From the Federal Reserve:

"Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution’s individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner." (emphasis added)

What about mergers or acquisitions — did the CRA get in the way of that?

"Since 1988, there have been more than 13,500 applications for the formation, acquisition, or merger of bank holding companies or state-member banks reviewed by the Federal Reserve Board. Over this time, twenty-five applications have been denied, with eight of those failing to obtain Board approval involving unsatisfactory consumer protection or community reinvestment issues." 

Wow, just 8 out of 13,500. That’s less than one tenth of 1%.  

What about the methods of forcing compliance?

"The CRA is one of several laws enacted to ensure that consumers and communities have access to financial services and products regardless of location or demographics. Congress sought to achieve that goal not by imposing rigid, prescriptive rules but by charging regulators to use flexible standards that could change, as needed, over time."

Gee, this doesn’t sound too onerous; What was all the brouhaha about?

"The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. Partly in response to these concerns, the act adopted by Congress included little prescriptive detail.

What are the requirements of the CRA?

The CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:

• to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;
• to assess their records of performance under the CRA during examinations; and
• to take those CRA records into account when evaluating proposals for expansion.

Hey, that sounds pretty flexible. What sort of discretion exists in applying the CRA:

The law gives the agencies considerable discretion and flexibility to fashion programs and procedures to carry out the purposes of the law, to issue implementing regulations that include measures of performance, and to modify those regulations in response to changing markets.  This flexibility has contributed to CRA’s relevance and adaptability through times of rapid economic and financial change, and widely differing economic circumstances among neighborhoods.

Wow, this stuff makes the wingnuts and gasbags look pretty foolish. What’s your source for all this?

All quotes are come from the testimony of Sandra F. Braunstein, Director, Division of Consumer and Community Affairs of the Board of Governors of the Federal Reserve System, before the Committee on Financial Services, or from the Federal Reserve website.


>

Source:
The Community Reinvestment Act
Sandra F. Braunstein, Director, Division of Consumer and Community Affairs
Before the Committee on Financial Services, U.S. House of Representatives
February 13, 2008   
http://www.federalreserve.gov/newsevents/testimony/braunstein20080213a.htm

See also:
The Community Reinvestment Act: Its Evolution and New Challenges 
Chairman Ben S. Bernanke
Community Affairs Research Conference, Washington, D.C. March 30, 2007
http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm

Community Reinvestment Act   
http://www.federalreserve.gov/DCCA/CRA/default.htm

The Performance and Profitability of CRA-Related Lending
Robert B. Avery, Raphael W. Bostic, and Glenn B. Canner
Federal Reserve Bank of Cleveland, November, 2000
Economic Commentary
http://www.clevelandfed.org/research/commentary/2000/1100.htm

Category: Federal Reserve, Taxes and Policy, UnScience

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

73 Responses to “Federal Reserve Director on the CRA”

  1. TulsaTime says:

    Obviously sourced by one of those Commie Red Analyst types that want the government to run everything……wait, I mean…

    FIRST!!!!!!!

  2. TulsaTime:
    Do you think Charlie Gasparino will believe the Fed? Since BR’s word wasn’t good enough for him.

  3. TulsaTime:
    Do you think Charlie Gasparino will believe the Fed? Since BR’s word wasn’t good enough for him.

  4. techy says:

    Barry sorry for this off topic thing, but i am totally lost as to the future of the economy hence looking for some directios.

    (i had posted this comment on other thread but unable to find it)

    i have been reading everywhere that now we are heading towards a great depression and not much can be done to make the pain less.

    by great depressions, people are predicting that unemployment(official) will shoot up as much as 10%.
    housing will fall another 30%(panic sales and foreclosures) and will stay there for 4-5 years.
    businesses are going to now start laying off preparing for a long recession and consumers are already maxed out and scared hence they will pull back sharply, sending the consumption on a cliff dive.

    but i feel that if the government wanted it can definitely lessen the pain by doing the below:

    1. backstop housing by buying and removing from market all default/foreclosure property(will the current bailout plan do it?)
    2. FED interest rate lowered to 0.5%, and mortgage interest lowered to 5%(fannie and freddie are gov entities and can loan money infinitely)
    3.more benefits given to home buyers to help housing(how about increasing the short term tax break from 7500 to 25000, which can also be financed from IRA or 401k with no penalty)
    3.stimulus checks every three months to help consumer income
    4.Faciliate interbank lending by being the middle man(use the trust of the government).
    5. Massive infrastructure projects to support job.
    6. Homeland security is still hiring though.

    in other words…fight deflation and debt with inflation to stave off the sharp pain.

    i think these are doable….but will they do it?

  5. PeakVT says:

    While I hope you keep fighting the good fight, Barry, I think this has already become an wingnut urban legend, joining the ranks of “jack-booted thugs” and “welfare queens”.

  6. Chet says:

    Bottom line is you point out many flaws in the “no regulation” espoused by libertarians but are missing an enormous piece with your defense of the CRA flaws.

    Having traded many billions in whole loan and MBS assets I can tell you the banks paid up bigtime for CRA loans and that generally meant big buys of subprime and especially “Alt-A” pools. The biggest buyers however were Fannie and Freddie. I’m sorry but your focus on comments from the same regulators who failed us all to defend the CRA is laughable. Do some research in the Agency Housing Goals. If you follow the money (always the most efficient path to understanding these issues) you’ll see bonuses were tied to these housing goals and they were satisfied by buying outright or only guaranteeing loans. I’d bet half that target was met with subprime and stated income Alt-A loans over the last 5 years.

    ~~~
    BR: Fannie has been around since 1938, the CRA has been around since 1977 — suddenly, it all went to hell in 2005? And THATS your explanation for why?

    Gee, isn’t that rather odd — after 70 years?

  7. ssm says:

    The theme of central banks abusing their power to control money in order to extract wealth is as old as Moses …

    Thomas Jefferson prophesied:

    “If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs.”

    Ask Lincoln how he was treated after issuing Greenbacks to finance his war. The bankers believe it is their birthright to control our money.

    To this generation: welcome to the party.

    Sound money, no fractional reserve banking, and no, I’m not for Ron Paul but he has spoken the truth on this issue.

  8. Zach says:

    Barry, I don’t see how this is an effective defense of the CRA. You’re asking someone whose job it is to defend it if it was a burden on the banks. What do you expect their answer to be? “Yes, we did put undue burdens on the lenders.” It’s like quoting Barney Frank in defense of Fannie Mae and saying case closed. Also, “encouraging” lenders is a very vague term, and certainly does not preclude members of congress from witholding positive legislation from the banks in return for lending to risky communities.

  9. mark mchugh says:

    One of the big problems that I have with the characterization of the housing crisis is this notion that it will be devastating to poor Americans. Bullshit. Most poor people, who were smart enough to live in “poor people” neighborhoods, have relatively modest amounts of debt. If you can keep them employed, they will pay their debts. The cost of ownership is still lower than the cost of rent in these areas.

    In actuality, the poorest Americans live in $500,000 neighborhoods, with 2 financed SUV’s in the driveway, maxed-out credit cards and not a snowball’s chance in hell of paying the principle (let alone interest) on their debt. In short, trailer trash who thought they were republicans.

    Main street knows this, and that’s why most people were dead set against the bailout. Drag these pretenders back to the trailer park first, then we’ll talk about who needs to be rescued.

    That said, I think the bottom line you were trying to get at is:

    Charlie Gasparino’s a tool.

  10. Dave says:

    The CRA was a tiny part of the problem, but the idea behind it, that the government should be out there making sure people get loans, is at the heart.

    That’s why when people tried to point this out or reign in Fannie and Freddie they got pushed aside.

    NYT link:

    Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

    “When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

    ——————————

    There it is right there. Prices are increasing faster then incomes, so it is the governments job to make up the difference with credit. If you question that you hate poor people and the dream of home ownership. Or at least according to Fannie’s lobbying efforts.

    NYT
    One automated phone call warned voters: “Your congressman is trying to make mortgages more expensive. Ask him why he opposes the American dream of home ownership.”

    But hey, I’m just a free market fundamentalist. I don’t understand why the idea of government trying to increase the housing stock beyond free market levels is a great thing. So questioning the CRA, Fannie, or Freddies very purpose for existing means I’m crazy.

  11. Winston Munn says:

    The propaganda machine is in high gear to deflect blame from their basic tenets and policies.

    “The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over”
    Joseph Goebbels

    Or another way to say it – make sure the bullshit fits on a bumper sticker.

  12. RW says:

    A high-quality post by Larry Tate over at the “I hate what you just said” blog addresses one of the right-wing Frannie/CRA canards, the Kevin ‘Dow 36,000′ Hassett “Democrats did it” version, in considerable detail (good comments too); see http://tinyurl.com/3lw9au

    Tate and the references he cites make it pretty clear the so-called sub-prime bubble was a complex event but for those who simply can’t avoid the compulsion to find a single, major culprit then Frannie would not be a good choice — too many fingers from all sides of the fence in that pie — the repeal of the Glass-Steagall Act is much less ambiguous, one could almost say, simple.

    The money quote:

    “…the repeal of key New Deal-era regulations of the financial markets, most notably the Glass-Steagall Act [whose] explicit intent was to prevent a “repeat of the 1920’s era scams in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank.” Sound familiar?

    And guess what law repealed that Glass-Steagall Act? It was the Gramm-Leach-Bliley Act of 1999. Yes, that is …the same Phil Gramm whose legislation led to the Enron scandal; the same Phil Gramm who is likely the new head of the Treasury if McCain is elected.

    And the vote? With one exception, it went straight down party lines: all Republicans voting “yea” and all Democrats voting “nay.”

    But hey, I’m not pointing fingers.”

  13. RW says:

    A high-quality post by Larry Tate over at the “I hate what you just said” blog addresses one of the right-wing Frannie/CRA canards, the Kevin ‘Dow 36,000′ Hassett “Democrats did it” version, in considerable detail (good comments too); see http://tinyurl.com/3lw9au

    Tate and the references he cites make it pretty clear the so-called sub-prime bubble was a complex event but for those who simply can’t avoid the compulsion to find a single, major culprit then Frannie would not be a good choice — too many fingers from all sides of the fence in that pie — the repeal of the Glass-Steagall Act is much less ambiguous, one could almost say, simple.

    The money quote:

    “…the repeal of key New Deal-era regulations of the financial markets, most notably the Glass-Steagall Act [whose] explicit intent was to prevent a “repeat of the 1920’s era scams in which banks made speculative investments, turned the debts into securities, and sold them off to unsuspecting investors with the blessing of the bank.” Sound familiar?

    And guess what law repealed that Glass-Steagall Act? It was the Gramm-Leach-Bliley Act of 1999. Yes, that is …the same Phil Gramm whose legislation led to the Enron scandal; the same Phil Gramm who is likely the new head of the Treasury if McCain is elected.

    And the vote? With one exception, it went straight down party lines: all Republicans voting “yea” and all Democrats voting “nay.”

    But hey, I’m not pointing fingers.”

  14. john says:

    to the anti-CRA crowd, from another post:

    show me an enforcement action against a bank – any bank. a press release. an indictment. a prsecution. one that says “[banker]/[bank name] failed its obligations under the community reinvestment act”? because surely one bank in the past ten years stood up to the federal government and said “enough is enough with this regulation that forces me to make bad loans”.

  15. Frank says:

    I find it ironic that the roots of this credit crisis can be traced back deep into the “wonderful” Clinton years (with a complicit Republican-controlled Congress). Seems like Slick Willie managed to get his thumbprint on yet another debacle. Having said that, George Bush was no angel in this either. I distinctly recall the State of the Union addresses in which he touted “the home ownership society”. So there’s plenty of blame to go around, like spreading butter on a piece of toast (the toast being our economy).

  16. Scott in Chicago says:

    The only people laying this problem at the feet of CRA are those that are politically driven. Gasparino has such visceral hatred for New York Dems that it oozes from him. He is not capable of being fact based in his assessment of this issue. It is pure emotion. Others just want their team to win and will say anything to further same. That is in no way exclusive to either party. What may have been lost in trying to lay this on pressure from Dems on Fannie and Freddie is the “ownership society” bullshit the Bush Administration pushed. What was owned was shitloads of debt and overpriced houses. The majority of blame goes to the dereg., laissez faire, zero oversight, and just plain half-assed lazy efforts of the current occupant. Charlie can get as belicose as we chooses, can have the absolute certitude of a zealot if he chooses, but he is on the incorrect side of this issue. A side question for anyone who may know: Is Gasparino an “I need to seriously compensate” short guy? Just a hunch.

  17. David Merkel says:

    Barry, this was my experience with the CRA. I used to be involved with affordable housing lending (Section 42). I would go to conferences alone, while Fannie and Freddie had armies there, and many banks and utilities (huh?) had small teams there. Fannie and Freddie had 2/3rds of the market share, with the rest of us clamoring for the rest, forcing down yields and underwriting standards.

    The banks were there for the tax relief and the CRA credit. Fannie and Freddie were there for the tax relief and meeting the demands of Congress for affordable housing.

    Banking regulators use informal pressure to see that CRA requirements are met, the same way they do loan underwriting requirements. The standards, and their enforcement are squishy, but their existence has made many bankers that I have known act, at least in the 90s and early 2000s.

    That said, the Bush administration probably took the same approach to regulating underwriting and CRA — they didn’t do it. The bigger problem was not regulating underwriting, which in a fiat money system is poisonous — it is akin to not caring about the growth of the money supply. That was a key component of how we got to the current mess.

    ~~~

    BR: David, I am sympatico on the issue of fiat money supply.

    What I do not understand is how Fannie / Freddie forced banks to write no money down mortgages, 120% LTV, Interest Only loans, and 2/28 Arms ?

    Can anyone explain that to me? I cannot find those requirements anywhere in the books, legislation or charter of FNM/FRE/CRA . . .

  18. OhNoNotAgain says:

    Chet, Dave, and all trying to defend this POS theory:

    Try actually backing up what you say with some facts, and actual links. An “idea”, or the fact that a single congressman said something, does not constitute an effective argument that the CRA had *anything* to do with the mess we’re in. Demonstrate to us that the number of mortgates that were sold *directly due to the CRA* were large enough, and disproportionately given to un-credit-worthy customers, to cause the problems that we’re seeing with widespread mortgage defaults. *You* are the people claiming that the CRA and FM&FM are *the cause* of the problems that we have now, so it is up to you to back it up with some actual facts.

    This is revisionism on a grand scale, and a giant effort to cover up the culpability of the upper classes, and their bought-and-paid-for representatives, in causing this mess. I guess “personal responsibility” is only something to scold poor people about.

  19. Steve Barry says:

    When the sub-prime crisis began, the Ben Steinery School of Economics said that sub-prime is such a small part of the mortgage sector, that even if every loan went bad, it couldn’t impact Main Street. Of course, he didn’t bother to consider that for every inconsequential $200,000 sub-prime loan, Wall Street sold $6 Million in derivatives. The people who took out the loans are no angels…they didn’t really qualify to own those homes, and thus I can’t worry too much that they lose those homes. They’ll go back to renting. It took Wall Street though to take a contained problem and turn the whole financial system radioactive. And Mr. McCain, who said just days ago the economy is sound, is very anti-regulation. The same guy who said he would invade Iraq again, even knowing there were no WMDs…the WMDs, as Buffett once said where here all along in credit derivatives.

    The only constant during the building of this bubble, through Reagan, Clinton, Bushes, was one Alan A. Greenspan…you tell me what A stands for.

  20. I think it’s fair to say that while Frannie may not have precipitated this disaster by themselves, they are symptomatic of the lack of oversight and sheer ignorance of economic reality by members of our political class, of all persuasions.

    The fact is, the left turned a blind eye to Frannie because they were fulfilling their desire for governmental involvement in housing finance (to provide mortgages to folks private industry ignored or shunned). They didn’t want to go poking around in there to see how the short-term-profit side of those GSEs’ personality had taken over (we have to be able to hire the best and brightest C-level mgrs, right?). So you have what the British would call quangos (quasi non-governmental organizations) with the profit motive of private companies, without the traditional skepticism of public oversight (as their mission and their operatives knew what the buttons and levers are in gov’t as much as any high-powered lobbyist).

    So… I guess what I mean to say is that those who called out Frannie should have gone further and called _ALL_ the players in this MBS/CDO catastrophe to account and failed to do so because of their tribal affiliation, and those who stuck up for Frannie due to _their_ tribal affiliation should have looked at it with clear eyes and done the right thing.

    At any rate it’s too late now, at least childrens’ wooden arrows are gonna be cheaper, right??

  21. Chet says:

    Frannie and banks paid well thru the market for billions of subprime and AltA loan pools that I saw. If it was year end they might pay a point or more to get it. You can say CRA and Agency Housing Goals didn’t impact these institutions, but I know different. At least they sure acted with the belief they mattered. Frannie traders told me bonuses requires hitting the goals.

    There were plenty of other players with various reasons for loading up on bad assets, but given what I saw and experienced I just don’t buy this whitewash of the housing goals pushed by Dems. Plenty of blame and corruption in both parties and private companies, but you’re way put to lunch if you don’t believe the housing and community activist linkage to Frannie and the Democratic Party wasn’t a significant factor.

    ~~~

    BR: I don’t say that at all. I have been saying that Fannie and Freddie were cogs in the machine, and there are lots more proximate causes than them.

    Fannie has been around since 1938, the CRA has been around since 1977 — suddenly, it all went to hell in 2005? And THATS your explanation for why?

    Gee, isn’t that rather odd — after 70 years?

  22. Roger Bigod says:

    I have no problem with blaming the CRA, but I have yet to see any attempt at providing numbers. So I think this is just another bumper sticker slogan.

    The covert message seems to be that those worthless bl… um minority people were gaming the system. But a glance at the BR’s infoporn maps shows that the worst foreclosure problems are in FL, CA, NV. There’s a little peak in OH and MI, probably Cleveland and Detroit, but nothing like the sunbelt. Some of the CA peak may be immigrants. Still, loans that might have been influenced by CRA seem to be a small part of the problem

    It shouldn’t be difficult to put actual numbers on this. A good first approximation would be the percent in value of defaults and foreclosures in zip codes with high numbers of minority/poor buyers that CRA is supposed to benefit. I’d guess around 10%, but I’d be happy to be corrected. It certainly adds to an already serious problem, but using it for political traction is vile.

  23. BTW, IMO non-recourse loan laws have caused far more damage than CRA or any other sort of jiggery-pokery.. The fact that hundreds of thousands of Californians can just walk away leaving the house keys on the granite countertop, all by itself, is a massive blow against the economy.

    If I were smart and amoral, I’d ‘buy’ a CA house at 120% LTV, HELOC the shit out of it, stash that $$$ in impenetrable overseas banks, then skip out on the mortgage.

    OTOH the laws were there before the loans were made, so bankers, traders and ranking agencies Should Have Known Better(tm) when it came time to sign those contracts and package those securities.

  24. OhNoNotAgain says:

    Chet,

    That’s, again, a lot of talk with zero actual facts. Show me facts. Christ, at least indicate a year when this suppposedly occurred. My understanding is that the Fannie and Freddie didn’t start gobbling up sub-prime loans until 2007:

    http://www.realestatejournal.com/buysell/mortgages/20070420-hagerty.html

    End quote in the article:

    “Part of this turnabout is luck. If Fannie and Freddie had to have accounting scandals, they picked the perfect timing, just as the housing market was heading into a speculative binge fueled by aggressive mortgage lending. Those accounting woes forced Fannie and Freddie to reduce their loan purchases when the market was lowering credit standards on subprime mortgages. So other investors, as well as lenders, ended up with most of the worst loans and will absorb the bulk of the losses.”

    That sounds to me like Fannie and Freddie came in at the tail end of this, and were not the responsible parties at all.

  25. cloudy says:

    When Frannie lowered lending standards, and started promoting 80-10-10, 80-20, etc., that certainly fed the beast. FNMA/FHLMC got so HUGE, it boggles the mind.
    I’m sure clinton dems (that includes me)(and their influence continued after shrub took office) were behind a lot of the loosened regulations/standards. CRA was more of a by-product. I think we need to get off this CRA discussion. Saying it didn’t contribute just validates those who like to blame it.

    Dems and Repubs share the blame. There wasn’t a problem as long a house prices went up. It was a scandal that we all played, let’s face it. How could you turn down a deal on principle when your competitor would take the deal if you didn’t?
    But there was a ton of fraud, and some players who should have known better. FNMA/FHLMC are at the top of my list; but they could have been reined in. Where was the political will to stop the mania? There were multiple, variable, dynamic inputs on many levels that led to where we are today.

  26. chad says:

    The CRA is the nucleus of where this all began. However, it is not, in and of itself, the sole factor in the housing meltdown. I say this because the overwhelming majority of troubled loans made during the height of the housing boom were the type born out of the CRA act – specifically the 95 revision. But, what nobody sees here is middle-class whites exploited these products to trade up, and to use for additional speculative investments. After all, these products had been working for years in the areas where they were designed for, the thought was……”well if they’re working in the low-income sector, we can apply them in ‘traditional’ sectors of the real-estate market and really clean up.” And that’s exactly what happened. Barry, you have said as much when you site geographic data that show the majority of these loans were made in non-minority areas at the peak. Because, by this time…..these innovations brought on by the CRA of 95 were the only options available to the working and middle class white families.

    This isn’t a racial issue. Because of the success of the CRA, we saw the innovations born out of it expand into every sector of the residential real-estate market. I contend that it was the success of the CRA that made lenders feel invulnerable to risk. The CRA was designed for a traditionally troubled demographic in our society. Because it worked, it was an easy step to avail the new innovations to traditionally more stable demographics. At the peak, it was the only way many people, regardless of income or race could afford the homes they chose to purchase.

    The CRA definitely has a role here, but its not the boogy man folks on the right make it out to be. The innovations born out of it do have a place in our economy. Ultimately, it is on the bankers. The risk experts. They know and knew all along that risk exists. They ignored it or underestimated the impact. Either way its on them. These products financed the peak and the bankers believed there was no risk, or they had it under control.

    However, I do agree with Barry on the SEC relaxing margin requirements. Yet, as Franklin Raines’ 2004 testimony to the House Subcommittee on Financial Services illustrates everyone was seeking more leverage when he says that Fannie could operate with “2% of its portfolio set aside to cover losses.” That’s what happens in bull markets.

    I wonder if CDOs and the like had a regulated exchange and clearing mechanism how much, if any of this mess in the financial sector been mitigated?

  27. cloudy says:

    If anybody is able to search back issues of the WSJ around 2001-2002, I recall the size of the GSEs was a big issue sometime in there. There were WSJ editorials against GSEs getting so big.
    To me, trying to assign blame is not productive at all. We should learn from the past, and history will teach us. But we should also look forward to non-partisan solutions.

  28. OhNoNotAgain says:

    Chad,

    I’m sorry, but that’s a reach of monumental proportions. There’s no way that the success of the CRA had anything to do with the real estate bubble and lending standards in the 2000′s. The problem was simply that interest rates were too low for too long and too much money was chasing too few investment opportunities. The Internet bubble semi-deflated, but Greenspan just pumped it right back up so that the money could then chase the next bubble. Originators were handing out loans like candy because they could just pass them right on to be packaged up as MBS’s. CRA loans bear no resemblence to this situation at all. They are primarily held by the lending insitutions that originate them, and from what I’ve been told, are handled with kid gloves. These insitutions do this so that they can show that they are complying with the spirit of the CRA.

  29. Chet says:

    OhNo -

    Growing their loan portfolios in your article refers to direct buys. Housing goals were met thru that or just guaranteeing deals. Most of the subprime and Alt A was wrapped with a Frannie guarantee so, like a Moodys AAA rated CDO you could turn lead to gold. This may have been a conscious strategy to avoid reporting as a balance sheet asset. I don’t know. But they were heavy in subprime and absolutely made the Alt A market in the mid 2000′s.

    I guess you must be part of the DNC machine to be so incredulous. Even my Dem insider friends know just how dirty that activist connection with the party is and acknowledge the disservice often done to the purported constituents. Lots of money there and Dem activists don’t eat if it dries up and they can’t skim the top. That’s obviously a powerful motivator for you to kill this story!

  30. Jay says:

    Obama 08 !!!

  31. People, people… This clusterfuck is so big you’re ALL right!

    Broad St. isn’t long enough for the stockades we need to punish these folks…

  32. cyrus says:

    @PeakVT

    “…become an wingnut urban legend, joining the ranks of “jack-booted thugs” and “welfare queens”.”

    I know of of a family where three generations are on welfare\subsidized housing (All women). Welfare queens are by no means an urban legend.

    @Barry

    “Sandra F. Braunstein, Director, Division of Consumer and Community Affairs of the Board of Governors of the Federal Reserve System”

    Doesn’t she have a conflict of interest? Isn’t that what she is supposed to say? I am not saying that CRA caused the whole thing, but it certianly didn’t help. It was at bare minimum a contributing factor.

  33. Chet says:

    Btw, I am NOT hacking for the Gop here. They’re equally incompetent and corrupt. This particular topic CRA and Housing “goals” hits at an area where the DNC makes it’s money and is clearly out to protect that cash cow.

    We obviously (to me anyway) need a whole new look at regulation in the financial sector. Not Chicago school of economics and not Chicago school of community corruption either.

  34. druce says:

    1980s – you live in the Bronx = no loan for you!
    1990s – Clinton and co. pass CRA and other measures
    2000s – Financial institutions discover subprime = cash cow
    2008 – subprime craters. Banks and wingnuts: but…but… you were the guys who said we should make loans in the Bronx. This is all your fault!

    not that the guys who came up with the CRA deserve a Nobel Prize or even a Cracker Jack prize. But jeez, how stupid do these guys blaming CRA think people are? (oh, those are the guys who bet their business on subprime…never mind)

  35. ECONOMISTA NON GRATA says:

    Hey Barry:

    I watched your debate with Charlie Gasparino yesterday on CNBC. You really ruffled his feathers. What amazes me is how he continues to show his face. He should be hiding under some rock after all his Bull Shit regarding LEH. I guess that he has an axe to grind as it relates to you.

    If I were running GE I would dismiss him and Kudlow, If I were the Dictator I would have one of my thugs shoot them on the spot.

    On another note, I did disagree with your opinion that the market would rally, anyway as I remember, you said over the next three days, you’ve still got Monday and Tuesday and perhaps a 50 bp Fed cut is in the works for Monday morning. I “bought the rumor and sold the confirmation”. Somehow or another that always seems to work, even when everybody is talking about it as was the case yesterday.

    Best regards,

    Econolicious

  36. OhNoNotAgain says:

    “Growing their loan portfolios in your article refers to direct buys. Housing goals were met thru that or just guaranteeing deals. Most of the subprime and Alt A was wrapped with a Frannie guarantee so, like a Moodys AAA rated CDO you could turn lead to gold.”

    Yes, and in what years did they increase their purchases of AAA-rated securities from the private sector ? And why was the private sector dumping these securities on Fannie and Freddie ?

    “I guess you must be part of the DNC machine to be so incredulous…That’s obviously a powerful motivator for you to kill this story”

    You got me….

    I’m way up there in the DNC hierarchy. I’m also covering up for all of the DNC “actitists” that have been running the show and holding the banks hostage until they gave loans to a bunch of dead-beat minorities. But, I have to ask – how did you discover my secret identity ?

  37. Jon H says:

    druce: “1990s – Clinton and co. pass CRA and other measures”

    CRA is from 1977.

    cyrus wrote: “I know of of a family where three generations are on welfare\subsidized housing (All women). Welfare queens are by no means an urban legend.”

    I’m sure there are plenty of white families the same way, and will become more even common in the crystal meth towns. A “welfare queen” is not someone who’s lived on welfare for a long time, it’s someone whose standard of living is suspiciously high for someone who lives on welfare, implying that there is fraud or manipulation at work. (Thus, the ‘queen’ part, implying high living.)

  38. donna says:

    Always blame the failure on the poor who lose out, not the rich who profited.

    It’s the Republican way.

  39. Estragon says:

    BR – “What I do not understand is how Fannie / Freddie forced banks to write no money down mortgages, 120% LTV, Interest Only loans, and 2/28 Arms ?

    Can anyone explain that to me? I cannot find those requirements anywhere in the books, legislation or charter of FNM/FRE/CRA .

    As you’ve said yourself, this was/is complicated and has many moving parts. The GSE part is rooted in the structural problems inherent in a blurry public/private mortgage system. GSE’s were designed to lower mortgage costs by piggybacking on the credit rating of the US government, and were designed to use this advantage to encourage home ownership at the low/middle price range. It worked. A side effect though, was to push private lending to dig in the corners for profitable mortgage lending business. That meant larger loans, more securitization, going out the risk curve, creative amortizations, etc.

    That might not have been a big deal but for the confluence of other factors (demographics, trade deficit recycling, cheap gas, stimulative monetary and fiscal policy, etc.). The GSE’s weren’t the whole problem, but they clearly were a factor.

    Assuming there really was a need for government intervention to promote home ownership, maybe it would have been better for the government to either explicitly nationalize the entire mortgage market in the first place, or explictly subsidize borrowers it believed needed it. Instead it put a subsidized competitor into the market, and contributed to distortions which have turned out to be disasterous.

  40. Troy says:

    The Federal Reserve says that there were $6.4T of outstanding mortgages at the end of 2002 and $10.4 at the end of 2006, for a net rise of FOUR TRILLION dollars of debt over 5 years.

    2008 will be lucky to come in with a $200B/yr growth in net lending, and outstanding consumer credit only rose $400B from 2002 through 2006.

    Anybody thinking CRA had any significant impact on this historic run-up — run-out, more like — in mortgage debt is an idiot and/or trying to blow smoke to camouflage the real issue (IMHO) that the Republican party apparat was using the housing sector as a magic growth engine to get them through the 2004 elections and keep themselves at the levers of power, damn the long-term consequences to the nation.

  41. Whammer says:

    Once again, Steve Barry gets it right. The problem is really due to the spectacular leverage strapped on top of these mortgages. Everything could be going to hell with the borrowers today, and the impact would not nearly be so bad without all the securitization.

    The other, obvious point that doesn’t get mentioned too much is that *NOBODY CARED* that the loans they were making were risky. Foreclosure was a feature, not a bug, because “housing prices never drop”, and “nobody read the fine print” about non-recourse loans. I will guarantee you that the pro formas of these businesses had assumptions about increasing foreclosure rates on these loans, but that they did not view that as risky because they would end up making money by foreclosing and selling. It was a guaranteed money machine, why would housing prices drop????

    You would think that a bunch of supposedly smart guys and sophisticated investors would think about this, but oh well……after all, the ratings agencies had looked at this stuff and given it AAA!! Wahoo!

    Blaming this whole mess on the CRA is so intellectually bankrupt that I can’t believe that it is even a discussion point. But that is pretty much par for the course among the right-wingers in this great land of ours.

    I’m holding out hope that these despicable people can be finally and irreversibly discredited so I can live out the rest of my years (50 more, if I can live to 100) in some kind of peace.

  42. D.L. says:

    Of course, CRA didn’t cause the housing bubble. But one must consider the motives of those who argue this; equally important, one must consider the motives of those who are on the other side of the political spectrum. Many on the left argue that what caused the bubble was “predatory” lending. This is just as ridiculous as arguing that CRA caused the bubble. And what do these people want? Presumably what they want is for the government to retroactively change the terms of those mortgages so that they are more favorable to the borrowers. Some of them simply want government handouts for subprime borrowers.

    The point is that if one wants to criticize those who argue that CRA caused the bubble, one should also take a look at the arguments on the other end of the spectrum.

  43. DeDude says:

    I agree that there are problems associated with F&F loans. However, F&F had about half of the mortgage market but only a small part of the subprime problem. Compared to their size they have done a lot better than the rest of the mortgage securitization businesses.

    The reason they got into the subprime mortgage market was not that the (Bush appointed) regulators suddenly in 2002 started telling them to do that. It was that their shareholders and CEO wanted more profits and more marked share. The reason F&F got into problems was that we allowed them to be privatized. So their mission changed from providing inexpensive loans to those that could afford it, to making as much profit as possible for their COE’s and shareholders.

    The solution is to never again allowing these two companies to become private enterprises. Leave them as government agencies with very specific missions that have noting to do with sucking more money out of people, and everything to do with making mortgage loans available to those that can afford it.

    The problem is not giving loans to poor people. Look at all the loans given to poor people during the Clinton years, they didn’t default. The problem is giving people (poor, middle class or rich) loans they cannot afford. The loans that are defaulting are not the small conforming loans on houses in poor neighborhoods, it’s the big nonconforming loans in middleclass neighborhoods.

  44. Mysticdog says:

    I think it is hillarious that wingnuts can believe that poor, undereducated blacks tricked and trapped all of the wealthy white accountants, MBA’s, economists, brokers and executives into destroying the wealth of rich white people (not really, most of them still won’t fall out of the top quintile of wealth…).

    I mean, if the largely powerless blacks making up ~10% of our population have been able to so completely beat us whites on our home turf at our own game, I only have one thing to say:

    I, for one, would like to welcome our new black masters … HAIL BLACKS!

  45. VJ says:

    D.L.,

    Many on the left argue that what caused the bubble was ‘predatory’ lending. This is just as ridiculous as arguing that CRA caused the bubble.

    More than a dozen states attorney generals disagree with you.

    They’re prosecuting wide-spread predatory lending.
    .

  46. wunsacon says:

    Great point, mysticdog!

    That reminds me of the propaganda term used to describe prisoners who commit suicide after years of solitary confinement and beatings: It’s “asymmetric warfare”!

    Our poor, poor masters!

  47. AGG says:

    Compliance Enforcement????
    The Supreme Court now tells time by kookoo clocks, Congress is cowed, the administration is bought so we can rely on our low level bean counters to enforce? HA HA HA HA HA!
    It’s all happened before folks. Ask the Dutch, the English or the Hapsburg Spanish. As their empires were caving their economies becaome increasingly top heavy with financials, their aristocracy more entrenched instead of less and wealth distribution became extreme on the top end while any semblance of a middle class withered.
    For the wing nut true believers in “free markets, prosperity is God’s blessing” and all that, I say fine. Keep it up. Better you than me. I’ll stick with the trailer trash that stayed in their trailers. The rest of you can default.

  48. rational says:

    Barry, I have been discussing this with a friend over email the last couple of days. In addition to the Fed articles you posted, you may also want to read this Fed survey 9http://www.clevelandfed.org/research/commentary/2000/1100.htm) which points out that CRA loans were profitable. Sure, there weren’t widly profitable, but were at least marginally profitable.

    They were not unprofitable and force banks to hedge themselves with fancy financial instruments, as some rightwing talking points allege.

  49. Bobo says:

    The CRA wasn’t solely responsible for the problems, but it (and the associated political pressure from Bill Clinton and his comrades) is not blameless either. A Clinton 2000 Treasury report on lending activity between 1993 & 1998 touted the success of Clinton’s CRA regulatory reforms:
    # $467 billion in mortgage credit flowed from CRA-covered lenders to CRA-eligible borrowers.
    # The amount of home mortgage lending to low- and moderate-income borrowers, low- and moderate-income communities rose 80% during that time. In 1998 alone, these institutions made $135 billion in mortgage loans to these borrowers.
    # CRA-covered lenders and their affiliates increased mortgage lending to low- and moderate-income borrowers and communities at more than twice the rate of increase for other borrowers. The number of mortgage loans made by CRA-covered institutions and their affiliates to these borrowers and areas increased by 39 percent between 1993 and 1998, while such institutions’ loans to other borrowers increased by only 17 percent.
    # Subprime lending drove growth in lending to low- and moderate-income borrowers and areas for institutions not covered by CRA
    http://www.treas.gov/press/releases/ls564.htm

    While the legislation may have been “flexible”, the FDIC’s Clinton-modified regulations were less so. Take a look at the the “lending test” in FDIC’s CRA regulations (S 345.22(b), especially paragraph 5:

    (b) Performance criteria. The FDIC evaluates a bank’s lending performance pursuant to the following criteria:
    {{6-30-95 p.2786.04}}
    (1) Lending activity. The number and amount of the bank’s home mortgage, small business, small farm, and consumer loans, if applicable, in the bank’s assessment area(s);
    (2) Geographic distribution. The geographic distribution of the bank’s home mortgage, small business, small farm, and consumer loans, if applicable, based on the loan location, including:
    (i) The proportion of the bank’s lending in the bank’s assessment area(s);
    (ii) The dispersion of lending in the bank’s assessment area(s); and
    (iii) The number and amount of loans in low-, moderate-, middle-, and upper-income geographies in the bank’s assessment area(s);
    (3) Borrower characteristics. The distribution, particularly in the bank’s assessment area(s), of the bank’s home mortgage, small business, small farm, and consumer loans, if applicable, based on borrower characteristics, including the number and amount of:
    (i) Home mortgage loans to low-, moderate-, middle-, and upper-income individuals;
    (ii) Small business and small farm loans to businesses and farms with gross annual revenues of $1 million or less;
    (iii) Small business and small farm loans by loan amount at origination; and
    (iv) Consumer loans, if applicable, to low-, moderate-, middle-, and upper-income individuals;
    (4) Community development lending. The bank’s community development lending, including the number and amount of community development loans, and their complexity and innovativeness; and
    (5) Innovative or flexible lending practices. The bank’s use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income individuals or geographies.

    Frankly, Fannie and Freddie were a bigger contributor to the problem. Republicans tried several times to reign in Freddie/Fannie only to be stopped.

    The Bush administration proposed better oversight in 2003: http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print

    McCain sponsored a reform bill (S-190) in 2005: http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

    Listen to the politicians’ words and decide for yourself who was on which side of the Freddie/Fannie regulatory debate: http://www.youtube.com/watch?v=_MGT_cSi7Rs

  50. Francois says:

    “Having traded many billions in whole loan and MBS assets I can tell you the banks paid up bigtime for CRA loans.”

    Really? Then pray tell why in all the testimonies, interviews and journalistic investigations regarding subprime and Alt-A, not ONE lender invoke (even OFF THE RECORD) the CRA as source of the problem?

    C’mon! We’re anxiously waiting…

  51. wunsacon says:

    Bobo, Hudson City Savings never relaxed their lending standards, as one example. And they’re still around and profitable. Did the CRA shut them down for not relaxing their lending standard? No.

    The problem was the securitization and overleveraging. Republican decisions. Stop trying to pass the buck.

    Read the great article RW pointed to: http://tinyurl.com/3lw9au

  52. DeDude says:

    Yoo Bobo

    That is all fine, but those CRA loans were profitable, so how can they be responsible for banks failing now?

    F&F had half of the mortgage market and required a 200 billion bailout, whereas the rest of the market requires a 700 billion bailout package. How come you are hitting on F&F?

    And again; the loans that are failing were made in 2004-07 when the Bush administration had stopped enforcing CRA. How can all that irresponsible lending in 2004-07 be due to an old law that was enforced in the late 90’ies without causing problems, but not enforced in the period when the problems occurred?

    DeDude

  53. moses says:

    Independent.co.uk
    Dominic Lawson:

    Thus by 1998 you had the Federal Reserve Bank of Boston producing a document entitled “Closing the Gap: a Guide to Equal Opportunities Lending”, which instructed banks that an applicant’s “lack of credit history should not be seen as a negative factor” in obtaining a mortgage.

    As Stephen Malanga of the Manhatta *Institute notes: “Of course the new federal standards couldn’t just apply to minorities. If they could pay back loans under these terms, then so could the majority of loan applicants. Quickly, these became the new standards in the industry.

    As the housing market boomed, banks embraced these new standards with a vengeance. Between 2004 and 2007, Fannie Mae and Freddie Mac became the biggest purchasers of subprime mortgages from all kinds of applicants, white and minority, and most of these loans were based on lending standards promoted by the Government.”

    One of the few journalists to see where this would lead was Jeff Jacoby, of the Boston Globe. Last week he reminded his readers what he had written in 1995: “Our banks are knowingly approving risky loans to get the feds and the activists off their backs… When the coming wave of foreclosures rolls through the inner city, which of today’s self-congratulating bankers, politicians and regulators plans to take the credit?”.

  54. Richard says:

    So, the government exculpates itself. Wee Hoo.

  55. Bobo says:

    wunsacon – While Hudson City is a very well run bank by many measures, it has not done particularly well on CRA examinations; it received 2 “needs improvement” and 5 “satisfactory” in 7 exams since 1992. Its most recent rating (2003) was “satisfactory”, but it received “low satisfactory” on the lending test. http://www2.fdic.gov/crapes/2003/13074_030721.pdf

    Neither securitization nor leverage would have been a problem if it weren’t for the high defaults (and corresponding price correction) on the underlying mortgages/homes.

    Also, if you want to talk leverage, listen to the youtube clip in my prior post where Franklin Raines (ex-Fannie CEO, Dem insider and Obama advisor) told Congress that home loans are “so safe” that he should be allowed 50-1 leverage.

    DeDude – Where did you get your information that CRA loans were “profitable”. Profitable to who? Maybe they were profitable to the initiators, but I don’t believe they’ve been profitable for the people who got stuck with them in MBSs and CDOs.

    As for Fannie/Freddie, they hold/insure $5T in mortgages, so it’s not at all clear that the $200B that’s been committed so far will be sufficient. Also, they were the giants and as such standard bearers for the industry. Many bankers found themselves having to be more aggressive just to compete with Fannie/Freddie.

    Absurdly, Fannie/Freddie continued to buy alt-A loans even after the subprime market started to implode. They also pioneered dangerous policies like “virtual appraisals”. http://biz.yahoo.com/ap/080906/mortgage_giants_what_went_wrong.html

    Criticism of Fannie/Freddie was not restricted to just the GOP. The Clinton administration tried to rein them in in 2000. Armando Falcon, a Dem who Clinton appointed to head OFHEO was arguably their biggest critic. Warren Buffet (Dem and Obama backer), Allen Greenspan and Ralph Nader have also been critical.

  56. RW says:

    “McCain sponsored a reform bill (S-190) in 2005″

    Oh please, that was Chuck Hagel’s bill, McCain slapped his name on it after it was proposed but like most Republicans and Democrats gave it no support and it ultimately died … didn’t even leave committee if I recall correctly.

    Frannie is not a good subject for apologists of either major political party and neither is loyalty to capitalist principals; that’s the real message.

    Words are cheap, the action is the tell, and McCain’s action tells the same story as many in Washington DC (Hagel and a precious few like him excepted). The message is: I want to be (re)elected, I like playing this game and I will literally do anything including beggaring our nation or sacrificing your children to wars for the next century if it will keep the dice rolling.

  57. AGG says:

    Barry,
    The other day Mr. Buffett was talking about the reason for his investment in GE. He mentioned that GE was in the industrials 100 years ago and would still be around 100 years from now. What got my attention was when he said that he expected (he did not say hoped) to be around too. He wasn’t juking or laughing. He was quite serious. This was ignored by the interviewer (Rose, I think) but I got to thinking about the “donation” that Buffett made to the Gates foundation. These guys want to be immortal! Don’t believe me? Why did Buffett say a year or so ago that he would love to be around 40 years from now to see “how it turns out”? This was at the conference to announce the donation to the Gates Foundation. I found that comment and another one about how Bill Gates reads a lot about biology and explains things to Buffett as strange considering the Gates Foundation was supposed to be involved with vaccines for Africa and such. I suggest you keep your eyes on Buffett and Gates. They are cooking up something VERY elite in health care. It will only be for the very rich and will involve extended longevity. Who knows? Maybe they’ll have cloned pigs with their DNA for spare parts. I always thought cloned pigs would be more appropriate for wall street execs but you never know.

  58. john says:

    as Franklin Raines’ 2004 testimony to the House Subcommittee on Financial Services illustrates everyone was seeking more leverage when he says that Fannie could operate with “2% of its portfolio set aside to cover losses.”

    i would agree w/ raines’ assessment *had* traditional lending requirements not been relaxed. has 20% down been the norm a 2% capital requirement would have been fine. but then, there’d be no bubble and we wouldn’t be arguing any of this today.

  59. WallStreetNobody says:

    It is remarkable how a “theory” started by Ann Coulter of all people, and discredited by every single economist and financial analyst, has gained so much popularity with the wingnuts. As is typical of them, they refuse to look at any and all facts and instead would rather listen to a radical political pundit like Ann Coulter. This really needs to be spread around because the underlying appeal of this theory to the right-wing nuts is exactly what is most obvious – racism. The classing right-wing mantra of “let me blame all my failures in life on minorities, oh and the media”.

  60. DeDude says:

    Bobo

    As pointed out by “rational” (right above your 8:45 posting), all of those horrible loans that Clinton forced upon the poor innocent banks actually were profitable (http://www.clevelandfed.org/research/commentary/2000/1100.htm). And as pointed out by others in previous debates here, the CRA loans losses are less than non-CRA loan losses. But I guess you are one of those people who quickly forget what others have written if it conflicts with your preconceived notions.

    No it is not at all clear that the 200B for F&F are enough but that was the emergency bill for them. It is also not at all clear that the 700B for the other half of the mortgage problem is enough but that was the emergency bill for them. So in apples to apples comparisons it turns out that F&F were the least reckless and required the least bailing out.

    The idea that F&F were reckless and that banks therefore had to be reckless to “compete” with them is absurd. You do not compete on recklessness, you walk away from it and wait for the opportunity to pick up the pieces of your crashed competitor. That is what happens in the real world just look at the banking sector right now. The banks had pleanty of money-making opportunity by making safe conforming loans and handing them over to F&F, not to talk about the opportunities in the rest of the credit market.

    I am in no way saying that F&F did perfectly well, just that it is absurd to blame them for the current crisis. The problems occurred after we privatized those companies and now that we have reversed that stupid descition, I hope that we can revert their goals from making profit for shareholders to making inexpensive loans to people that can afford them. There is no reason to allow fat-cat profitters to put their gready hands in peoples pockets every time they by a home. The original system worked great until these dead-brained neconmen decided to fix it.

    DeDude

  61. TKL says:

    So you’re saying that the pressure on Fannie and Freddie to lower lending standards, which caused their eventual collapse, is o.k. because private institutions lowered standards too?

  62. DeDude says:

    What pressure to lower lending standards?

    I agree that there was a pressure on F&F to make a higher fraction of their loans to people with below median income. But that is not the same as a pressure to lower lending standards. You can make very responsible conforming loans to poor people living in poor neighborhoods (just don’t put below median income people into above median cost houses). If F&F had not been so busy making money for their shareholders and zillion dollar bonuses for their CEO, they could have increased their fraction of loans to below median income people by reducing their share in the above median income part of the market (leaving that high risk game to private companies).

  63. TKL says:

    Dream on. Politicization of lending plainly contributed to the current crisis.

    Bloomberg (Sept. 22) — “The companies said they were urged to increase purchases of subprime debt by the Bush administration. The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year.

    The updated goals “were significant enough to force them to go down the credit curve to meet them, which meant participating in some way or form in the higher-risk areas of the mortgage market,” said David Stevens, a former head of Freddie’s single- family mortgage business who now runs lenders affiliated with Long & Foster Real Estate Inc. in Fairfax, Virginia. That included “the subprime business.””

  64. rockitz says:

    BR: Looks like Chet, Bobo, et al. spanked you and your lib sympathizers pretty well on this thread, but, by all means, keep bringing this up. The truth will set you free and hopefully this country as well.

  65. DeDude says:

    TKL, yes when it began to dawn on some of the people doing subslime loans to poor people that their ponzi scheme might not last forever, they asked their republican puppets to make it a little easier to get rid of it (after all the upfront fees had been collected). Sticking it to the government is exactly what neoconmen do. Why else do you think they are so absurd in their attempt to claim that it was the governments fault, in spite of clear evidence that their failed ideology caused the financial crisis.

  66. Bobo says:

    DeDude – it’s ridiculous to presume that a study done in 1999 tells us anything about the CRA loans made during the housing bubble.

    Furthermore, if you read the Fed link, you’ll see they admit the study was done hastily (due to a Congressional deadline), and there were many problems with the study. For example:

    “In principle, to assess a law or regulation’s influence on loan performance and profitability, one must measure its “marginal” effect; ideally, this would mean considering only the additional loans made because of the law. Such an assessment, however, is impossible in practice because one cannot specify the subset of loans that are made solely because of the CRA”

    “In addition, we encountered some confusion as to the definition of a CRA loan. The definition was not well understood by all survey respondents, some of whom equated CRA loans with loans made under special lending programs.”

    “We received responses from 143 of the 500 institutions to which we sent the survey (a 28.6 percent response rate). These responses and our follow-up telephone contacts revealed that banking institutions generally do not track profitability and performance separately for CRA-related lending, so our report emphasized qualitative results regarding profitability. Because fewer than half of the respondents answered quantitative questions on performance, one must be cautious when using these responses to draw qualitative inferences comparing the performance of CRA-related and other lending.”

    Finally, the respondents did not unanimously claim profitability:

    “A majority of CRA special lending programs were reported to be profitable or marginally profitable. About 25 percent of them were described as unprofitable or marginally unprofitable.”

  67. DeDude says:

    OK then we can agree that Clinton (who actually enforced the CRA) is not responsible for the problem loans. Hope we can also agree that (as previously pointed out) 50% of the subprime was made by companies that were in no way subject to CRA and 30% by institutions that were only marginally subject to it.

  68. mik says:

    Not that facts matter, but still. From NYT:

    Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers–more than three times as much as in all its earlier years combined,
    according to company filings and industry data.

    “We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”

    ~~~

    BR: Yes, Fannie was an element in the Housing mess. Obviously not in the overseas housing markets, and obviously not for the prior 20 years — but they were a factor.

    Do you think they were the single most important reason for the housing boom and bust ? Is that your argument?

  69. mik says:

    BR wrote “Yes, Fannie was an element in the Housing mess. Obviously not in the overseas housing markets, and obviously not for the prior 20 years — but they were a factor.

    Do you think they were the single most important reason for the housing boom and bust ? Is that your argument?”

    ~~~
    No.

    I don’t understand and/or know many elements.
    For example, I don’t understand how mortgage originators, like CntryWide and WaMu, got into trouble. I thought that the only mortgages they had on books were new mortgages in pipeline to be sold to Fanny/Freddy or to securitizers.

    I don’t understand how CMO got spread.

    We have something close to a perfect storm.
    I suspect -just a gut feeling on my part, a combination of Clinton/Bush administrations pushing Home ownership, Fanny/Freddy bribing politicians, politicians pushing bureaucrats, bureaucrats pushing banks, Greenspan easy money and new classes of derivatives not understood by anybody, all of it together caused the storm.

    Missing one or two factors we probably would not have had the storm.

    Without CRA or Fanny/Freddy or easy money or CMOs it would not have happened. [BR: it happend overseas w/o FNM/FRE/CRA!]

    With better behavior of administrations and/or Congress, it may or may not have happened.

    If there was no CRA – storm would not have happened.
    If instead of sleazeballs, Frank and Dodd, we had better pols, it probably would not have happened.
    If there was no Greenspan’s easy money, it would not have happened.
    If Housing was not the only game in US economy, it probably would not have happened.
    If Fanny/Freddy did not exist or were tightly regulated

  70. DeDude says:

    Mik,

    Fanny/Freddy did relatively less of the risky stuff than the rest of the private mortgage industry. They are almost half of the total loans but the 270 billion is less than 20% of the risky loans in 2005-08.

    Without Fanny/Freddy there would have been other even less regulated private companies to do fill the gap, and those would have taken on at least as much risky (high profit) stuff as Fanny and Freddy did.

    The only difference is that without Fanny/Freddy there would not be anybody to securitize mortgages today and the housing market would be in total chaos, with pretty much no other byers than those who can pay the full price in cash.

    CRE actually prescibes that an institutions CRE activities “should be undertaken in a safe and sound manner”. So without CRE the institutions subjected to CRE would have felt even more free to abandone all caution.

    Sleazeballs Frank and Dodd had absolutely no power when these problems were created and expanded, so their existence or not would have made no difference.

  71. Whammer says:

    One of the lines of thoughts on this that always makes me laugh is the “Republicans in Congress tried to reform Fannie/Freddie” — all with a Republican-controlled Congress. Funny how they got stopped by those dastardly Democrats again…….

    Barry rightly makes the point that the problem happened in other countries without FNM/FRE/CRA.

    Plus, once again, all you wingnuts can’t seem to get it through your pea brains that the problem is that a $200,000 mortgage got turned into a $3 million CDO. That has nothing to do with the CRA.

  72. The Performance and Profitability of CRA-Related Lending
    http://www.clevelandfed.org/research/commentary/2000/1100.htm

    In November 1999, the U.S. Congress asked the Board of Governors of the Federal Reserve System to conduct a comprehensive study of loans made under the Community Reinvestment Act of 1977. The Board’s study focused on the loans’ delinquency and default rates—their performance—as well as their profitability. This Commentary reports the results of the study.

    Concerns about the availability of credit to lower-income borrowers and communities and to small businesses and farms are long-standing. Over the years, many government programs, such as those of the Federal Housing Administration, have been established to address these concerns. Regulation of private-sector activities also is intended to bolster such lending. The most prominent government regulatory effort to improve access to credit, the Community Reinvestment Act of 1977 (CRA), was designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, consistent with safe and sound operations.

    Responding to the CRA, banking institutions have used various methods to expand lending to lower-income customers and those in lower-income neighborhoods, but their approaches fall into two broad types, both typically involving special marketing and outreach. In one approach, lenders have sought additional CRA-related customers who would qualify for market-priced loans using traditional standards of creditworthiness. In the other, lenders have gained customers by modifying their underwriting guidelines or loan pricing. Many banking institutions, especially the larger ones, have established or participate in special programs to foster lending.

    Special lending programs vary widely but they often feature more flexible credit-underwriting guidelines than those used for other products; education and counseling for prospective borrowers; enhanced, targeted marketing of credit products; and coordination with a wide range of third parties, both private and public. In addition, some banking institutions offer pricing incentives for loans made under these programs and have established procedures to mitigate the credit risk associated with such loans.

    Although the CRA’s effects on lending to lower-income populations and neighborhoods are difficult to assess, such lending has increased substantially over the past decade or so. For example, home- purchase lending to lower-income households has increased 86 percent since 1993 (compared to about 50 percent for higher-income households). Lending to borrowers in lower-income neighborhoods also has risen sharply (nearly 80 percent) since 1993.

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