“It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.”

-Robert Gordon, American Prospect

>

>

I have been meaning to get back to this issue, but events in the market have kept me a tad busy.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE’s role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry — cognitive dissonance writ large — of those folks who have been pushing for greater and greater
deregulation, and are now attempting to disown the results of their
handiwork.

I feel
compelled to set the record straight about this pseudo-intellectual
detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks
required by Congress to lend the first mortgage and do a HELOC for the
down payment — at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

Caseshillerpricedeclines_2

• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund
managers load up on an investment product that was hard to value,
thinly traded, and poorly understood

• What was it in the Act that forced banks to
make “interest only” loans? Were “Neg Am loans” also part of the
legislative requirements also?

• Consider this February 2003 speech by
Countrywide CEO Angelo Mozlilo at the American Bankers National Real
Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?

The answer to all of the above questions is no, none, and nothing at all.

The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron’s, there is plenty of things to be angry at D.C. about — but this ain’t one of them.

If you were to ask me to reveal the prime causative factor for the Housing
boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and
then leaving them there for a year. The prime factor in the bust was
nonfeasance on the Fed’s part in supervising bank lending, allowing banks to give
money to people who couldn’t possibly pay it back.

The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs
off of the field and erroneously expecting market participants could
self-regulate, the powers that be in DC gave the players on Wall
Street enough rope to hang themselves with — which they promptly did.

There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

Shame on them for their foolishness or cowardice.

Whenever I see a CRA proponent blathering, I have a “Star Trek
moment.” That’s when Captain Kirk proves to some random alien computer
that its basic programming is logically inconsistent. It’s the AI
(artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .

“You can fool some of the people some of the time and some of the people all of the time. That’s usually enough.”

-MILTON BERLE

~~~

Note in the Sources section, we have a few subtopics: “Sources” is what I use to show where data, quotes and charts are from. “Previously” discusses commentary on this subject we have written in the past. “Related” is a good jumping off point for further reading; lastly, Consistently Wrong
is where we point out the willfully misleading tripe written by people
who should know better, but publish nonsense anyway. In the case where it appears some are trying to mislead the public, the least we can do is call them out.

>

Previously:

A Memo Found in the Street
Uncle Sam the enabler
BARRY L. RITHOLTZ
MONDAY, SEPTEMBER 29, 2008

http://online.barrons.com/article/SB122246742997580395.html

Download A Memo Found.pdf

(PDF)

The Ongoing Impact of the Housing Sector
Barry Ritholtz
Investor Insight, Aug 27 2007, 11:50 AM

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/08/27/the-ongoing-impact-of-the-housing-sector.aspx

Real Estate and the Post-Crash Economy
Barry Ritholtz
Thoughts from the Frontline,December 29,  2006

http://www.2000wave.com/article.asp?id=mwo122906

>

Related:
Community Reinvestment Act had nothing to do with subprime crisis
Aaron Pressman
BusinessWeek,  September 29

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

It’s Still Not CRA
Ellen Seidman
New America Foundation, September 22, 2008 – 9:36pm

http://www.newamerica.net/blog/asset-building/2008/its-still-not-cra-7222

“The Community Reinvestment Act: Thirty Years of Accomplishments, But Challenges Remain”
Prepared Testimony of Michael S. Barr
Professor of Law, University of Michigan Law School
Before the Committee on Financial Services
U.S. House of Representatives, February 13, 2008

http://tinyurl.com/CRA-Michael-S-Barr-testimony

The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.
THOMAS FRANK
WSJ, OCTOBER 1, 2008

http://online.wsj.com/article/SB122282690823092989.html

Did Liberals Cause the Sub-Prime Crisis?
Robert Gordon
The American Prospect, April 7, 2008

http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis

After the Deal, the Focus Will Shift to Regulation
FLOYD NORRIS
NYT September 28, 2008

http://www.nytimes.com/2008/09/29/business/29norris.html

>

Consistently Wrong:
Don’t Blame the Markets
JERRY BOWYER
NY Sun, April 18, 2008

http://www.nysun.com/opinion/dont-blame-the-markets/74903/

How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
TERRY JONES
INVESTOR’S BUSINESS DAILY, September 24, 2008 4:30 PM

http://www.ibdeditorials.com/IBDArticles.aspx?id=307149667289804

Wingnuttery on CNBC
TBP, Wednesday, September 17, 2008
Michelle Caruso Caberra

http://bigpicture.typepad.com/comments/2008/09/wingnuttery-on.html

IT’S NOT JUST THE LENDERS
There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem.
TYLER COWEN
NYT, January 13, 2008

http://www.nytimes.com/2008/01/13/business/13view.html

Category: Credit, Derivatives, Fixed Income/Interest Rates, Psychology, Real Estate, Taxes and Policy

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.

124 Responses to “Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs”

  1. Dick Armey says:

    Dick Armey on CNBC spouting the same line of bullcrap –

    Best quote: “Herbert Hoover was a must better president than he gets credit for.”

    He also cites the BS Amity Shlaes book.

  2. txchick57 says:

    who you calling a wingnut ;)

  3. MikeBC says:

    thanks for staying on this point.

  4. Ben says:

    Excellent case against the CRA being a key factor in the crisis. I’m still waiting for some deeper analysis on FF lending and how much responsibility they have for priming the subprime bubble. But it seems that they are probably just one of many players who lowered standards.

    What’s very clear is whomever is responsible for lowering lending standards, nobody forced investment banks, hedge funds and PE to build a huge edifice on top of a risky market. Deciding to build their skyscrapers on that particular piece of quicksand was clearly Wall Street’s fault.

    I do think saying that the fault is deregulation and profit-motive is a tad vague. I subscribe to the idea that we live in a unique historical moment where computer models stoked an irrational belief in our ability to predict the future. Investors delegated to fund managers who delegated to their boffins who delegated to their computers.

    Too much faith in markets and models, chaos and complexity, too little clear thinking about what was actually happening in the world.

  5. xon says:

    I wish I could print this all on a business card, or perhaps make a sign with it. I wouldn’t even have to waste breath on these nutjobs; just hand ‘em their sign. . .

  6. rm says:

    Barry:

    Trying to straighten out wingnuts is a fool’s errand.

    That said, has anyone ever seen a comprehensive discussion that would back up Barry’s statement:

    “The root legislative cause of the current was excessive deregulation.”

    I am not arguing with the point. However, I’ve never seen anything that really shows, all in one place, exactly which “deregulation,” excessive or otherwise, that can be said to have allowed (or not prevented) the loan originators, appraisers, bond packagers and credit rating agencies to have failed so thoroughly.

    Bits and pieces of this I’ve seen. A comprehensive discussion, not so much.

    I am looking for something that includes all the legislation that was repealed, as well as all the legislation that was proposed, but then beaten back.

    Anyone?

  7. wunsacon says:

    The CRA struck again!

    http://tinyurl.com/5m3uo8

  8. those questions are Classic. the product of a Sound Mind, unencumbered by the cacophony of the unthinking..

    as I said before, BR, you can handle my Voir Dire, anytime ;)

  9. dave says:

    The CRA is a red herring, however the ACORN lobby deserves a long look. They are not the same thing, they are related. The group, and others in the same vein, its supporters in congress are in this mess up to their necks. What sets them apart is that they approach the “crisis” with their hands out. To them this is a golden opportunity.

  10. FredW says:

    Larry, you hit the nail right on the head

  11. grumpyoldvet says:

    Barry, you are tilting at windmills. The nutzoids in this country will blame anyone and everything fot their foolishness. Americans all wanted to live like “the millionaire Next Door” whether they could really afford it or not. Take out equity, HELOC loans, liar loans, anything to get their McMansion, Boob jobs, vacations in Caba San Lucas and the big bad ass SUV. It’s always easier to blame the other guy rather than look in the mirror.

    As Walt Kelly’s Pogo said “We have met the enemy and he is us”.

  12. Bruce in Tennessee says:

    I posted this on the open thread, but I think it is something we just don’t think about…

    “Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to tell which was which.”

    Last sentence of Animal Farm. George Orwell

    Gale Norton, former Interior Secretary, general counsel for Shell Oil.

    Tom Ridge, former secretary of Homeland Security, now on board of directors of Savi Technology, supplier to Dept. of Defense.

    Jon Corzine.

    Hank Paulson.

    Dick Cheney.

    and so on….

    Maybe it was a cautionary tale about communism, but today, you still can’t tell the faces of the pigs from the humans…

    and some wonder why the bailout bill was going to pass, and everyone knew it…only the creatures “outside” seemed not to know…

  13. Deano, Peoria, AZ says:

    The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

    I agree with all your statements except wording of the above. I live in the Phoenix valley and to say that this illegal immigrant capital of the Southwest is an affluent, non-minority region is stretching it a little. There may be affluent spots like Scottsdale, Tempe, etc., but we are about to the point of this area reverting back to Mexico.

  14. Steve Place says:

    Could it not be both? I do agree that deregulation was done in areas which hurt our economy, however:

    Did the GSEs not remove some of the systemic risk in the mortgage markets? Did they not buy up mortgages that shouldn’t have been made in the first place, creating government-induced demand?

    Were the GSEs not advocates of the deregulation themselves?

    I’m not saying Fannie and Freddie were *the* cause of this current mess, but they are certainly not victims.

    ~~~

    BR: As I noted in the Barron’s piece, “THERE’S ACTUALLY A LOT MORE we could add to these items. We could mention impotent supervision of Fannie and Freddie by the Office of Federal Housing Enterprise Oversight; the negligent oversight on ratings agencies; the Boskin Commission’s monkeying around with how inflation gets measured; the “Greenspan Put,” etc.”

    Fannie and Freddie were cogs in the machine, but are far, far from the root cause of this. And the CRA is essentially an irrelevant factor.

    Unless you are a partisan grasping at straws. Then you ignore reality, and go to whatever you can pin on the other guy . . .

  15. brasil says:

    Fair and accurate piece..great work …It was more like 10 vultures eating a live victim…which was responsible for the eventual death..

  16. Bruce in Tennessee says:

    497k new claims, which will be revised next week to over 500k. You will be told in the strongest language that when the bailout bill passes, it will be safe to get back in the equity waters again….

    Wanna bet?

  17. cuvo says:

    Right on. Beware any subculture that never accepts responsibility for failures and always assigns blame to others…

  18. AGG says:

    Steve Place,
    Barry covered all the bases. For you to ask a question like, “could it be both?” is like asking if humans are equally full of both blood and urine because we take a piss every now and then.

  19. Hulu says:

    US. government pulled the biggest accounting scam ever by spending $trillion subsidizing housing in off-balance sheet financing with Fannie/Freddie, just like Enron! Instead of helping the working class, our government destroyed their lives. Home foreclosed, no savings left, just more debt for our kids. Thanks Uncle Sam.

    Government is the problem, not the solution!!!

    What do I know? In the big picture, I am just another wingnut.

  20. Barry,

    With all due respect, you are describing the symptoms of the disease, not the cause of the disease. We need to treat the cause, not the symptoms.

    The evidence is clear (unless your rational neocortex thinking is inhibited by emotional amygdaloidal political bias) that the cause of the disease is CRA rewrite of 1995; more specific, Clinton ordering Robert Rubin Treasury Department to rewrite the rules in 1995 (banks were given strict new numerical quotas and measures for the level of “diversity” in their loan portfolios) that according to the Harvard study resulted in, from 1995 to 2005, minorities making up 49% of the 12.5 million new homeowners. Because of this Clinton policy, the banks were forced to cheat (symptoms that you describe like JPM Memo) to get a good CRA rating.

    If you really want to eradicate the disease, you need to understand the root causes of this disease, and not simply provide a salve for its most troublesome manifestations.

    P.S. Why the democrats cannot understand that their social engineering programs like Affirmative Action and CRA will not work, because these programs are attempting to reverse millions of years of evolution and natural selection (Survival of the fittest)?

    ~~~

    BR: Herbert, how do you explain then, that there was no problems in either Housing or Credit for another decade?

    If you were to ask me for the prime causative factors for the Housing boom, I would say it was Fed Chair Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was the failure of the Fed to supervise lending, allowing banks to give money to people who couldn’t possibly pay it back.

    As to the credit crunch, look at the 2 key elements: The 2000 Commodities Futures Modernization Act that exempt CDS from regs, and the ratings agencies slapping triple AAA on what turned out to be junk paper.

  21. Bruce in Tennessee says:

    There isn’t any credit crisis…

    http://biz.yahoo.com/rb/081001/business_us_financial_bailout_fdic.html?.v=2

    FDIC Seeking “Temporary” Unlimited Treasury Loans.

    Oops. I am afraid I put the quotation marks in there, and mispelled taxpayer as Treasury…mea culpa..

    Now just how long was that temporary ban on short selling….ummmmmmm…

  22. brasil says:

    ..The rating agencies ..unless also politically coerced also by the Clinton and Bush admins…hold the majority of the blame ..they let a family cold turn into a plague..

  23. grumpyoldvet says:

    Well I knew if one waited long enough that bag of wind bullshit artist Dick Armey would say it. It’s all Clinton’s fault. The Republicans did everything theuy could to stop him but failed.
    Jeez…how in the hell does CNBS give him air time. Oh wait, it’s the network of Jack Welch, that other rightwing cuckoo.

  24. Barry, am with you there and thanks for staying on this topic! Unfortunately, what we have in Congress right now don’t realize that they represent ‘we-the-people’ and continue to bulldoze economic plans good for America. Am amazed for $700B there’s no hearings whatsoever from economists!! I respect Frank, but Frank is no W Buffet, who gets his deal right.

  25. Francois says:

    “I feel compelled to set the record straight about this pseudo-intellectual detritus.”

    Sorry to disagree with you Barry, but affixing the word “intellectual” (even with the pseudo disqualifier) to what is in reality a blatant. propagandistic lie is an insult to anyone who value thought processes.

    The fact is that the far-right wingnuts made up this story because no matter how dangerous the current mess can be, it is out of the question for the wingnuts to accept that their cherished beliefs should bear ANY blame for the mess we’re in.

    The ONLY reason we have to spend precious time debunking those myths is because too many of these idiots (Jerry Bowser, Amity Schlaes, Cherles Krauthammer etc.) have too much access (when measured by merits of their arguments and quality of their thinking) to an uncritical mainstream media much more preoccupied with false fair-balance than seeking the facts for what they are.

    Is it any wonder the best financial news come from Financial Times, The Economist an other foreign publications?

  26. Jay says:

    Of course it’s excessive deregulation and not CRA and GSE’s, this is a liberal business blog. Duh. I was wondering where partisanship went. Ah, welcome back!

    ~~~

    BR: Who could ever argue with such flawless logic?

  27. OnTheBrink says:

    Couldn’t agree more with Francois post above.

  28. TulsaTime says:

    And then there was the last 8 years where the prime directive of the unitard executive was to ignore any and all regulations that might impede the enrichment of cronys. Seen in the atrophy of SEC, Dept. of Justice, etc., it led to heck-of-a-jobs for Brownie and Alan.

  29. Davis X. Machina says:

    Anybody here confusing Jay’s effusion with an actual refutation of any of the claims made in BR’s piece?

    Anybody who’s already had their coffee, that is?

    Didn’t think so…

  30. ECONOMISTA NON GRATA says:

    Barry:

    Down here in my neck of the woods we don’t know nothin about the CRA, RCA, Freddie and Fannie is that looker that lives down the street. You should see all the traffic that moves through that house while her husband is out working at the bowling alley. That poor man…..

    Down here we figure it’s Satan that’s at work up there in your neck of the woods on Wall Street and in Washington. Hell, it’s obvious, Can’t you see it….?

    Anyway, I gotta get back to work makin some wooden arrows so the kids can have some good clean fun shooting each other in the eye.

    Best regards,

    Econolicious

  31. Hulu says:

    BTW Barry,

    Opinions from editorials are not FACTS.
    So let’s get your facts straight, please.

    The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

    This “FACT” is obviously a fairy tale!!!

    If you “compelled to set the record straight”, how about showing us some real facts.

    Thanks for the laugh Barry…
    Great website…great info and good laughs, too.

  32. Bob A says:

    Fox News security will be knocking at your door any minute…

  33. steveeboy says:

    thanks for this barry.

    as usual, LOVE THE BLOG.

    I don’t think any real thinking person buys this latest BS from the desperate wingnut whackjobs.

    but it is nice to see that they cannot leave their “blame the dirty mezcans and negroes” ideology behind.

    you just know that jesus and tyrone where walking the halls of all the big investment banks and just forcing them to leverage up to 30x and throw all that money at those poor “minorities” in Orange County!

  34. Francois says:

    “(banks were given strict new numerical quotas and measures for the level of “diversity” in their loan portfolios)”

    Simply untrue: prove me wrong if you dare. Go ahead! Quote me the text of law where this is written.

    “that according to the Harvard study”

    THE Harvard study?? You can’t even name the damn thing? Where is the link? Who are the authors? Was it published in a peer-reviewed journal? Think we’re all beyond stupid here? Pathetic!

    “resulted in, from 1995 to 2005, minorities making up 49% of the 12.5 million new homeowners.”

    Let me get this straight: Quotas are enacted (where is the proof?) and presto pronto! minorities home ownership zooms like benver before. Ergo, the (unproven) quotas MUST be responsible for that.

    When I was studying Statistics 101, the 1st thing we learn never to confound correlation with causation. If town A has 10 churches and 10 brothels, but town B has 100 churches and 100 brothels, must I conclude that a rise in churches is responsible for the rise in prostitution?

    No, right?

    Likewise here: there are much more compelling reasons that explain the rise in minorities home ownership. I invite you to browse Calculated Risk blog and read Tanta’s posts on this matter.

    But BEWARE!! She was an industry insider, she knows what she’s talking about, and here posts are fact-based. This is a very dangerous thing that has been known to catastrophically splatter brain matter on quite a few computer screens.

  35. Jose in Houston says:

    Barry,

    I don’t think lending to minorities was the cause of this failure. Rating agencies and derivatives built on risky loans have the biggest share of the blame. However, LA, Miami, Phoenix and LV have huge minority populations, to the point that in Miami and LA non hispanic whites are the minority.

    What do you think about this article? http://reason.com/news/show/129116.html

  36. Jason says:

    An anecdotal data point — my parents live in an agricultural town in California which is probably 80% minority low-income. Yet a 3 bedroom house were going for $800K at the height of the boom. The buyers in my parents neighborhood were not flippers but families living there. I would say that whether CRA was the cause depends on the type of community. There were obviously other causes too that led to flipping in other “nicer” bedroom communities, but CRA had a part in the overall picture.

    BTW, the greater Miami and San Diego areas, I don’t anything about Las Vegas, which are indicated in your plot have significant minority, low income populations.

  37. Bill says:

    Excellent piece. However, I sense a derogatory tone when you stated…

    “The root legislative cause of the current was excessive deregulation.”

    What’s wrong with deregulation? Free markets work…there are winners and there are losers. Free markets deteriorate when government steps in and tries to keep companies from failing.

    I know this case is different and we are in for a world of hurt is ‘something’ isn’t done. But the message to take away is NOT “The root legislative cause of the current was excessive deregulation.”

  38. larster says:

    Thanks, Barry for the rant. The scary thing is how this crap gets into the system so that all the wingnuts spout it instantly. This false premise is goint to make it difficult for anyone to fix this situation. Maybe we are beyond fixing due to terminal ignorance.

  39. Hal says:

    we (the public and govt) have put a bunch of loaded guns in the hands of wall street ( and mortgage cos) and “they” figured out a way to game the system to their benefit to the nines.

    in the future they wil contiue to find ways to play hte game to their advantage and the disadvantage of hte rest of the public.

    its called unintended consequences.

  40. The Great Ape says:

    Please excuse my n00bishness, but I need a little help understanding how all the pieces fit. I understand how all the items BR listed are the specific choices of those making them, but when all these loans are made, how much of them do F&F buy up? If F&F had been under tighter control and with less buying capacity, would it have limited the the number of these loans they could support? Enough to reduce the volume such that the incentive for quantity vs quality for the mortgage originators wou not have made it economical to lower standards so far in order to maximize transactions?

  41. mw says:

    Laws of gravity– an apple that breaks away from a limb will fall to the ground. A bad debt MUST default. Anything else is unnatural, and cannot be sustained.

  42. Frank Raines says:

    The problem is that people have too much access to the evidence.

    If you can stomach 10 minutes of Barney Frank and Co., he will explain why the CRA needs to be further deregulated, expanded and even extended to Credit Unions and other institutions that think they have the right to expect down payments and good credit reports before granting loans.

    The Community Reinvestment Act: February 13, 2008:

    http://www.youtube.com/watch?v=pPn64jJBGcw

    ~~~

    BR: What does this have to do with any of the issues discussed above? Your lizard brain is working against you . . .

  43. Jason says:

    Speaking about Angelo Mozilo mentioned in the last bullet, from Wikipedia:

    In June 2008 Conde Nast Portfolio reported that several influential lawmakers and politicians, including Senate Banking Committee Chairman Christopher Dodd, Senate Finance Committee Chairman Kent Conrad, and Fannie Mae former-CEO Jim Johnson, received favorable mortgage financing from Countrywide by virtue of being “Friends of Angelo.”[9][10] Senator Dodd received a $75,000 reduction in mortgage payments from Countrywide at allegedly below-market rates on his Washington, D.C. and Connecticut homes.[9][11]

  44. p.a. says:

    Ah yes. An act passed in 1977 and mortgage facilitators in existence, in one case since the FDR admin. caused this crisis only now, 30+ years later. Poor GW; a victim of bad timing his whole life (Arbusto, Harken, 9/11, Katrina…)

  45. Jack says:

    As in Cool Hand Luke, “what we have here is a failure to regulate”.

  46. Mitchn says:

    The best Congress that money can buy. No taxation without (real) representation! Vote ‘em out in November. (You’re going down when it’s your turn, Chuck and Hillary.)

  47. auditor says:

    Question: Can someone explain what happened to PMI insurance in all of this. Wasn’t insurance required on sub prime loans? Are the insurers unable to pay or are the terms strict that collection is unlikely?

  48. Honest Mortgage Broker says:

    Thank you Barry for comprehensively debunking the GOP’s latest and most outrageous ploy of using rampant Racism and Bullshittery. It truly illustrates their level of extreme desperation and viciousness. I thought Jesse Helms was dead and buried.

    Great additional piece here by Thomas Edsall:
    http://www.huffingtonpost.com/2008/10/01/conservatives-seek-to-shi_n_131020.html

    I actually recieved several emails of the IBD article forwarded by the executive directors of state Mortgage Broker associations and from several executives of Mortgage Banking companies. They had and have been sending out this pattently Racist garbage to their members and employees! Oh and these people are legally required to uphold Federal and State Fair housing Laws. Hmmmm …. Oh, and most of the deals they have done have been with players outside CRA regulations – And they happily took their 2, 3, 4 and 5 pts Yield Spread from these players.
    Its a blatant ploy by the GOP to play on people’s racial fears and an attempt to mobilize the vote of 250,000 unemployed mortgage professionals, missinformed of the facts.
    I am totally disgusted.
    Thank you Barry for doing your part to help expose the GOP’s Racism.

  49. MW says:

    RE: Further to your observation on home process in Las Vegas, I have been following the Case Shiller stats closely for 4 years and have consistently imported their data into my own excel analysis of the 20 key markets.

    I am a developer from Florida and could see what was happening and sold all of my real estate assets in 2005. I developed property in Las Vegas as well up until 2000 and am very familiar with your market area.

    Here are a few comparisons between the Miami market and Las Vegas and a dark “prediction.”

    The height of the Las Vegas Market occurred in the calendar year of 2004 with a one years appreciation in property values of a staggering 45.50%. In the year just prior (2003) it was 17.222% and the year just following (2005) it was 10.5%. For 2007 it was -15.34%. For the first seven months of 2008 the market is down a further -23.58%.

    I chart appreciation over time and look for anomalies. When I was in Las Vegas between 1987-2000 working on single family home development with a very well-known national homebuilder, it was clear that your market was growing due to a very large influx of retirees and refugees from California who were looking for relief from high taxes. In those days we saw the market was appreciating at a rate of about 5% and we were astounded at how robust it was.
    Robert Shiller’s own analysis is that homes in the US across all market areas from 1890 to 2000 only appreciated on “average” about 3.5%+/-.

    The other anomaly that most realtors know is that home sale accelerate between March-August and then fall off sharply through the following February. In fact February is the cruelest month of all. In part, this follows with the moving habits of families with a rush to get into a new home before the beginning of a new school year as we have all have seen.

    It is interesting to note that the Las Vegas market reached its peak a year earlier than Miami and other cities in Florida and California and it will most likely emerge sooner. For Las Vegas the ultimate peak in the buying frenzy was August 2006 however, there was already a significant reversal in overall market appreciation “2 years earlier.” This is explained by those late to the party who figured that they too could cash-in on the “housing casino” outside the casinos on the strip.

    The peak month of the frenzy seems to be between May and June of 2006. The reversal from that point forward is really quite evident and the acceleration to the down side in recent months has been quite shocking. As to my point above of -23.58% loss for the first seven months of 2008, that equals an average loss of -3.36% per month with some months recording a loss of greater than -5.10% (January 2008).

    The Prediction:
    Based on my analysis and the evaluation of the latest Case Shiller numbers I anticipate the Las Vegas market to fall another 45% from current levels before hitting some normal trend line for growth. For Miami it is worse, the market there is still overvalued by 49.36%. Meredith Whitney said last week, when interviewed while in Las Vegas, that nationally she expected “the total market to still fall roughly 30% from current levels.” I think she is being too optimistic.

    The trend has never encountered the variables that we have now.

    I think that we have roughly 3,000,000 too many homes in the market place; this is across all categories single family homes and condo towers, essentially anything termed a “dwelling.” When the toxic mix of severe unemployment, huge number of foreclosures thrust upon the market, tightened lending (if any) and a recession (or worse) is factored in, we may very well overshoot far beyond the target I mentioned above. The homebuilders actually need to stop building for two years just to give the market a head start on absorption. I suspect many of them know this and insiders are quietly selling their stock before we see the numbers of builders in the country shrink by 50% or greater.

  50. Jason says:

    Relevant to the third bullet, here’s a Wash. Post article, not too long ago:

    Mortgages with No Money Down

    Is it possible that competing against Fannie Mae and Freddie Mac led commercial lenders to lower their standards ?

  51. Hugh says:

    Barry,

    I don’t disagree with the answers you give to your own questions, but here’s the main point: Fannie and Freddie muscled into the mortgage market making use of their lower borrowing costs thanks to implicit then explicit government backing. They ate the “healthy” market and left the marginal loans for the private sector.

    Hugh

  52. Eric038 says:

    Thank you, Barry, for delivering this well-deserved smackdown of a zombie wingnut talking point. I’m a first time commenter who has been lurking here because I am a civilian who wants to know more about the financial system, and informed commentary like this post is an important reason why I read your blog.

    I’ve seen these claims advanced even in some of the more rational parts of cyberspace. “Pseudo-intellectual” is exactly the right term: it’s designed to have the appearance of a rational thought process, but any resemblance between this and actual rational thought processes is purely coincidental. Nobody forced lenders to offer negatively amortizing loans, or LTV of more than 100%, or “liar loans,” or other such idiocies–the lenders did those things to themselves.

    As for those who are asking for what specific deregulation caused the problem, the reason that question is so hard to answer is that there were so many deregulation actions, or failures to enforce existing regulations, that contributed to the problem. Here’s just one example: the decision of the OCC to exempt most mortgage originators from state regulations. By 2003 several state regulators were screaming bloody murder over predatory lending practices by many mortgage originators. Had they been allowed to enforce state laws against these practices, the bubble would have popped sooner and less painfully. There are many other things the Federal government could have done but didn’t do to either prevent or minimize the bubble.

  53. wisedup says:

    Get real – the name of the blog is “The Big Picture”
    Forget all this left-right horseshit.
    The root cause has been the total lack of sufficient investment opportunity. Look at the amount of capital running around – far in excess of any thing that American industry can utilize. All that capital screaming for better returns than Treasuries. Housing was the logical avenue. Let the biggies crash. Let the stupid investors pay the ultimate lesson in failure to do due diligence. The Fed would be smart if they used whatever they can borrow from the Chinese to guarantee local govt. bonds. Even rates of 1% are a hell of lot better than the alternatives.

  54. Donkei says:

    It weren’t regulation/deregulation. It weren’t the CRA, Acorn, Fannie Mae or Freddie Mac, or any other acronyms for bad ideas. It weren’t the repeal of Glasss-Steagal in 1999. It weren’t nothing ‘cept too much money being printed relative to the value of the goods and services it was meant to represent.

    There has never been an unregulated market for money. The fed is an absolute monopolist, controlling its supply and setting it price (interest rate).

    But for the easy money of Alan Greenspan’s fed after 9-11, and continuing until about 2006 w/ Bernanke, none of this would, or oculd, have happened. In that regard it was loose regulation, but it was loose regulation of the money supply, that set all this in motion. Too much money creates an illusion of demand that fosters too much supply. Now the housing market is way over-supplied. Nothing short of time and massive, market-clearing price decreases, or of bull-dozing houses to the ground (as Holman Jenkins of the WSJ advocates) will fix the supply/demand disjunct.

  55. brasil says:

    wait..lets say we had no..none..zero regulators..and the rating agencies did there job correctly …would there be $2 trillion of this crap mortgage credit card paper…no because TRIPLE AAA is a different animal than junk ..as to letting off politicians ..especially enablers of Fannie and Freddy ..there is no question…none..imo.. it is like arguing against gravity…this was corruption..as old as dirt … yet again without the prompting of Wall St to the rating agencies to rate this crap..this would be a much smaller big problem that could have been absorbed..$300 million ..maybe a $1 billion..nothing like the size or scope of this

  56. jomama says:

    The root legislative cause of the current was excessive deregulation.

    So, Loose Money Fed had nothing to do with it?

    [BR: Yes, read above]

    In any case, what will Americans and the rest of the Western world pay with for such regulation now?

  57. mhm says:

    “…non-minority regions…”

    oh please, what does it mean? Sounds good and very social concerning but such asymmetric arguments fall flat on ears connected to functional/ing brains.

  58. Marek says:

    In 1999, Los Angeles Times praised Clinton for the housing boom. (But in 2006 they blame Greenspan for the same housing boom)
    I am not surprised to see it from NYT or LAT, but I am surprised to see it coming from you Barry.

    “It’s one of the hidden success stories of the Clinton era. In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites.

    These numbers are dramatic enough to deserve more detail. When President Clinton took office in 1993, 42% of African Americans and 39% of Latinos owned their own home. By this spring, those figures had jumped to 46.9% of blacks and 46.2% of Latinos…

    …All of this suggests that Clinton’s efforts to increase minority access to loans and capital also have spurred this decade’s gains. Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

    Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

    In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets. Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected.”

    ___________________________________________

    Francois,

    BOSTON, Oct. 13, 1999 (Reuters) – “The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups.

    ‘We need to push into these underserved markets as much as we can,’ said David Glenn, president and chief operating officer of Freddie Mac. Glenn made his remarks at the annual convention of the U.S. Mortgage Banker Association of America (MBA) this week.

    In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.

    The call for greater efforts to broaden minority home ownership comes at a time when interest rates are pinching mortgages. A record $1.5 trillion mortgages were granted in 1998 in a refinancing boom fueled by the lowest interest rates in nearly three decades.

    The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.

    Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets.”

  59. Marek says:

    Re: Harvard Study

    Have you read this Harvard study? For more information please go to: http://www.jchs.harvard.edu/publications/markets/son2006/index.htm.

    [BR: Yes, i referenced the 2008 version here http://bigpicture.typepad.com/comments/2008/06/harvards-state.html

    Some facts in the report: According to the Joint Center for Housing Studies of Harvard University, “Accounting for nearly two-thirds of household growth in 1995 to 2005, minorities contributed 49 percent of the 12.5 million rise in homeowners over the decade.” . . . “Without the sudden expansion of sub-prime lending, most of these homeowners would have been denied access to credit.”

    Sub-prime growth from $210 billion in 2001 to $625 billion in 2005 represented 20% of the dollar value of loans and 7% of originations of outstanding mortgages. [$35 billion in 1994, $125 billion in 1997]

    The Harvard study reports that in 2004 high-income minority communities (more than 50% minority) have about 19% of all mortgages as high-cost mortgages compared to 7% for predominantly white. They have 25% vs. 12% in moderate income communities and 28% to 18% in Low-income areas.

    By the mid-90s, sub-prime instruments like ARMs had been around since the deregulation of the early 80s. They took off in the 90s. Sub-prime growth from $210 billion in 2001 to $625 billion in 2005 represented 20% of the dollar value of loans . . .

  60. rockitz says:

    Gordon rebutted.

    http://tinyurl.com/yw59sw
    http://mises.org/story/2963

    Try again BR.

    ~~~

    BR: You are not addressing any of the issues raised above. A link and a quip does not qualify as a successful fisking.

  61. Greg says:

    Barry,

    Re: CRA and minorities.

    The trouble is in the areas with significant minority population:
    -California Central Valley & Inland Empire. It’s nearly all Mexicans.
    -Las Vegas. Mexicans
    - Florida. Cubans
    - San Diego. Mexicans.

    The coastal areas of California were holding up, until recently. It is only very recently that the affluent areas got hit.

    Best

  62. Ken M. says:

    Here’s another example. This guy is a photojournalist in the Bay Area, and he’s got some good stuff. But here, he thinks that he’s found the genesis of the entire economic crisis:

    http://www.zombietime.com/zomblog/?p=60

  63. Dave says:

    This isn’t just a subprime problem. Even people who got prime mortgages were buying houses for more then they are worth. Just because the GSEs weren’t big into subprime doesn’t mean they aren’t part of the problem.

    What exactely is the mission of the GSEs? To make housing “affordable”. They do that by making more credit available then would otherwise occur in a free market. The fact that this drives up prices doesn’t seem to phase them. Since they have a government guarantee people will lend them an incredible amount of capital at low rates. There is immense moral hazard there. After all, nobody needs to know what Fannie and Freddie are doing or what shape the housing market is in because the government has got your back. Its an immense mis allocation of resources.

    I could go on about how the GSEs have become a dump for the crisis or thier gross mismanagement and other issues over the years, but I want to stick with a simply message. Why do these GSEs exist? Other then making more credit available for home purchases then should exist what purpose do they serve?

  64. Joe says:

    I JUST got an email this morning trying to blame House Democrats in 2004 for the failure of Fannie and Freddie! Thank you for this article. Brilliant once again!

  65. Luke Mullins says:

    Overall, 1 out of every 538 U.S. households received a foreclosure filing last month.

    Top 10 States for Foreclosures in March

    1. Nevada: 1 in 139 homes
    2. California: 1 in 204 homes
    3. Florida: 1 in 282 homes
    4. Arizona: 1 in 283 homes
    5. Colorado: 1 in 339 homes
    6. Georgia: 1 in 351 homes
    7. Ohio: 1 in 448 homes
    8. Michigan: 1 in 475 homes
    9. Massachusetts: 1 in 486 homes
    10. Maryland: 1 in 538 homes

  66. Nate says:

    This is about as good a discussion as I’ve seen regarding this issue. It thoroughly debunks the canard that the CRA and the GSEs were fully to blame for the credit problems we see today.

    The problem is that understanding this argument requires a rather sophisticated comprehension of derivatives, ratings, and asset backed securities. Most of the wingnuts who are looking for somebody to blame in this matter aren’t willing or able to understand a financial product more complicated than a “subprime mortgage.” It is true that subprime is a big part of this crisis, but let’s face it: when a bank such as Bear Stearns can act as a counterparty in trillions of dollars of credit-default-swaps with a gearing ratio of 30-1, what we’re really dealing with is a lack of adequate capitalization. In a totally unregulated market for CDS, this is what happens.

    Also, where were all these wingnuts when the stock and housing markets were soaring in 2004, 2005, and 2006? At that time, uber-idiots like Kudlow, Luskin, Westbury, and Bowyer were cheerleading the “Bush boom” and crediting their supply-side, free-market idealogy every chance they got. They didn’t seem all that concerned with the GSE’s, nor did they seem concerned with the fact that corporate profits on the S&P 500 were dominated by the financials.

    They also didn’t seem too concerned with mark-to-market accounting. The reason: when the illiquid assets were going up in value, this made the banks balance sheets stronger. Westbury penned another of his crackpot WSJ editorials yesterday blaming mark-to-market for the the banking systems woes. I wonder how many CDO’s his investment firm is buying these days, since he obviously believes that this paper is worth more than the market is saying it is. Funny, I haven’t seen his name come up as a buyer into the finance sector in the same way Warren Buffet’s has.

  67. Mongbat says:

    http://www.businessspectator.com.au/bs.nsf/Article/Goldman-Sachs-Morgan-Stanley-at-risk-JZ3WA?OpenDocument

    “Well, look, we live in a democracy. They have bought what they wanted. They wanted over-the-counter swaps and derivatives. They wanted to do affordable housing which was largely urged by the Congress. OK. Barney Frank and the rest of them are profoundly responsible for this. So, sure, I like market based solutions, but let’s be really specific. The US is not a free market economy. We are a highly socialised compromise between communism and the ideal of, you know, von Mises free market individual liberty that everybody pretends exists. But look at our economy. Look at our banks. Our banks are Government sponsored entities. If you look at their liabilities and how they raise money, most of the places where they gather cash have some form of government guarantee, so you know it’s kind of silly I think to pound your chest and go on about free markets when you live in a social democracy. That’s what the United States is. We’re not as bad as Europe and we don’t have the limitations on individual freedom that you have in Europe, but you know we’re a largely socialised country; always have been since the ‘30s”

    I find your extreme position to be highly dubious, Barry.

  68. LongtimeLurker says:

    Damn, Barry.

    Now this is a wonderful, on-target laying out the facts that I just didn’t expect from a business blog, even one as good as yours. Congratulations and thanks from those of us who’ve watched the wingnuts in action for far too long.

  69. VoiceFromTheWilderness says:

    One of the clearerst and scariest signs of what is going on in this country is the refusal to take responsibility, and the associated passion for finding blame somewhere away from the actions of those with real power.

    It used to be in this country, that when something went wrong, people in power took responsibility simply because they were in power, even (and especially) when it was pretty obvious they really weren’t the cause. The change came with St. Reagan. When they were caught operating a treasonous military/political adventure out of the basement of the white house, America simply could not handle another treasonous act from it’s elected officials and therefore opted to go in to denial mode. It was at this time that ‘I didn’t know’ began to become an accepted excuse. (the fact that ‘I didn’t know’ means you weren’t doing your job, and is thus irrelevent at best, the only alternative being that the speaker is simply lying, was simply ignored goes to my point). Ever since then we’ve seen an ever accelerating rate of blamelessness takeover american politics and american thinking generally, but particularly among those who identify with the ‘conservative’ movement.

    For any con to work it is essential that there be a large (depending on the scale of the con) supply of people who are fooled. The aliance between the rich and powerful and the (metaphorical) poor white trash, against the interests of bulk of society has always been the main vehicle by which a powerful, but small, elite, end runs the interests of the society.

    The fact that ‘free market’ advocates cannot and will not take responsibility for the situation at hand is proof, all by itself, of either their disingenousness (to be nice) or of their status as … suckers. There is a special section in hell reserved for suckers who got suckered by their rigid adherence to ‘true beliefs’, regardless of both experience, and logic. That section is being filled rapidly in the current age. Translation for the less mystically inclined: Arguing that because your ‘true beliefs’ were imperfectly implemented by the impure powers that be, therefore your beliefs are not responsible for the consequences of those actions is extravagantly disingenous. If you don’t know that no ‘ideology’ is *ever* perfectly implemented in the real world, and that the value of an idea in areas like economics and society precisely it’s ability to make a postive impact *at the margin* only proves that your ideas exist in a fantasy world. It also proves that you know nothing about the very essence of free market theory you so love to espouse.

    The fact that these free market ideologues and their republican partisan buddies, refuse to acknowledge even the most basic correlations between the dominance of their ideas and the economic and political strength of this country prove (all by itself) the disingenousness of their beliefs. The facts are clear 1) right wing dominance goes directly and quickly with massively increased federal debt, 2) massively increased lawlessness on the part of corporations resulting in 3) serious economic problems for the entire society. You can look to St. Reagan, St. Nixom, St. Hoover. The pattern is more than clear, it is startling. In fact so startling that this observer had assumed the current crop would tread more carefully, before unleashing their real plan, the better to obfuscate their plans. But I was wrong (see how this works kids) They knew, as I did not, that their lies and propaganda had become so thoroughly entrenched in the system that they were free from real oversight, and free from real political opposition. Thus the trap was ready to spring… which it now has.

    The reality is that every important element of the right wing ideology is not only wrong, but in fact a deliberate con. A set of emotion laden talking points whose purpose is to cement the alliance between the ultra powerful and the poor white trash — the suckers. Everything from ‘Free Market ideology’ to ‘Moral Majority’ and ‘Peace through Fire Superiority’ is a con. If it wasn’t clear before it should be clear now that the trap is sprung. Not only don’t the real architects believe any of these things (though they have a legion of suckers who do — poor white trash who work for a pittance implementing the agenda that will net their owners giga-fortunes), but all of these things are trivial to disprove on their own — lies in support of thievery. Debunking ‘free markets’ is a trivial excercise in 1st year economics, whether it be externalities, assymetric information flows, assymetric power, or non-linearities in the dynamics of the system, to in fact a host of other problems, ‘free market theory’ in fact was de-mythologized by it’s creator Adam Smith and has never overcome the host of technical problems the idea engenders. Indeed the incredibly need of right wing ideologues to deny the existence of environmental issues altogether undoubtedly stems from their recognition that the environment is precisely an externality. As to Moral Majority, and the passion for hiding one’s head in the sand about the incredible, and incredibly horrible, moral failings of those who would proclaim themselves righteous, I’m sure that all the Bible quoters out there can — if they try — find some kind of comment somewhere in the bible that has something to say about those who proclaim their moral superiority. Ya know something about money changers in the temple, or he who is without sin. One of those minor passages.

    The reality is that the real agenda of the right wing is the destruction of the american government and the transformation of american society into a corporatocracy. That agenda is plain as day, and well on it’s way. All who support this agenda while using language that purports to support some other goal are either suckers or con-artists.

    The problem with denying reality, with lying and manipulating to avoid responsibility, is that the real world still moves forward. The consequences of the dominance of the right wing agenda are all around us. Shifting blame, indeed blame altogether (as opposed to action) simply serves to support the ego’s of those doing the talking — the consequences march forward relentlessly. This is the basic con at the heart of blame shifting: that somehow by blaming someone else the consequences will not occur. They will.

    Unfortunately it does not seem to have occured to most people that the consequences of the right wing takeover exceed by far the simple (!) economic problems we have so far uncovered. There are much deeper problems that don’t fit in a TV news sound bite, and hence don’t get noticed. We have completely undermined the basic fabric of society. Unfortunately for the right wing ideologues, the middle class, people who know how to design circuits, and fix aeroplanes, and keep the sewers running clean, are *essential* to the glorious dream that right wing capitalist follower on’s want as an outcome. The perhaps unintended consequence of an excessive focus on cornering power and wealth is the destruction of the host body from which that wealth proceeds.

    As in that nebulous place called the real world, once the virus kills it’s host body, it too will die.

  70. elephantnomore says:

    Barry,
    It saddens me greatly to see how much of our media have been taken over by the Cato/Heritage crowd to be used for false propaganda by the Big Money interests. Even on this site, which as far as I can tell is pro-free market capitalism, they call you a liberal blog because you won’t swallow their garbage. Their smash-and-grab style of doing business is profoundly unethical, and they immediately attack anyone who dares to call them on it. It reminds me of the Nazi tactics in the early thirties of calling anyone who disagreed with their policies a dangerous communist who should be arrested and put in jail for the safety of the nation. God help America.

  71. taxtrumpet says:

    Speaking of responsibility, I think people should make their mortgage payments that they promised to make for the houses they bought. The moral failure to keep one’s promise should not be excused.

  72. dome says:

    The contribution of this generation of investment bankers, particularly those involved in the mortgage market, has been to destroy Western Capitalism. Full Stop. By association, the rest of us in the finance industry are the laughing stock of financiers in Russia, Japan, France and South America. When will we see these people being banned from the industry? In the UK, we have a “fit and proper” test for regulated individuals – how long do we have to wait before it is applied by the regulators?

    Angry? Moi?

  73. leftback says:

    Barry,

    Thanks for dealing with this CRA red herring so firmly. Most of these hacks blaming the CRA are simply closet racists.

  74. mark says:

    Oh jeez…
    Socialists to the left… Interventionists to the right…
    FYI, most media heads agree with Barry and blame our troubles on deregulation, lack of supervision, and the free-market going wild.

    Barry’s position is the conventional position, not the unconventional. It is the orthodox view. However, it is wrong and erroneous. Government and its badly incentivised regulations, Fannie/Freddie, the ratings agencies, big banks and the FED are ALL TO BLAME — and guess what — they are all government or quasi government entities. The FED regulates money; a few national ratings agencies, endorsed/regulated by goverment, were allowed to become the authority on all things risk; Fannie/Freddie, implicitly guaranteed by government, bought up crap rated by the ratings agencies; banks and everyone down played the game created by government and sold/packaged crap, blessed by the ratings agencies, to Fannie/Freddie or other institutions required by law to purchase crap blessed by the ratings agencies. Every step of the way, the “free market” was thwarted and government regulation/sanction/blessing took its place. So to blame the current financial mess on the “free market” is complete nonsense. The blame goes squarely to government and its tangled web of quasi agencies that thwarted the proper working of the free market.

    ~~~

    BR: Its far from the conventional position. Its moving in that direction. But note that this has been my position for ~3 years now.

  75. Comrade Darkness says:

    According to the Mortgage Brokers Association 2007 report the FBI estimates that “80 percent of all reported fraud losses arise from fraud for profit schemes that involve industry insiders.”

    What we have here is fraud. On a massive scale. That’s why deregulation is at the root of the problem. In a system where so many players make their money by taking a cut of transactions, if there is no downside to fudging their little part, the players will push every transaction they can through the system, valid or not. The appraisers, straw buyers and real buyers who dreamed they were flippers, realtors, loan brokers, banks, rating agencies, everyone was in on the action and anyone who complained got demonized and cut out of further action, until only the sleazy players remained. Low interest rates kept the scheme running much longer than it should have by feeding the system with much needed, and undeserved nourishment.

    Capitalism is like bacteria, if you breed it too fast, the waste product will poison the whole system and it will suffer a massive die off. Proper risk/reward as structured by enforced regulation gets the players to act for their own best interest, including taking the risk of jail time into account when they decide on the best action to maximize profit. That limits toxic waste, so the system can function at a healthy level indefinitely. Without each player thinking that there is a chance of penalty, you get what we have now.

    This is a no-brainer. To reach for excuses otherwise is to insist on dooming the system to repeated die-offs. I mean if you don’t want to solve the problem, fine. Just admit that.

  76. Fred S. says:

    Don’t forget those lovely lobbyists which pushed the deregulation regime. Also the TV show “Flip this House” on A&E propagated a mindset that flipping homes could make you rich thus fueling the speculative frenzy.

  77. jdp says:

    The questions are written as if by a lawyer taking a deposition. Of course they lead to only the answser the questioner wants. Did Fannie and Freddie “require” banks to lend without checking credit score? No, of course not. Did they allow and encourage banks to do so? Yes, I think they did. Give a banker a chance to make loans and sell them taking up the profits from the sale but without sharing in the downside risk of loss from the loan and every banker in America will eventually sign up for that deal.

  78. David says:

    Barry, you need to correct your statement about “affluent non-minority” areas.

    Not only are the cities you state majority-minority, or darn near close, but as previous posters mentioned, when you drill down into those cities, you find that the heavily minority areas are the most bubblicious–those areas appreciated the most in percentage terms.

    Just one example, there is a neighborhood in Oakland (CA, not Michigan) called the “Laurel.” It’s heavily Asian and Hispanic. In 1997, I looked at a house there (on California Ave), and it cost $110,000. In 2005, that same house sold for $550,000. No “affluent” area in Oakland (i.e. Rockridge) saw their home prices go up 5-fold. Now that same house is foreclosed on, and last time I saw it on the block for around $275,000. Again, nothing like that in the affluent areas.

    The bubble was fueled in various cities largely by this phenomenon. As you know, it’s all about the margins–the marginal ‘hoods were goosed the most by non-existent lending standards, and now they’re dropping the most. Marginal ‘hoods are often (just stating facts here) minority (and illegal/legal immigrant) ‘hoods.

  79. OhNoNotAgain says:

    “The trouble is in the areas with significant minority population:
    -California Central Valley & Inland Empire. It’s nearly all Mexicans.
    -Las Vegas. Mexicans
    - Florida. Cubans
    - San Diego. Mexicans”

    And what’s your point, Greg ? Don’t be shy, just come out and say it:

    In your world, minority=bad credit risk, right ?

    “The coastal areas of California were holding up, until recently. It is only very recently that the affluent areas got hit.”

    And what does that tell you ?

  80. mark says:

    BR: Mark, you completely exonerate the banks for these loans? Zero responsibility? That’s astounding to me anyone believes that.

    ~~~

    • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

    – Doesn’t matter as long as the loan was able to get the blessing of the government endorsed ratings agencies and thus able to be sold off to the GSEs or other institution required by law to purchase debt blessed by the ratings agencies.

    • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?
    – GSE’s bought their packaged loans thus creating a cottage industry of mortg. service companies and/or their loans were blessed by the government endorsed ratings agencies and thus they were able to sell off their loans to institutions.

    • What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?
    – Doesn’t matter, as long as the loans received the blessing of the ratings agencies and thenwere subsequently purchased by GSEs or other institutions.

    • Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?
    – Who cares. The market will a game a bad system. But don’t blame the market for that. Blame the bad system for creating the bad incentives.

    • Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?
    – Who cares. The ratings agencies blessed these loans anyhow. The blame goes to the ratings agencies and the GSEs who purchased the loan packages.

    • Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
    – Again, doesn’t matter. The loans still got the blessing of the ratings agencies/GSEs.

    • How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?
    – As government regulated/endorsed/blessed entities, the problems existing in these agencies have only the government to blame. By giving special endorsement to certain national ratings agencies, the government thwarted the natural market that would have punished the ratings agencies for shoddy work.

    • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?
    – Obviously, the banks were allowed to do this as the loans packaged were rated AAA by the ratings agencies and thus able to be sold off to GSEs or institutions.

    • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)
    – The market will game a bad system. So what’s new? It’s a failure of government, once again.

    • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?
    – The CRA is part of a bigger picture of bad government regulation and interference in the marketplace.

    • Did the GSEs require banks to not check credit scores? Assets? Income?
    – Obviously, they implicitly did, yes. Otherwise, the banks would not have gotten AAA ratings from the ratings agencies and thus be able to sell them off to the GSEs.

    • What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood
    – They all got caught up in the game created by government (Fed, GSEs, ratings agencies) to make a buck. Eventually, as it always does, the house of cards come tumbling.

    • What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?
    – Who cares — the banks were obviously able to sell off the loans with the blessing of the ratings agencies.

    • Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?
    – Who cares — it’s all part of the bigger picture of the corrupt tangled web of government regulation and quasi government agencies that created a perverted marketplace with perverted incentives.

    ~~~
    BR: Now I understand. Its all the GSEs fault.

    The banks that made the loans are completely free from any responsibility.

    Throughout human history, credit has been based on the borrowers ability to repay. But for the first part of the 21st century, the lenders ability to securitize and repackage mortgages became the basis of credit.

    You are okay with this?

  81. Eric S. says:

    I’m not in the industry, so pardon the simplicity of my language and errors in logic should you spot any.

    I get that blaming the CRA is a canard. What I don’t get is the lenience afforded F/F in this post.

    You provide a laundary list of things you argue were not forced upon banks et al. by F/F. To the extent whatever laws/regs at issue do not contain such affirmative language, fine. But the entire premise of F/F, i.e., a government guaranteed system of mortgage debt simply disincentivized the entire mortgage industry from performing any due diligence. I think this is obvious not just with loans to poor people, but as others have said, loans to middle/upper class people who simply bit off more than they could chew. Without the support of F/F, more due diligence would have been put into loan practices. I agree that F/F did not force anyone to use corrupt appraisers, but there was no incentive not to if F/F was still going to by the mortgage.

    In short, I think F/F are plenty culpable and strongly disagree with the notion that my belief is a “zombie myth.”

  82. bichevartz says:

    This section I quote below from poster Herbert Spencer is unbelievable to me, and I haven’t seen a response.


    If you really want to eradicate the disease, you need to understand the root causes of this disease, and not simply provide a salve for its most troublesome manifestations.

    P.S. Why the democrats cannot understand that their social engineering programs like Affirmative Action and CRA will not work, because these programs are attempting to reverse millions of years of evolution and natural selection (Survival of the fittest)?

    Spencer, you’re saying that the core reason for this crisis is that CRA is a failed attempt to “overcome millions of years of natural selection”?!?

    I find no other way to understand these statements, in the context of your blaming the diversity goals of CRA as the engine of the current crises, as anything but overt, mindless racism.

    Educate us simple, unevolved folk, Herb: survival of the fittest determines who will get a mortgage? Who will get the job that affords them that mortgage? Doesn’t really play into the American ethics of hard work, individualism, or greed (among others), does it? Explain it to us.

    And while you’re at it, I’d love to see you do it without coding all this as “treating” and “eradicating” disease.

    Thanks, wingnut.

  83. mark says:

    BR: Mark, you completely exonerate the banks for these loans? Zero responsibility? That’s astounding to me anyone believes that.
    ——

    No, the banks are not exonerated. They’re part of the problem. And they’re also quasi government institutions as well. So their mess is the government’s mess and indirect responsibility. Banks are certainly not “free market” agents. The banks gamed the system. A bad system created by the government involving the GSEs (that bought/guaranteed the loans), the ratings agencies (that authorized/sanctioned the loans) and the FED/banking system (that provided the liquidity for everyone to play the government’s game and with ever more leverage). There is an agency problem with the banks They make money, they win. They lose money, we the public lose. The system is perverse. And more regulation on top of the existing perverse system is not the answer. And thus to say that “deregulation” created this mess completely misses the point that the system is bad from top to bottom.

  84. mark says:

    BR: Now I understand. Its all the GSEs fault. The banks that made the loans are completely free from any responsibility. Throughout human history, credit has been based on the borrowers ability to repay. But for the first part of the 21st century, the lenders ability to securitize and repackage mortgages became the basis of credit. You are okay with this?
    =========
    No, I’m not ok with this. But how did it happen that the lenders’ ability to securitize and repackage mortg. became the basis of credit?? It’s the GSEs and government endorsed ratings agencies that enabled this. The ratings agency gave the securities the seal of approval; then the GSEs bought them up with the full implicit backing of the federal gov’t. Absent the GSEs or the gov’t endorsed ratings agencies, this could NEVER have happened.

  85. Mike Lanza says:

    I’ll accept that loose monetary policy from the Fed, inadequate regulation of derivatives, and inadequate oversight of ratings agencies played a large role. I wouldn’t shed a tear if all these were reversed. Republicans should be condemned for opposing these things, if indeed they did.

    However, it doesn’t take an eagle-eye researcher to find evidence of Democratic politicians pushing laws and regulations to increase home ownership down to lower income people over the past fifteen years. We see this in their ardent, unwavering support for Fannie/Freddie and opposition to limiting them, their extensions of the CRA, their enthusiastic endorsement of Greenspan’s Fed loose credit policies (did they ever advocate that he tighten credit? raise interest rates?), etc.

    My reading of all this is that all the government actions which caused this mess (and, of course, this is only a part of the story – poor bank management also played a huge role) were the result of a unique alignment of strange bedfellows – conservatives who opposed regulation and liberals who advocated for home ownership. *Both* pulled in the same direction.

    Think about it this way. Businesspeople normally are limited by the liberal press and liberal politicians from perpetrating greedy capitalist excesses. To their credit, these liberals are the folks who are largely responsible for stopping blatant polluters and exposing the evils of melamine in Chinese milk. However, what happens when the people who normally take this role take the other side and cheer on capitalist excesses, in this case irresponsible, loose credit?

    That’s a recipe for disaster. Our system of political checks and balances failed. Greedy capitalists did what greedy capitalists do, albeit with unusual stupidity, and conservatives/free marketers did what they always do in promoting business interests, but liberals cheered the capitalists on to achieve their own homeownership objectives.

    To deny the latter is pure dishonesty.

  86. Dave says:

    Barry, I think you miss the point that some of us moderate nuts are trying to make. We don’t think the CRA or Fannie/Freddie are the only causes. We just ask that you be honest about the impact of government distortions to the housing market. I’ve commented on this a few times before, but you seem to ignore the facts that I have presented to you. I will try one more time.

    mark’s post at Oct 2, 2008 12:12:51 PM does a decent job summing up why this is not to be completely blamed on the free market – it wasn’t a free market, and some of the poor incentives were created by government intervention. There were other deregulation-related factors that also contributed, and you’ve named many of them. You seem to want evidence that the CRA, Fannie, and Freddie (and presumably HUD) were the complete causes. They were not. But they contributed in a significant way both in the early stages of the bubble and the later ones.

    What I argue is that the government helped get housing bubble underway with regulations that artificially increased demand by giving financial incentives to Fannie and Freddie to support the secondary market for low income mortgages, and later allowed them to count subprime securities towards affordable housing goals.

    First, let’s establish when home prices started accelerating. It looks to me as if it started in the 1997/1998 time frame. From 1989-1997, real home prices were flat/down. The Fed funds rate in the mid to late 1990’s wasn’t particularly low. The effect of the Fed that you are referring to had to have caused only the portion of the housing bubble that occurred AFTER rates were taken down in 2001. That may help explain why prices accelerated again, but the upward trend was already underway.

    So what did change in 1997? Well, according to this press release, that was the year the first CRA loans were securitized by Bear Stearns, and guaranteed by Freddie (the guarantee is what gave these particular securities the “AAA” rating).

    But why would Freddie (and Fannie) be so interested in guaranteeing CRA loans, or any low income mortgages, in particular? It seems that HUD gave them quotas for affordable housing with the authority to punish them for failure to do so:

    “Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of ‘affordable’ mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.
    In 1995, President Bill Clinton’s HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers.”

    So what kind of goals are we talking about and when were they actually set? Here’s an account of how HUD set its affordable housing goals:

    “Cuomo’s predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the ‘very-low-income.’ Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren’t granting mortgages to minorities at the same rate as the private market.”

    So the goals were set at the end of 1995, and we start to see real prices increase in 1997. The GSEs met these quotas first by buying conforming loans that met their standards (note: this gave lenders/brokers the incentive to bend the rules since it was easier to sell off a conforming loan, especially when it met the GSE affordable housing quota requirements). And later, they filled their quotas by buying subprime securities:

    “Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more ‘affordable’ loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

    The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.”

    They clearly contributed to the demand for subprime mortgages. And it was because of HUD quotas. Of course there are others at fault, including lax oversight, and some inappropriate deregulation.

    The last point to make (slightly off the topic of CRA/Frannie/Freddie/HUD, but on the topic of government intervention), the Taxpayer Relief Act of 1997 gave exemptions to the capital gains tax earned on homes up to $500K. It’s another example of the government trying to distort the market through incentives. Hmm… 1997, eh?

    Barry, please do not ignore these facts. No, the CRA/HUD/Fannie/Freddie were not the only reasons for the bubble and current financial crisis. But please be honest as to how they contributed.

  87. jdp says:

    Banks are in business to make money and bankers are supposed to make money for their company just like everyone else in business. The thing that ensured that bankers tried their best to make solid loans only to people who could repay them (at least back in the ’70s and ’80s when I was a collections supervisor and then a loan officer) is that the bank suffered losses if the loans they made didn’t get repaid. In fact, every loan officer was faced every month with a report to his/her supervisor that detailed what percentage of their loans weren’t being repaid on time. If you take away that downside, by allowing the banks to make money per loan whether or not it was a good one, anyone with half a brain would see that bankers would eventually end up making more and more bad loans. In fact, it’s so obvious to me, a financial novice, but former banker, that I have trouble believing it’s that simple. Where am I wrong, though?

  88. loan shark says:

    All of these strange, ignorant comments implying racism to those who disagree with the pure ‘market failure’ talking points regarding the distortions caused by government interference in the residential mortgage market IS the root of the problem. That is exactly the M/O employed by those wishing to maintain a sick system of lax oversight and self dealing. The ‘wingnut’ meme is a tired and thoughtless response. Grow up.

  89. craig says:

    To bichevartz:

    You’re reading your own bias wrt conservative (“wingnut”) thought into others’ posts. There is no racism required, overt or covert, to support the conservative line of argument.

    You write: “Educate us simple, unevolved folk, Herb: survival of the fittest determines who will get a mortgage?”

    No, no, no. It doesn’t. Survival of the fittest determines which banks survive. The ones that make better loans do; the ones that don’t, don’t.

    Once there are explicit targets for making riskier loans, and/or threats to sic the Fed or the Congress on banks that don’t make such loans, you have the beginnings of a housing bubble. Results-oriented lending goals inevitably lead to boiler room, just-make-the-numbers mortgage sales. That’s just human nature. See mark’s post above for the details.

    That minority borrowers may happen to be riskier per conventional gauges (credit histories, incomes, down payments, etc.) may be no fault of their own, but it’s no fault of the banks’, either. The point is, changes to CRA et al. over time led to the banks going with the political winds to avoid bad press so long as they were able to transfer the risk off their own books. The presence of Fannie and Freddie worsened it by hiding the exposure.

    More buyers + more “implicit” guarantees = higher prices + more moral hazard.

  90. RW says:

    Demographics of the four biggest cities hit by the loan crisis;

    Phoenix, AZ: 34% Latino, 5% black
    Las Vegas, NV: 23% Latino, 10% black
    Miami, FL: 66% Latino, 0% black
    San Diego, CA: 25% Lation, 7% black

    You are simply wrong that these are white cities. These are some of the most Latino cities in the USA.

    So, perhaps the CSA conspiracy theorists have one data point that supports their claims.

  91. Jim says:

    The CRA resulted in banks having lending targets. Since banks can’t give people money, they simply ignored their income and credit scores. Therefore, the CRA did lead to subprime business ramping up. But I understand you have a story to support.

  92. Howard says:

    We are all looking for THE reason or person for this situation. There is no “the” there, only we. It has been the climate since 1980 that insists we “prove” we’re not in it just for the money, to prove that we’re not racists, to prove that we respect homosexuals and so on. The PC turf in our field demanded that we “do something” to help Blacks, Mexicans, and so on. DEMANDED is the operative word. I once had a CFTC asshole inspecting our office ask me how many Black people I had as clients; tell me there wasn’t an implied threat there. All of us got caught up in the greed, do good, look fantastic society, and that includes ALL.

  93. steveeboy says:

    wow,

    I never knew there were no blacks in Miami!

    and again, what about orange county?

  94. RW says:

    Sorry, Miami is between 20% and 22% black depending on whether you include Dade county. Thanks for noticing my mistake. This only makes the correlation even more correct.

    Here is the US Census “quick facts” for Miami URL: http://quickfacts.census.gov/qfd/states/12/12086.html

  95. RW says:

    The top 5 states for foreclosures are ALL among the top 10 states having the highest percentage of Hispanics.

    1. Nevada: 1 in 139 homes (#5: 20%)
    2. California: 1 in 204 homes (#2: 32% hispanic)
    3. Florida: 1 in 282 homes (#7: 17%)
    4. Arizona: 1 in 283 homes (#4: 25%)
    5. Colorado: 1 in 339 homes (#6: 17%)
    6. Georgia: 1 in 351 homes
    7. Ohio: 1 in 448 homes
    8. Michigan: 1 in 475 homes
    9. Massachusetts: 1 in 486 homes
    10. Maryland: 1 in 538 homes

    Source: US Census Web Sight: http://www.census.gov/mso/www/rsf/hisorig/sld010.htm

  96. Dave D. says:

    For some reason I got blocked by the spam filter again, so I will post my comment in pieces:

    Barry, I think you miss the point that some of us moderate nuts are trying to make. We don’t think the CRA or Fannie/Freddie are the only causes. We just ask that you be honest about the impact of government distortions to the housing market. I’ve commented on this a few times before, but you seem to ignore the facts that I have presented to you. I will try one more time.

    mark’s post at Oct 2, 2008 12:12:51 PM does a decent job summing up why this is not to be completely blamed on the free market – it wasn’t a free market, and some of the poor incentives were created by government intervention. There were other deregulation-related factors that also contributed, and you’ve named many of them. You seem to want evidence that the CRA, Fannie, and Freddie (and presumably HUD) were the complete causes. They were not. But they contributed in a significant way both in the early stages of the bubble and the later ones.

    What I argue is that the government helped get housing bubble underway with regulations that artificially increased demand by giving financial incentives to Fannie and Freddie to support the secondary market for low income mortgages, and later allowed them to count subprime securities towards affordable housing goals.

  97. Dave D. says:

    First, let’s establish when home prices started accelerating. It looks to me as if it started in the 1997/1998 time frame. From 1989-1997, real home prices were flat/down. The Fed funds rate in the mid to late 1990’s wasn’t particularly low. The effect of the Fed that you are referring to had to have caused only the portion of the housing bubble that occurred AFTER rates were taken down in 2001. That may help explain why prices accelerated again, but the upward trend was already underway.

    So what did change in 1997? Well, according to this press release, that was the year the first CRA loans were securitized by Bear Stearns, and guaranteed by Freddie (the guarantee is what gave these particular securities the “AAA” rating).

  98. Dave D. says:

    But why would Freddie (and Fannie) be so interested in guaranteeing CRA loans, or any low income mortgages, in particular? It seems that HUD gave them quotas for affordable housing with the authority to punish them for failure to do so:

    “Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of ‘affordable’ mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.
    In 1995, President Bill Clinton’s HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers.”

  99. Dave D. says:

    So what kind of goals are we talking about and when were they actually set? Here’s an account of how HUD set its affordable housing goals:

    “Cuomo’s predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the ‘very-low-income.’ Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren’t granting mortgages to minorities at the same rate as the private market.”

  100. Dave D. says:

    So the goals were set at the end of 1995, and we start to see real prices increase in 1997. The GSEs met these quotas first by buying conforming loans that met their standards (note: this gave lenders/brokers the incentive to bend the rules since it was easier to sell off a conforming loan, especially when it met the GSE affordable housing quota requirements). And later, they filled their quotas by buying subprime securities:

    “Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more ‘affordable’ loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

    The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.”
    They clearly contributed to the demand for subprime mortgages. And it was because of HUD quotas.