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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If lower income neighborhoods were such a good credit risk, why did the CRA have to force banks to make loans there?
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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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Please share your opinion on ACORN and B. Frank & Co. with regards to the bubble.
Thank you.
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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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Bap33 says
Bap--I urge you to read the St. Louis article again. It talks about how the subprime really took off with the deregulation in 1980 and 1982 because it allowed banks to charge higher fees and higher rates based on credit worthiness. With the shackles off, so to speak, they jumped in headfirst. It's not so much that someone or some thing forced them into the subprime market, it's more that they never wanted to get in it before because they couldn't charge enough fees or high enough rates to justify entering that market. After 1980/82 that changed... Does that make sense?
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Interesting Comments...
OPED from Wall Street Journal.
http://bx.businessweek.com/apple/view?url=http%3A%2F%2Fc.moreover.com%2Fclick%2Fhere.pl%3Fr2330745813%26f%3D9791
Testimony to Congress see page 3-4.
http://www.house.gov/apps/list/hearing/financialsvcs_dem/pinto_testimony.pdf
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"Ninety percent of CRA lending was not classified as high-rate subprime, even though much of it had subprime and other high credit risk characteristics: This is because CRA lenders generally, along with Fannie and Freddie (the GSEs), did not classify CRA and affordable housing loans that had high risk characteristics (i.e. low FICOs, high LTVs, or high debt ratios) as subprime so long as they did not contain other features such as higher fees or higher rates, interest only or negative amortization, or low initial payment features with adjustable interest rates. Under this narrow and misleading definition, only an estimated 10% of CRA lending ended up being classified as subprime. Ironically, the reason that these were not high-rate loans was that the big banks and the GSEs were subsidizing the rates, as recent events have painfully demonstrated;"
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"For a glimpse as to possible overall CRA performance consider the following: o Third Federal Savings and Loan’s (Cleveland) has a 35% delinquency rate
on its “Home Today” loans versus a rate of 2% on its non-Home Today portfolio. Home Today is Third Federal’s CRA lending program, which targeted low- and moderate-income home buyers who prior to March 27, 2009 (the date it suspended the program’s innovative and flexible underwriting requirements due to poor performance) would not otherwise qualify for its loan products, generally because of low credit scores and high LTVs. For the reasons noted earlier it did not classify its Home Today loans as subprime lending, however, it noted that the credit profiles of Home Today borrowers “might be described as sub-prime”1;
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@Iwog and tatupu,
Thank you.
Need sleep folks. gnite.
@thomas, great points too.
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tatupu70 says
When you cant outfact or outthink your opponent throw rocks at his family to get him off topic.
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http://www.investors.com/NewsAndAnalysis/Article.aspx?id=513131
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@nosf41,
Great link, and thank you.
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NOSF, watch out. The liberal progressives are going to attack you. They'll say your facts don't count because they have facts that say other-wise. And on top of that they'll say CRA loans had far fewer defaults.
Oh, I get it... LOWERING the standards, accepting poor credit risks and accepting borrowers with little if any cash INCREASES the loan repayment results...hahaha. What, because government shadow statistics says so? RIIIIGHT.
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Lafayette, CA
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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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I do see what your saying Iwog. And I do know how smart you are. So, it is with great respect for your intellect that I ask you if you feel there are political reason's for the positions we see on this board where the CRA is the issue? I ask this because I honestly came to my point of view by reading info, just like the housing info I read on here, and until this housing mess, I never heard of CRA, or ACORN.
The way the mass media ignored the ACORN issue ... did that bother you? It sure bugs me.
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iwog says
The issue is not the marginal profitability of these loans but the political pressure to lower the lending standards. That created a foundation for housing bubble.
Quotes from Thomas Sowell's article (link provided in my previous post)"
"...These pressures began to build in the 1990s and increased exponentially thereafter. Studies in the early 1990s, showing different mortgage-loan approval rates for blacks and whites, set off media sensations and denunciations, leading to both congressional and White House pressures on agencies regulating banks to impose new lending rules, and to monitor statistics on the loan approval rates by race, by community and by income, with penalties on banks and other lenders for failing to meet politically-imposed norms or quotas.
These stepped-up pressures began during the George H.W. Bush administration and escalated during the Clinton administration, when Attorney General Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions..."
"...In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had.
For banks, simply proving that they were looking for qualified buyers wasn't enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of "innovative or flexible" lending practices to address credit needs of LMI borrowers and neighborhoods..."
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nosf41 says
OK--let's think about this. Your theory is that the government "pressured" or "forced" the banks to make a "requisite number of loans to low- and moderate-income borrowers", right? So, you're saying that the Banks didn't want to make these loans, right? They were pressured, or forced.
So, wouldn't they make the bare minimum to satisfy the government then? Only the "requisite", and no more? After all, they didn't want to make these loans.
Given this--how could it have caused the mess? Surely, the government didn't require that there be that level of low-and moderate-income loans...
Nevermind that the VAST majority of foreclosures are in non-CRA areas. Which completely blows a hole in that theory anyway.....
Any objective look at the facts cannot come to the conclusion that the CRA had anything to do with the housing bubble and subsequent crash.
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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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Some more interesting stuff...
http://www.forbes.com/2009/10/03/community-reinvestment-act-mortgages-housing-opinions-contributors-peter-schweizer.html
President Obama has been a staunch supporter of the CRA throughout his public life. And his recently announced financial reforms would make the law even more onerous and guarantee an explosion in irresponsible lending. Obama wants to take enforcement of the CRA away from the Federal Reserve, the FDIC and other financial regulators who at least try to weigh bank safety and soundness when enforcing the law, and turn it over to a newly created Consumer Financial Protection Agency (CFPA). This agency's core concerns would not be safety and soundness but, in the words of the Obama administration, "promoting access to financial services," which is really code for forcing banks to lend to those who would not ordinarily qualify. Compliance would no longer be done by bank examiners but by what the administration calls "a group of examiners specially trained and certified in community development" (otherwise called community activists). The administration says, in its literature about the reforms, that "rigorous application of the Community Reinvestment should be a core function of the CFPA."
For good measure, Obama's plan also calls for the CFPA to work closely with the Department of Justice to combat perceived discrimination in lending.
Obama's battle against banks has a long history. In 1994, freshly out of Harvard Law School, he joined two other attorneys in filing a lawsuit against Citibank, the giant mortgage lender. In Selma S. Buycks-Roberson v. Citibank, the plaintiffs claimed that although they had ostensibly been denied home loans "because of delinquent credit obligations and adverse credit," the real culprit was institutional racism. The suit alleged that Citibank had violated the Equal Credit Opportunity Act, the Fair Housing Act and, for good measure, the 13th Constitutional Amendment, which abolished slavery. The bank denied the charge, but after four years of legal wrangling and mounting legal bills, elected to settle. According to court documents, the three plaintiffs received a total of $60,000. Their lawyers received $950,000.
The CRA is not about community development; it is, essentially, affirmative action in lending. Trillions in loans are now to be made not on the basis of whether they can be paid back but to meet CRA goals. This is precisely what we need to get away from. Drinking this potent cocktail would be dangerous to our financial health.
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a real kicker from the article...
" According to the National Community Reinvestment Coalition, in the first 20 years of the act, up to 1997, commitments totaled approximately $200 billion. But from 1997 to 2007, commitments exploded to more than $4.2 trillion. "
Are they even worth $4.2Trillion.
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iwog says
I agree. The hiring policeies would be fun to scan over.
in a simalar light:
THe Vatican is not pro-sodomy, but the media condemed all for the actions of a few.
Not all gaurds at GitMo made the prisoners act like dogs, but the few that did sure spent a bunch of time on the front page, and some idiot now wants to close the best base we have for captured combatants.
The story about Bush that was invented by a Major News Anchor, that was proven false and cost the anchor his job, was ALL front page when it was attacking Bush, and was all quiet when the story was proven false.
The ACORN story, and all of the other welfare system abuses that have been documented ... coupled with the EBT card payment system that allows welfare takers to get cash from ATM's and buy whatever they wish .... coupled with the marching illegals demanding laws remain unenforced .... these things start to matter to bitter renting conservatives like me.
I guess the mass-media does a good job of projecting and protecting. That's why I enjoy Fox.
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BBC is probably the closest you will come to a somewhat, but far from totally, objective source of news. Fox and MSM are equally garbage. Agenda's, half truths, selective reporting, ignoring any dissenting information, or outright lying is what passes for reporting in both worlds. You have to accept both as entertainment only.
Of course for the people who want their news to prop up their preconceived agenda without any of that inconvenient objective thinking stuff both sources represent manna. Just out of curiosity do public (or for that matter private) high schools teach philosophy and objective analysis any more??
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iwog says
@IWOG
Are you a liberal-progressive?...I am a conservative progressive who is known for attacking arch-conservatives for their favorite color: Stupidity. The problem with most conservative views is that they lack compassion for humanity and only focus on the bottom line of issues.
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Labels anybody?
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Bellingham, WA
Just out of curiosity do public (or for that matter private) high schools teach philosophy and objective analysis any more??
Quality private schools, as a matter of course. As for public ed, If the curriculum can't be tested on a scantron, it's not covered. The NCLB mindset is that we need defensive education (enough to run a cash register), not mind-expanding stuff.
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4X says
I'm not exactly sure. Most people call me a liberal because of my disgust with the Bush administration and my support of an FDR style federal government. I'm definately for progressive taxes and economic border controls. I also think modern globalism is a disaster. I also think it's time for single payer healthcare and I wish Democrats would have the guts to simply do it and not succumb to these half-assed compromises.
That being said, I strongly support the second amendment. I hate affirmative action. I think our immigraion policy is a joke and exists only to provide cheap labor for corporations. I want to see the federal reserve crash and burn. I think Democrats are stupid to embrace so much political correctness and instead should be trying to find practical solutions. I also want to see tort reform and family law reform in this country. Many of our social problems are rooted in an idiotic legal system that rewards irresponsibility and punishes success.
Anyway I guess I'm hard to define.
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This topic makes me long for the good ol' days of the "Why Bay Area housing won't crash" thread. As memory serves, even OTS wasn't simple enough to blame the CRA for the housing crash.
Now, here's the real nail in the coffin of this arguement: NOTHING HAS CHANGED WITH THE CRA. It is still there and CRA banks are still required to comply, yet somehow banks worldwide don't seem to be "forced" to make bad loans to anyone who walks in the door. If the original premise of this thread was correct, then everything would be continuing on unabated.
The housing market has undergone a massive correction because, get this, free market forces are at play and have always been at play. The banks were free to make bad loans and foist them off on unsuspecting investors as mortgage-backed securities in the free market. Investors lost their asses and nobody will buy these products anymore. If the banks cannot sell risky loans to investors at a profit, they will no longer offer risky loans. It's that simple, and it's all about free market forces as are all bubbles and crashes.
The fact that the CRA is unchanged is the main logical faults of this premise. There are many others, that that is the main one.
Market forces are not suppressible in the long term; they simply go underground as black markets. For example, on of the largest industries in the US is the illicit drug trade, which accounts for billions of dollars every year. It is completely illegal and completely unsuppressible. Market forces don't need people like HH to protect them; they do just fine on their own.
Not a single person on this board has come out in defense of the CRA. It's just that we aren't silly enough to blame it for a worldwide housing boom any more than sunspots or fluoride in the drinking water. "Honest Abe" has a hidden agenda; he wants to call anyone who disagrees with him a "lib" or "freedom-hater" so he can make-believe he is an AM talk radio show host.
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I do not blame the CRA as the sole cause for the housing mess.
I do blame the people - that dream up programs - that make buyers out of liars, for most of the mess.
So, it would be fair to say that the politics behind such things as the CRA are where most of "the blame" lands in my view. But the law itself is more of an effect than a cause, I guess.
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There's no single cause for the housing mess. It's a combination of a number of things.
1. Alan Greenspan lowering interest rates to near zero levels.
2. Constant stimulus from the US government.
3. The tax code changes which made it more appealing to speculate in real estate.
4. Tax breaks for taking on a mortgage
5. Fannie/Freddie's unlimited access to money to buy up any real estate asset
6. A bunch of dishonest real estate agents, mortgage brokers, bankers, and Wall St. jerk offs willing to rip everyone off.
7. HGTV and every other media outlet acting as the propaganda arm to the NAR.
I could go on and on but blaming the CRA alone isn't rational. I'm sure it's 5% of the story at most. The community reinvestment act was a stupid idea. But that does nothing to explain the mega rise in prices in the richest areas of the country. The fed & the government flooded the market with easy money and created a situation where it was more appealing to buy real estate than anything else through tax breaks and subsidies. The government is able to shift hundreds of billions of dollars into industries that are even much less profitable than real estate or not profitable at all by simply passing legislation (see Ethanol).
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From the NY Times, April 7, 2010. "He (Greenspan) pointed out that the Fed had warned about sub-prime lending and low-down-payment mortgages in 1999 and again in 2001. Several witnesses explained how banks originated sub-prime mortgages, made loans to independent sub-prime companies and bought a huge number of sub-prime mortgages that it packaged into complex securities known as collateralized debt obligations. All acknowledged A SHARP DETERIORATION IN LENDING STANDARDS kept the housing market aloft and Wall Streets loan-packaging machines humming".
In other words, without CRA the housing market would have slowed down all by itself. It was artificially inflated by all the CRA loans. This has nothing to do with race, but it's got everything to do with government intervention and artificial manipulation of the marketplace. As usual, the result is financial disaster and the taxpayer has to pay to clean up the mess - again.
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Alan Greenspan said quite pointedly in testimony that subprime mortgages were not the root cause it was the securitization of all mortgages.
http://money.cnn.com/2010/04/07/news/economy/Greenspan_financial_crisis_commission/
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Yes, the article says it was the securitization of RISKY HOME LOANS that caused the mortgage meltdown. "Risky home loans" is doublespeak for CRA loans.
Government intervention and artificial manipulation of the marketplace = yet another financial disaster. But don't worry, it can be fixed - by screwing the taxpayer, again.
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Honest Abe says
So, where exactly does it say anything about the CRA in there? Subprime and CRA are NOT the same thing. As has been explained to you numerous times.
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Honest Abe says
Um, no it's not. Risky home loans are loans freely made by financial institutions because they underestimated the risk. You can blame the government for poor oversight and regulation if you'd like, but it has nothing to do with the CRA.
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Vicente says
Exactly! More than 50% of the CDO's were sold over sea. A lot of foreign investors lost money. We are not in such a bad shape like everyone thinks.
Also, the Option ARM and Alt-A loans are currently being dealt with by the banks and government programs such as HAMP. So the shadow inventory will not be as big as everyone anticipated. Only two things can kill the housing market now: 1) high interest rate (above 7.5%) and 2) job market doesn't improve. Of course, I don't see much appreciation in the near future, but I don't see a big drop in home price either. Therefore, put me in the "NO DOUBLE DIP" camp.
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Bellingham, WA
CRA loans were by definition lower-value compared to the big stuff being moved 2004-2006.
Though in South Central LA prices in the ghetto peaked at $400K or so.
Here's an example house at random:
http://www.zillow.com/homedetails/charts/20617286_zpid,10years_chartDuration/
The mortgage meltdown was caused by lenders making loans the borrowers couldn't repay.
CRA had nothing to do with this. 80/20 no-down, negative-am, cash-out refis, stated-income/stated-asset, and the complete abandonment of underwriting standards did.
I don't think institutions underestimated the risk as much as there was an agency problem -- the risk the lenders were running wasn't a problem for the loan industry.
There was so much money flowing into the MBS that nobody cared about the risk. This was the global saving glut engendered by the rapid expansion of money supply since 1995:
http://research.stlouisfed.org/fred2/series/M3
Honest Abe's unwillingness to learn these facts is becoming quite humorous.
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Bellingham, WA
E-man says
Other things that can kill the housing market:
1) Higher taxes
2) Mandatory Insurance Enrollment
3) Higher Energy costs
4) Reduced government spending
Good luck.
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Portland, OR
Antoher thing that might kill the market (again) or more accurately in Portland, Oregon is 'prevent recovery' is the realization that homes are still unaffordable! The only homes that seem to be selling are those at the low end,
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Portland, OR
Sheesh, Abe, what part of 'redlined neighborhood' do you not understand?!?!
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San Jose, CA
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@ Troy,
You missed one: Government taking away the mortgage deductions. My point above is only relative to the SF Bay Area. Don't know much about other markets. In my last post, I think your area is still 20% over-value so waiting might be the wise thing to do.
@ Leigh,
I think your area is still about 20% over-value too.
Cheers.