrowers should be forced to buy any particular house, etc.

The fact of the matter is that "character" is a very valid measure when used to decide who should get a loan. And compelling a business to forgo that metric basically forces them to sell the loan. This leads to subprime securitization, which created the capital markets necessary for Countrywide et al to do their damage.

The bottom line is that political correctness brought down a system that at its essence could have been self-regulatory. It got very out of hand, but only because this new niche got so overblown that lenders added ever more leverage. But it could not have started if a Liberal would not have pointed a finger at a local banker and said, "Do you see this poor African-American with no assets, no education, a semi-skilled job, kids he can't afford, barely making rent, living in a crap 'urban' neighborhood? As a cost of your bank EXISTING in our community, you OWE him a loan."

[Mr. Kelly]

Capitalism compliments socialism (Or in this case government intervention.) But socialism (Or in this case government intervention.) Competes with capitalism.

I think that can be used to explain a lot of what the original post used as why this was capitalisms failure.

Those institutions not held to the CRA to the degree of other institutions still had to compete with those in which the CRA influenced their decisions more.

Right or wrong, with government intervention, capitalism has to compete, no matter how risky. It's often more risky not too.
In which unfortunately means adopting a policy that capitalism left alone would never have adopted. Hence the initial need to enact the CRA in 77.
This also applies across borders.
If you don't offer what others offer, you are seen as less competitive. Even if that product is actually inferior.

As well as the fact that economies are not isolated. What happens to the biggest economy in the world, affects all other economies in some way. This once again proves the trickledown theory.

But this also leaves out that the conservatives (For the most part) that are blaming the CRA. Are not necessarily blaming the original version for what tipped the scales. They are blaming the changes enacted on Jan 31st. 1995. That as I understand it, unlike the original version which was primarily aimed at lending practices as it relates to race.

These new regulations to the act in 95' expanded it to increase access to mortgage credit for inner city and distressed rural communities. (Or at least more so than 77', subject to some deviation in interpretation)
Something only loan sharks would have touched before.

Obviously a lot more to it than that. But too write off the theory of the CRA having perhaps the largest cause in effect resulting in this current condition as bull crap. Is closed minded at the least. All theories must be examined. And examined again. Or else we could easily come up with a solution that may have been part of the problem to begin with.
Or to call those researching that theory "pretty disgusting", in an apparent attempt to cease that line of research is to me quite possibly the most damaging thing we could possibly be doing right now.

Bottom line. Any time capitalism has to compete with Socialism, capitalism ultimately morphs to adapt. And it's that morph that is the problem. Not capitalism. It's that outside factor that nudges us. Some times for the good, sometimes for the bad.

Not all government intervention is bad, by any means. But it's up to us to realize which ones are.
This doesn't mean scrap CRA. It just means we need to research it exhaustively. Determine where the failure was, and theorize which (If any) government policy cause the market to morph to allow such a failure to happen.

[Rick]

It seems that Congress has been conveniently pointing the finger at Wall Street as the main culprit in the economic crisis we are facing. And, the failed bailout bill in congress was calling for more money, more regulation, and for punishment of derelict CEO’s. But the public is revolting against Congress and the Executive Branch right now. The bill failed because the public is waking up to the fact that government is at the heart of our problems. They are pressuring their members of Congress to say no to more socialism. And taxpayers are steaming mad.

The debasing of our Constitution has been happening incrementally since the 1930’s. New Deal advents like Fannie Mae and 1970’s add-ons like Freddie Mac and the Community Reinvestment Act severely subvert our Constitution.

The Community Reinvestment Act, for example, forced private banks to make risky loans in economically challenged areas. And Fannie Mae and Freddie Mac were mandated to buy them. Hiding the massive failure of these laws and quasi-government organizations is an existential necessity for the current Congress, because they have based their existence on manipulating and controlling these institutions for their own political and financial benefit. The Congress would much rather divert attention away from the real pathology and failure in the credit market, because if the public were really informed they would be marching on Washington with pitchforks.

In fact, the perception that modern-day robber barons are to blame or that even one party or another in responsible is a widely held view. However, this misses the point entirely. The fact is that neither the CRA, Fannie, nor Freddie is authorized by the Constitution. In fact, both parties have debased the Constitution and our economy for many years. These practices have finally caught up with us and ruined our credit market it seems.

At best, one could argue that the CRA was created out of good intentions – trying to help people in disadvantaged areas access capital. The congress deemed that banks where unlikely to invest in these quarters. And the CRA fulfilled its mission by imposing artificial incentives for making loans in these areas.

And so, our government created a situation where the banks where encouraged to make loans in areas where they otherwise would not. They would not, because, under normal market conditions, investing in these areas would have been too risky for their stockholders and directors.

CRA bank ratings, however, provided a contrived incentive for lending. In 1995 Clinton Administration changes to the CRA synthetically diverted even more mortgage capital to risky areas. And the ease to which these dubious loans could be sold to Fannie and Freddie created a tremendous moral hazard as a precondition. In other words, absent the risk of market consequences, banks willingly complied with the CRA, and eagerly sold the loans on the largely government-backed secondary market.

Fannie, Freddie, and private investment banks consumed this bad paper for years. And now that this paper is worthless (or “ill-liquid” as Paulson says, I love that), our government is trying to transfer the debt load to its citizens.

The current collapse of the credit market is the direct result of the moral hazard created by our political class. Wall Street is not without culpability. However, blaming Wall Street is a very convenient red herring for politicians who accept none of the blame. And we are witnessing the consequences of operating under a dual system – one where political corruption and obfuscation rule the day and, at the very best, where good intentions replace good practices. In fact, the same folks that propped up the CRA and Freddie and Fannie are the same people today that are wagging their fingers at Wall Street. By creating the image of modern-day robber barons, they deflect attention from their own fraud and infidelity to The Constitution.

The fact is, none of this government activity is authorized by The Constitution. Unfortunately, the reason for this is now clear.

It is ironic that the author of this refute is attempting to paint himself as a critical thinker by impugning the economist for fallacious reasoning, when his own sophistry and bias on the subject are so flagrant.

[Will]

I would love to see some empirical evidence that the CRA was not responsible. I think it is irresponsible for an economist to make conclusions based on intuition. All of the data I have seen shows that the CRA is part of the problem.

It is sad when one uses their political agenda to hide the truth.

[anne]

"I would love to see some empirical evidence that the CRA was not responsible."

Quite a comical sort of love. No political agenda there. There is yet no evidence that mortgage bankers responded to the Community Reinvestment Act in any damaging manner, but do set down some evidence when found. Beyond such evidence this is just a game of blaming those who were taken advantage of.

[Mr. Kelly]

"There is yet no evidence that mortgage bankers responded to the Community Reinvestment Act in any damaging manner, but do set down some evidence when found."

I don't see how anyone could say that? The CRA was created to get mortgage bankers to do something they otherwise would not have done. That alone is worth an open mind in researching how that could have a cause in effect.
Sure I pushed you into the street, but I didn't drive the car that hit you.

The CRA pushed mortgage bankers into the street. (In which they brought consumers with them, including many that had not previously been able to get to the street before).
The GSE's (government sponsored enterprise) promised the mortgage bankers they would clean up the mess if anyone got hit by a car. Which of course made bringing more people out in the street safer for those that brought them.
The Gramm-Leach-Bliley Act put more and more mortgage bankers into the street, as the GSE's promised to clean up for them as well. So they ran out into the street as well with all their consumers.
The low interest rates drastically increased the number of consumers each mortgage banker brought out into the street with them. People that understand the streets well, and those that would not be there without the CRA.
Sarbanes Oxley fits in there somewhere too.
But what happened was the road got pretty crowded.
Now, there has always been a certain percent of people that get hit crossing the street. Most of the time it's not their fault. (Job loss, health problems, etc.) But there are also those that just never should have been in the street in the first place. The CRA put more of those people in the street, that the free market was doing its best to not let them on the street in the first place. This is ultimately what caused the initial snow ball effect I will talk about later.
But for the most part before, The GSE's were able to clean up the mess before the road kill became dangerous for everyone else to trip over.
This explains the lag in why the crash is now, rather than right after 77' or 95'. The GSE’s capacity to clean up the mess was within spec. for a long time. (Or at least they told us they were within spec.)

But the road got pretty crowded.
The CRA had ultimately lead to the creation of products that put people on the street that when push comes to shove, didn’t have the resources to deal with it when problems arise. In inner city and distressed rural communities.
As well as I mentioned in another post, competition with the principles of those products lead to those same loans being available to everyone. Many of whom over extended themselves, and simply banked on the street being a good place to be. And that it was going to be easy to find other people to take their spot on the street when they needed too get off the street. (Myself being one of them).
The mortgage bankers didn’t care, because the GSE’s removed their risk.

Then what happened, were those who simply didn’t have the ability to handle themselves on the street did what they always do. Fall. They got hit by cars. These people for the most part, would not have been in the street without the CRA. The free market would not have given them this spot.
And now they were getting hit by cars in numbers. Which alone is no big deal as far as the street is concerned, because most people that were in the street before, knew how to step around the road kill until the GSE came along and cleaned it up.
But now, those in the inner city and distressed rural communities didn’t know how to step around the road kill. And they were the first to trip over the road kill, stumble and become road kill themselves.
All people on the street stated getting scared due to the percent of road kill increasing so rapidly. And as you know, you can’t get off the street unless you can find someone who wants on the street.
Well, the number of people wanting off the street increased. And the number of people wanting on it, decreased. This would not have happened had everyone on the street known how to step around road kill when it crosses their path.
But that lead to those such as myself, that had banked on this not happening. In the path of a car, and not being able to get off the street. Or even reposition myself on the street out of the car’s path.
Many decided rather than let the car hit them later, jumped in front of another car now. The large part of subprime mortgages went into default before the reset. When the rate was still very low.
Others started getting hit by their car.
The GSE's were falling behind on picking up the road kill, and were about to collapse themselves. But the GSE’s were hiding the fact that they were having a hard time keeping up. They even cooked the books, and asked people like Barney Frank to increase their capacity. But asked him to ignore the cooked books. And Barney did as he was asked in 06’ I think it was? With the help of the people the GSE’s had been paying over the years. (Chris Dodd, Barack Obama, etc. through campaign contributions)
Delaying the collapse a little longer.

In the end, the free market had a whole lot of outside influence. The natural checks and balances were tampered with. The exact things the free market does to make sure that this kind of things do not happen, were altered by government without regard to the cause in effect considerations. It wasn’t only the CRA that ultimately caused this, there were a lot of other aspects. But it was the CRA that directly, and indirectly put people into the market that should not have been there. Both that were the initial cause of the snow ball in the market, as well as those that only made the snow ball bigger for the entire system to handle.

[Patricia Shannon]

Mr. Kelly says...

"There is yet no evidence that mortgage bankers responded to the Community Reinvestment Act in any damaging manner, but do set down some evidence when found."

I don't see how anyone could say that? The CRA was created to get mortgage bankers to do something they otherwise would not have done.

That doesn't mean mortgage bankers were behaving in a rational way before the act, any more than anybody else, including investment bankers.

[Bill]

Someone please answer the question of why a great many of these "subprime" mortgages defaulted. All the talk here about blame needs to be made, but the bottom line is that alot of people signed legal documents that obligated them to make payments for "their" homes that didn't follow through. Explain the lack of personal responsiblity in this? Was everybody misled? God forbid all of the people who pay their bills decide the socialist train is where they want to be. Who was taken advantage of Anne? In the end, the people who actually perform as they promise have been ripped off by the peole you seek to protect here.

[Mr. Kelly]

You’re exactly right Patricia.
In anything, there are those in the game that don't know how the game works, and ultimately play the game wrong. And even those that do know, but have dollar signs in their eyes.
But there were not that many of them before. At least not a fraction of the amount by 2005. And they were very short lived even then.

This is because the free market works against people like this, and takes them out eventually. Every time one gets taken out, its proof the free market self regulates against destructive behavior. It does take a while, but it inevitably happens.

What we are seeing is those people were now being encouraged, rather than discouraged. And the checks and balances systems that should have taken them out years ago, were also altered to allow them to stay in business. Building, and building... Until...

Pop!!!!!!

[anne]

"Who was taken advantage of Anne?"

Not that it matters to some, but studies repeatedly showed that African Americans and Latinos who have long been discriminated against in terms of mortgages or housing as such were long being sold excessive cost mortgages. Excessive cost, because the African Americans and Latinos would ordinarily have qualified for far less expensive mortgages.

African Americans and Latinos were discriminated against repeatedly and sold mortgages that would prove too difficult to afford in a difficult economy or an economy where home prices began to level or even fall or simply because of, say, an illness.

Get it? I get it.

[anne]

"God forbid all of the people who pay their bills decide the socialist train is where they want to be."

Idiocy or meanness or both?

[Mr. Kelly]

"Not that it matters to some, but studies repeatedly showed that African Americans and Latinos who have long been discriminated against in terms of mortgages or housing as such were long being sold excessive cost mortgages."

No, people with bad credit, and not enough income to cover the mortgage and living expenses.
And homes in area's in which historic home price (Used as an asset to secure the debt on the front end)comps make their security factor much less than other areas, were being as you put it, discriminated against. Race had virtually nothing to do with it in terms of housing discrimination as far as mortgages go. (Rental is a different story)

For the same reason the free market was not giving them mortgages before redlining and the CRA.
Now with this government intervention the mortgages they got were structured different than conventional mortgages for one reason and one reason only.

THEY WERE HIGH RISK. Not the color of their skin.

The reason that minorities were rejected, or given a different kind of loan in the inner city and distressed rural communities more so than whites. Was simply because the inner city and distressed rural communities. And people with bad financial risk assessments, happen to have a much higher percent of minorities in the pool.

The reason we are in this mess now, is because the free market did not discriminate (For the most part) It just looked like they were because some people are so a tune to looking for racism. They ignore the real reasons for the discrepancy.
And then they try to pass laws changing the natural risk assessment system to now include factors that have no business in risk analysis.
I like to call them doo-gooders.
Great intentions, but dangerously unable to realize the consequences of their actions ahead of time.
And worse yet, after those negative consequences rear their ugly head and slap them in the face. Rather than connect the dots, or listen to people that have with an open mind. They try to do more of what got us here in the first place.

What we do now is what will decide if we go into recession/ depression? And if we delay the rebound so that we stay down for longer, or let it happen so we can rebuild quicker.

To me, it looks like we are going the weekend at Bernie’s route. no problem here, all we have to do is prop up ol' Bernie and everything will be fine.

[kthomas]

"Either the sorry socialist parasite is to be expected of libtards, a pathological liar or this fool doesn't have clue what he's talking about..."

What? Tone it down, please.

[Weiwen]

There is a mutual fund, the CRA Qualified Investment Fund (CRAIX) that invests in securities that support community development activities. Investments in the fund are deemed to be qualified under the CRA; CRA-subject financial institutions can invest in the fund to meet some of their CRA obligations.

Year to date, the fund is up 1.49%, which is 9% ahead of intermediate term bond funds. In 2007, the fund was up 5.8%, which was 1.1% ahead of intermediate term bond funds.

http://quicktake.morningstar.com/FundNet/Snapshot.aspx?Country=USA&pgid=hetopquote&Symbol=craix

If all the CRA was doing was loaning money to people who couldn't pay it back, I am guessing this fund would have tanked. A recent study by the law firm Traigler & Hinckley that covered the 15 largest metro areas in the US showed that banks making loans in their CRA assessment areas tended to make fewer high cost loans (at least 3% higher than a comparable Treasury bond yield, also a primary driver of foreclosure) and were less likely to securitize the loans. These behaviors created the securities that have tanked during the subprime crisis. Given that datum, I'd say the burden of proof is on the anti-CRA crowd to show that the CRA contributed significantly to this crisis.

http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf

[Rick]

Well, knock yourself out Weiwen. Invest in CRAIX, and see what your return is over 5, 10, 20, 30 years and so on. For that matter, why don’t you invest in places that are completely devoid of free market fidelity – like Cuban housing, Venezuelan television, or North Korean energy companies? I would not have confidence with that strategy over a long period of time though if I were you.

The market is telling us something right now. It is telling us that the credit market is insolvent, due to bad practices. And it may be telegraphing to us that our government is insolvent as well.

There is nothing more efficient and uplifting on Earth than market discipline. Unfortunately, we have been usurping our free market system and our Constitution for a long time. We subsidize all sorts of inefficiencies and bad practices. And we allow all sorts of special interest groups and corporations to game the system. The politicians love this, because they can get their palms greased and get money for re-election. This is totally counter to free market and our founding principles.

Most artificialities are simple corruption. Whether it is the CRA, which panders to an underclass who cannot afford homes; ethanol subsidies that pander to farmers; perks for oil companies; or perks for welfare recipients, it really doesn't matter. These practices deviate from the discipline of the Constitution and the free-market. We allow this corruption at our own peril. And if we do not accept what the market is telling us, better practices will never prevail.

[Mr. Kelly]

Well no, it's up .8% YTD. I don’t know what average is this year?

Anyway, CRIAX is considered one of the better ones because it invests primarily in low risk assets. Not only affordable housing, but small business loans, job creation, healthcare, economic development and schools. All of which are parts of the CRA, not just encouragement to lend to high risk buyers.
If I’m not mistaken, for the most part. The part of it that is housing, isn’t lending to high risk, low income buyers, but larger low income projects like 160 unit buildings, revamping them “Green” and turning them into low income housing.
Many of which have federal, and local fail safes on them. ie, lowering the risk. Such as guaranteed income from Section 8 and 42, (Almost completely removing the burden on the low income person in the respect that the CRA is being criticized.) and other local government backed guarantees. And I believe the GSE’s still back them too?
Almost like betting on a sure thing. If the government wasn’t backing these investments, I think the shift would go more towards small business loans and job creation, rather than affordable housing in this fund. In other words, ultimately this fund gets a lot of outside indiract help from the tax payer.
As well, it's even in the banks best interest that this fund does well. Because it helps them meet their CRA requirement while lowering the risk of doing it by diversifying. I may be wrong, but I believe that had a huge part in why this fund was altered to allow the investors to dictate the area of investment. Because they wanted control. So they could help the investments in other ways, outside the CRIAX to be sure it chose the low risk investments. And other local drive could assure that the risk was minimized by adding other private and public involvement.
That's my theory anyway.

Not something I know a terrible lot about. But I think the part of the CRA that is being criticized, isn’t part of the CRIAX fund.
Interesting theory none the less.

[dhlii]

I guess economists are devoid of common sense.
There is so much bogus argument above.
Because the CRA/Fannie Mae/Freddie Mac worked - more people, particularly minorities and the poor were able to buy (and keep) homes, it is impossible that this could be at fault. Economic bubbles - and the calamity resulting from their inevitable collapse are ALWAYS caused by too much of a good thing. It is particularly dangerous to artificially enhance markets for long term assets. None of this is secret or new. It is fundimental to virtually all accepted schools of economics. The unintended consequences of the CRA/Fannie Mae/Freddie Mac are not intrinsically intertwined with every single detail of everything that went wrong, but government policy decisions to foster home ownership alone created a bubble - the remaining failures (as well as some successes) did little more than control the timing of bursting that bubble. You can have my agreement that there were many other failures that contributed, or amplified this. But unintended consequences are not causes, and if you are prescient enough to foresee and adjust for the current set of unintended consequences, that will not prevent others from developing.
This is not about fiscal naivety (or credit unworthiness) of the poor and minorities, unscrupulous bankers and mortgage companies, housing speculators, securitization, poor risk assessment (anywhere along the chain) or ....
It is about government deliberately overheating (even by a small amount) a market in a long term asset.
Whenever a substantial market is moving lockstep in a single direction there is a serious problem. When it does so over a long term, and when the market is in a durable asset the consequences are dire. If the government has any responsibility at all in managing the marketplace it is to dampen precisely that kind of movement - not to encourage it.
Everything else is just noise.

[Mr. Kelly]

I agree with your overall point. It wasn't the fault of the poor, or the CRA. It was a combination of things.
The only time free market based capitalism fails on the macro level, is when socialistic style government economic policies are also in play. CRA, GSE's, Increased home owner pushes, Gramm-Leach-Bliley Act, federal reserve interest rate policies, and the natural flow of money to investments with the highest rate of return.
The only time government created economic policies succeed, is when the free market supports it. But the free market will only support it for so long. As soon as it stops, POP!
Socialism does not create anything, it consumes and redistributes what is already created by capitalism. Socialism cannot survive without capitalism.
The free market has built in safeguards. Those safeguards cut destructive behavior off in their infancy, before they become large enough to really affect others that are not involved in the destructive behavior.
Those safeguards assure that if you do something wrong, you will not be able to do it long. And very few people will be affected when you fail on a micro level.
However, socialistic inspired government economic policies are designed to disassemble those safeguards, and artificially prevent those micro failures.
People engage in economic destructive behavior because if they can get away with doing it, it will be very profitable for them. When socialism comes in and hides the damage being caused, and even encourages the destructive behavior. The free market often times react as if there is no danger, and flows specifically toward this sector.
For a while, since the damage is hidden. From the outside, everything looks good. Great even. This sector will do extremely well, and will be extremely profitable. This is what they mean by a bubble. It grows a lot larger and faster than it should be growing.
But this is only until the negative consequences of the destructive behavior are too large for socialism to mask. (Foreclosures start, GSE's can't keep up, the market realizes it was so invested in this that confidence disappears, divesting happens making the problem worse, pop!)
This will always eventually happen. The bubble will always eventually pop, and this will correctly be identified as a failure. Many people look at the result as a collapse in the free market, because it was after all the free market that flowed to that sector. But those people are wrong.
The free market had safeguards in place specifically designed to stop this from happening. But socialistic style policies like GSE’s had dismantled them. That is not a failure in the free market, that was a failure in the notion that a free market and socialistic policies can co-exist hand in hand on the long term.
Capitalism compliments socialism. But socialism competes with capitalism.

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