Posts filed under “Regulation”

Most Subprime Lenders Weren’t Covered by CRA

The CRA brouhaha last year led the Orange County Register to run an analysis of “more than 12 million subprime mortgages worth nearly $2 trillion” in late 2008.

What did their data based analysis discover?

“Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market – after smaller, unregulated players showed there was money to be made.”

Among their research conclusions:

  • Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law.
  • State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in.
  • Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren’t subject to the CRA law, though some were owned by banks that could choose to include them in their CRA reports.
  • Among lenders that were subject to the law, many ignored subprime while others couldn’t get enough.
  • Among those standing on the sidelines: Bank of America, which made no subprime loans in 2004 and 2005; in 2006 and 2007 subprime accounted for just 2 percent of its loan portfolio. Washington Mutual, meanwhile, raised its subprime bet by 20 times to $5.6 billion in 2006 – on top of its already huge exposure through its ownership of Long Beach Mortgage.

These are facts, adduced from analyzing data.

Data based analysis, for those of you who may be unfamiliar with the term, is how research and discovery get accomplished in the real world. It is an alternative way of arguing that the “Blame CRA” proponents are blessedly unaware of. However, outside the universe of rabid partisan sniping, its how actual analysis gets accomplished.


click for larger graphic
Chart courtesy of OC Register


Most subprime lenders weren’t subject to federal lending law
THE ORANGE COUNTY REGISTER, Sunday, November 16, 2008


Category: Bailouts, Credit, Legal, Real Estate, Really, really bad calls, Regulation

Friday Massacre: Bank Seizures 41-45

Congratulations to the 5 lucky ducks who managed to capture the attention of the FDIC: “Five U.S. banks with total assets of about $1.04 billion were seized by regulators, pushing this year’s tally of failures to 45 as a recession drives up unemployment and home foreclosures. Community Bank of West Georgia, in Villa Rica, Georgia;…Read More

Category: Credit, Legal, Regulation

Angelo Mozilo: “Back of the Bus”

Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates. There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s)…Read More

Category: Credit, Legal, Real Estate, Regulation

CRA Thought Experiment

Given how thoroughly the “CRA caused everything” meme has been debunked, you have to wonder why some poor souls are still pushing this discredited political talking point (other than as linkbait).

I’ve already spilled too many pixels debunking Phil Gramm‘s attempt to shift blame from his radical deregulation to other parties (see partial list at bottom). Oh, and I dropped another 322 pages explaining the actual causes of the crisis.

And yet, these attempts at misplaced fault continue.

So this morning, I want to try a completely different approach — the opposite of our usual data driven, analytical framework. Rather than show more facts, data and specific details, instead, I want to do a little thought experiment.

Imagine, if you will, that the discredited far right meme is actually correct: Assume that the CRA was a prime cause of the mortgage, credit and housing related crises.

Yes, he typed, it was all the CRA’s fault. (Stay with me here).

Assume arguendo that CRA legislation forced banks into making high risk, ill advised loans. And, let’s further assume a huge percentage of these government mandated mortgages have gone bad. The buyers who could not legitimately afford these homes or otherwise qualify for other mortgages have defaulted, and these houses are either in default, foreclosure or REOs.

What would this alternative nation look like?

Given the giant US housing boom and bust, this thought experiment would have several obvious and inevitable outcomes from CRA forced lending:

1) Home sales in CRA communities would have led the national home market higher, with sales gains (as a percentage) increasing even more than the national median;

2) Prices of CRA funded properties should have risen even more than the rest of the nation as sales ramped up.

3) After the market peaked and reversed, Distressed Sales in CRA regions should lead the national market downwards.  Foreclosures and REOS should be much higher in CRA neighborhoods than the national median.

4) We should have reams of evidence detailing how CRA mandated loans have defaulted in vastly disproportionate numbers versus the national default rates;

5) CRA Banks that were funding these mortgages should be failing in ever greater numbers, far more than the average bank;

6) Portfolios of large national TARP banks should be strewn with toxic CRA defaults; securitizers that purchased these mortgages should have compiled list of defaulted CRA properties;

7) Bank execs likely would have been complaining to the Bush White House from 2002-08 about these CRA mandates; The many finance executives who testified to Congress, would also have spelled out that CRA was a direct cause, with compelling evidence backing their claims.

So much for THAT thought experiment: None of these outcomes have occurred.


In reality, the precise opposite of what a CRA-induced collapse should have looked like is what occurred. The 345 mortgage brokers that imploded were non-banks, not covered by the CRA legislation.  The vast majority of CRA covered banks are actually healthy.

dcp_52aa00241The biggest foreclosure areas aren’t Harlem or Chicago’s South side or DC slums or inner city Philly; Rather, it hs been non-CRA regions — the Sand States — such as southern California, Las Vegas, Arizona, and South Florida. The closest thing to an inner city foreclosure story is Detroit –  and maybe the bankruptcy of GM and Chrysler actually had something to do with that.


I spent a year of my life researching and writing in painstaking details what the actual causes of the crisis were. I put together all of the moving parts as to what the actual causes were — and wrote them up in Bailout Nation, to wit: Irresponsibly ultra-low rates that led to a huge housing boom; a failure by the Fed to supervise non-bank lenders; An abdication of lending standards by both banks and non-banks; Radical deregulation of financial markets; the now discredited belief that markets can self-regulate; a shadow derivative market allowed to operate unlike every other financial product; Compensation schemes that rewarded short term risk taking over long term profitibility; Increases in leverage to the major investment houses from 12-to-1 to 35-to-1; These were the causes of the collapse — not some 1977 legislation.

Its not simply that the overwhelming amount of evidence points to many factors outside of the CRA, the actual results of CRA were minor. Relative to these other ginormous factors, the CRA impact is all but irrelevant.  And to date, nobody has produced any data based evidence that the CRA was relevant to the crisis. Not one shred.

Until that evidence is produced, the CRA remains a marker, one that separates proponents of intellectually honest debate versus the parrots of partisan talking points, not worthy of your time or effort.


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Category: Credit, Real Estate, Regulation

Volcker: We Need Radical Regulatory Reforms

“The biggest obstacle to Volcker’s reform agenda is Summers” > There is a long article at Bloomberg very much worth reading about Tall Paul: Volcker Gets Less Than He Wants in Curbing Wall Street Excesses. Consider the following: “If Volcker is at one end of the spectrum arguing for tougher financial rules, Summers and Geithner…Read More

Category: Regulation

Dastardly Real Estate Lobbying Letters

Our critique yesterday of the lobbying efforts of the commission sales people’s organization (Realtors and Mortgage brokers) included letters from these groups to their members and public officials. Be sure to see these Lobbying Letters from the NAMB and the NAR here: NAR Urges 18 Month Moratorium on Appraisal Reform Mortgage Broker’s Anti-Appraisal Reform Lobbying…Read More

Category: Bailouts, Credit, Regulation

NAR, NAMB Fighting Appraisal Reform

I am beginning to suspect that the Realtor’s association and the Mortgage Broker’s association are pro-fraud.

Yesterday, I noted the bizarre (and potentially corrupt) statement from NAR economists Lawrence Yun calling for appraisers “familiar” with local neighborhoods:

“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

I called that a thinly veiled hint for “friendly” i.e., “corruptible” appraisals.

I did some more digging, and I quickly discovered what this contemptible suggestion was all about: It is part of a broader lobbying effort by the The National Association of Mortgage Brokers (NAMB) and The National Association of Realtors (NAR) against honest appraisals.

For more proof of this lobbying effort, see the letters to mortgage brokers and real estate agents from their trade associations to mobilize against mandating honest appraisals ( Mortgage Broker’s Anti-Appraisal Reform Lobbying and Effort and this NAR Lobbying letter).

Why is this significant?

Appraisal fraud was an enormous contributor to the unsustainable run up in prices during the boom period. Many (but not all) mortgage brokers and realtors referred buyers to appraisers that ALWAYS hit the number of the home purchase price.

A Bernie Madoff-like 100% success rate is often cause for suspicion, but we have much harder evidence than a statistical fluke. For that, let’s go to the big book of real estate fraud, Bailout Nation:

Fraud in Real Estate, Mortgages, and Home Building
Minor amounts of real estate–related fraud have always existed. During the housing boom years of 2002 to 2007, it became a pandemic. These various fraudulent actions helped make the housing boom much bigger—and the bust that much more painful:

Appraisal fraud: Historically, there was no incentive to inflate appraisals. But with the rise of the mortgage brokers—many working closely with real estate agents—the business of steering appraisals to the most generous rose rapidly. By inflating appraisals, many appraisers found they could attract more referral business; some even managed to always hit the target prices given by real estate agents, which contributed significantly to the huge run-up in home prices. In 2005, more than 8,000 appraisers—roughly 10 percent of the industry—petitioned the federal government to take action against such abuses. But both Congress and the White House did nothing, allowing this rampant fraud to continue unabated.

So the very people who were enormous contributors to the credit bubble (mortgage brokers), and their colleagues who helped feed the housing boom and bust via friendly (i.e., corrupt) appraisals (RE Brokers, appraisers), are now mobilizing to make sure that honest appraisal reform is thwarted.

The NAR and NAMB apparently have no ethics to speak of. Their shameless self-interest, regardless of the damage it may cause, disgusts me . . .


Fraud in Real Estate, Mortgages & Homebuilders (August 17th, 2008)

Nonfeasance in Financial Oversight (August 18th, 2008)

Lobbying Letters

NAR Urges 18 Month Moratorium on Appraisal Reform

Mortgage Broker’s Anti-Appraisal Reform Lobbying Effort

Realtor’s Anti Appraisal Reform Lobbying Effort

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Category: Credit, Legal, Real Estate, Regulation

NAR Anti Appraisal Reform Lobbying Effort

TO: State Association Executive Officers State Association Presidents FROM: NAR Government Affairs DATE: 19 June 2009 RE: Fly-In Head’s Up Please note this notice is going to all state executive officers and state presidents. We will be sending Fly-In details on Monday June 22, 2009 to the states who have Members of Congress and/or United…Read More

Category: Legal, Real Estate, Regulation, Think Tank

NAR Urges 18 Month Moratorium on Appraisal Reform

Letter from Charles McMillan, 2009 President, National Association of REALTORS urging an 18 month moratorium on the Home Valuation Code of Conduct (HVCC) to Andrew Cuomo, NY Attorney General and James B. Lockhart III, Federal Housing Finance Agency: HVCC Moratorium Lockheart

Category: Real Estate, Regulation, Think Tank

Obama’s Weak Regulatory Reform For Derivatives

The Obama administration continues to demonstrate their lack of understanding about a) how derivatives work, and b) their role in the crisis and collapse. The proposals to regulate derivatives are weak and ineffective. CDOs and CDS may be trading at healthy discounts to their notational value, but at least Wall Street is getting 100 cents…Read More

Category: Derivatives, Regulation