WatchYES, the "only" institutions which were regulated by CRA were large commercial banks, BUT that CREATED the DEMAND that small mortgage companies happily filled. CRA loans were bundled as securities and sold all around the world...but the starting point of the entire food chain was the government forcing commercial banks to make unwise loans.
What happens to prices when suddenly MILLIONS of people can now buy the same product? Thats right - bidding wars -and prices skyrocketed, didn't they? With skyhigh prices many conventional borrowers chose Alt-A and Option Arm loans for the following reasons: (1) to get into the house, and (2) cope with skyhigh payments. Other's with equity borrowed in order to buy commercial properties. The cancer spread and it all started with CRA, kinda like when you toss a pebble into a pond - the ripple effect. By some estimates all this housing activity accounted for more than 40% of ALL jobs in the U.S. since 2001. Its ALL inter-related.
CRA had nothing to do with housing bubbles in other countries, however all have similar CAUSES to our own collapse. Central government planing, high inflation, and central banks are the involved...and they too are 100% government related - gee what a coincidence. America also has central government planing (gov't intervention), high inflation and The Fed, which create's money out of thin air then loan's it to the gov't, at interest, putting us all in debt, $1.4 BILLION... PER DAY on INTREST payments alone.
Still not convinced that the Community Reinvestment Act is the cause of our housing and economic crash? Ask yourself this: If ALL loans made in the last 35 years required (1) 20% down, (2) a fixed interest rate, (3) prudent lending requirements and (4) no CRA...would we in America have our current economic meltdown? Abe.
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Honest Abe says
So basically you've totally failed to indicate a single reason why CRA had anything to do with the housing crash, so you're going back to a flame war instead.
I happen to be extremely well versed in economics. I examined the issue and read several economic papers on the subject including this one by the San Francisco federal reserve:
CRA Lending during the Subprime Meltdown
The conclusion from every single source is that CRA was not responsible for the mortgage crisis. Furthermore most economists go further and say CRA banks were actually more responsible than non-CRA banks.
Now you can whine and cry about how this is wrong, but then again you've presented nothing. Nada. Zilch. A blind assertion is NOT an argument.
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elvis says
Banks were not forced to make loans there. Banks were given incentives to make lending available to people who qualified in certain areas. If you read the Dallas Federal Reserve article I linked, you'll find out that CRA lending remained either marginal or outright profitable for decades.
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Bap33 says
ACORN appears to be an unreasonable and sometimes criminal advocate for poor people. They had no effect on the mortgage crash and I'm happy they are being choked to death.
Barney Frank's involvement seems to be as an advocate for congressional control of Freddie and Fannie, and an unsuccessful attempt to get loans approved for multi-family housing. Whatever Barney Frank said about the 2005 reform bill, it was DEAD ON ARRIVAL! The bill had already passed the house, and George Bush promised to veto it. It was killed by REPUBLICANS in a REPUBLICAN chaired committee.
I like the guy and have yet never seen one shred of evidence linking him to the reckless subprime lending that was going on. He's probably too liberal for my tastes, but he's entirely rational.
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Honest Abe says
Everyone's facts count. The problem is that people like you don't present facts, you present blind assertions and hyperbole.
Accepting borrowers with little cash decreases the loan repayment results, that is why since the 1970s these loans have had more risk and been more expensive than traditional financing. This fact, which has been known and talked about for decades, had NOTHING TO DO with the disaster! The Dallas Federal Reserve, which I should remind you is not the government, said that
CRA loans are marginally profitable. Are they lying?
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Bap33 says
I'm certain political opinions get in the way of rational thinking for everyone once in awhile. No one wants to see their team fail.
I'm not sure how to feel about ACORN. When I first heard Fox making a fuss over them, it was about a couple of idiots padding their paycheck by submitting fake voting registrations. It was not systemic, it was not an indictment of voter fraud by Democrats, in fact the core of the case was theft. ACORN was actually the victim!
Of course I have a very dim view of Fox, and they made as much hay as they could without actually discussing the details.
Now the fake pimp/prostitute story was some great reporting and exposed some rot within the organization. For that reason they had their funds stripped and are now pretty much discredited. Do I think it was a major story worthy of front page coverage? Not really. Some of the offices they visited threw them out. Some of the offices they visited encouraged them to commit criminal acts. Once again it was not systemic and was not an indictment of anyone except those involved. There was no national policy to help pimps with their taxes.
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In order to qualify for CRA credits the loan had to be made w/in a "red-lined' neighborhood. Show me a 'red-lined' neighborhood in Portland, Oregon, Las Vegas, NV, etc. More than half the subprime loans made in the past ten years were done so by private mortgage lenders NOT regulated by CRA.
Ask yourself this, how long has VA and FHA loans been around and to what degree do those loans partake in the market. These are practically zero down and allow for some not so great credit scores.
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Why wasn't these a housing bubble in Selma and Cuba, Alabama? Wanna talk about poor... ( I chose these particular locations since I have relatives there)
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So what was the 'reward' for earning CRA credits???? How were the banks 'FORCED' to make bad loans. In the early years, what were the percentage that went bad?
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Honest--
That is just completely incorrect. The CRA only applied to very specific zip codes. And if you look at foreclosure rates in those zip codes, they mirror what would be expected during a recession.
Yes, lending practices were relaxed and, yes that directly caused the bubble. But, it happened completely independently of the CRA. It was because the crazy MBAs on Wall St. didn't understand the risk of mortgage debt. And the ratings companies called all the crappy Alt-A, Option ARM, liar loans, etc. as AAA investment grade securities when they were bundled together.
We've hand government intervention in housing for many, many years. Fannie Mae and Freddie Mac have been around since the late 60s and the mortgage interest deduction has been available forever. This is nothing new. You may not agree with the goals of government intervention, but it certainly didn't cause the bubble and subsequent crash
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Hey Abe, here's a bunch of info with links so you can check sources:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
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Seems like blaming the CRA is like blaming my great grandma for my frustrations with this country. Why the hell couldn't she stay in Czechoslovakia? What was so great about the USA in 1900?!;O) The CRA was a great concept but has been destroyed by further legislative action though it alone is not to blame for this housing and credit bubble/crisis.
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"ALL loans made in the last 35 years required (1) 20% down, (2) a fixed interest rate, (3) prudent lending requirements and (4) no CRA…would we in America have our current economic meltdown? "
Of course not. The point is 1, 2, and 3 had nothing to do with CRA, and your 'pebble in the pond' is just hand waving nonsense without explaining cause and effect.
I'm not sure what happened to the other thread. Vanished into the either. What's to point of going to the trouble to post anything? I'm done here.
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Abe what are you talking about? Subprime, low income, and CRA are not synonyms. Many subprime mortgages were pretty high up on the income ladder. http://seekingalpha.com/article/49701-subprime-mortgages-crossing-income-and-credit-strata gives a pretty good read about this. How can CRA be the cause of the housing bubble in the US but have nothing to do with the housing bubble in the rest of the world? You are saying there were 2 independent simultanious housing bubbles (the USA and the rest of the world) created by entirely different causes. Really? That's very interesting theory.
There is one and only one cause of the housing and economic crash everywhere in the world. The people who signed on the bottom line for houses they could not afford gambling they would cash in on the housing lottery. No one forced people to carry unaffordable mortgages with no savings in case of a downturn. Renting or buying a smaller more affordable house was always an option. I did and bitterly resent anyone or any irresponsible company being bailed out with my tax money. What happened to being responsible for your own actions?
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bob2356 says
Excellent post.
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bob2356 says
I also agree that this is an excellent post. Even though I am retired, I am forced by the state of California to pay absurd taxes every quarter. I know that even though I do not work, I am paying for the f***ing flakes who did not buy responsibly. I am their freaking bailout!!!!
Don't even get me started on how I am forced to pay for the illegals...
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I understand the frustration with the individual loanowner but what the hell were the banks thinking lending so much money to folks who obviously couldn't afford it?!?! Hey, I make 40K and support my family of four, would you as an individual loan me $400K? Hell NO! So why did the banks do it?
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I've read through this whole post, suggested attachments (Wikipedia), as well as other google postings on CRA. Here is my observations:
(1) Its pretty clear the feeding frenzy was started by CRA and the gov't required lax lending requirements. Banks that had standards exceeding that of Regulators were considered to have "unfair lending practices."
(2) CRA is a great concept BUT is unworkable in reality. It would also be great to let everyone fly around the country for almost nothing...but not so great if regulators forced the airlines to gut their safety standards. Do you see the similarity?
(3) Loans needing down payments, strict lending requirements and the like prevent run-a-way price increases (a bubble).
In other words CRA is the cause, devastation is the effect.
Millions of unsuspecting, innocent people like disgusted.again are paying the price for yet another government experiment gone horribly wrong.
Why is it that we continue to trust politicians, who are dumber and more messed up than we are, to control every aspect of our lives...usually with disastrous results (like CRA)? UGH.
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Elvis--
Could you explain how you came to the conclusion that
elvis says
I've read through the same articles and come to the exact opposite conclusion. Help me out. How does a loan in one of the CRA approved zip codes cause a bank to make a reckless loan in an affluent area? Regulators would only complain if they were not approving loans in the CRA approved zips--they wouldn't have anything to say about loans in non-CRA zips. And non-CRA zips is where the bubble and crash occured.
elvis says
No. I don't. I assume you're implying that the CRA forced banks to give away money like an airline letting everyone fly for free. But that assumption is false. So the anala]ogy is poor.
elvis says
You're right that down payments, strict lending requirements will prevent run-a-way price increases... but that has nothing to do with the CRA.
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The bubble and crash occurred everywhere. Lending standards were lowered across the board - in all areas - as a consequence of CRA. Here's why, it wasn't just "Regulated" banks which made loans to "meet the credit needs of local communities." Mortgage companies did too, all over the place, since they were not regulated to stay in any particular zip code.
And you are right, CRA didn't force banks to give away money, but did force them to lower their lending standards. The idea I tried to communicate was how dangerous it is if government forces any industry to lower their standards. For example, if the government forced the airline industry to lower their safety standards...it would have devastating consequences - wouldn't you agree?
Finally, I agree with the original post above in paragraph two, that millions of new "bidders" pushed up prices in a bidding frenzy. You remember 2004, 2005 don't you. Homes were selling for 5 - 7 - even 10% MORE than the asking price and that went on for years. It's a direct connection...cause and effect...lower standards = higher prices.
Hope you all have a great weekend and remember its patriotic and good for our nation "to have a healthy distrust for government"
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Elvis--
You still haven't made the connection between lowered lending standards and CRA. You say:
elvis says
How is that statement connected to CRA?? Mortgage companies DID lower their standards, but it had nothing to do with CRA. It had everything to do with the fact that there was a huge market for bundled mortgages. There was an insatiable appetite for them on Wall St., and as long as they could easily resell the mortgages for a large profit, the brokers were only too happy to write the crappy loans.
Finally--show me where the CRA states that banks must lower their lending standards...