WatchI have heard some variation of this assertion several times in the past few years when discussing the housing collapse with family/friends:
"The government had made it a priority to give away loans to anyone and everyone. It had gotten to where to gov. actually mandated to the banks that they had to make a certain amount of lousy loans to lousy applicants. The lending institutions were audited by the gov. and they were told in no uncertain terms what they had to do to stay within the government mandates. The lending institutions were forced into making loans to unqualified applicants. "
The thing is, I haven't seen it substantiated in any way. Is there any truth to this, or is this just talk radio soundbytes gone awry?
-s
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Tanta Vive!
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EBGuy says
Yes indeed. More people should read her old posts to learn more about how the mortgage market worked:
http://www.calculatedriskblog.com/2008/12/in-memoriam-doris-tanta-dungey.html
Did she cover a lot of the self-dealing and things of that sort? I don't remember seeing much of that on Calculated Risk. Sources like ProPublica covered some of that very well, however -- pretty consistent with the war stories I heard contemporaneously with the peak of the boom from people in real estate finance.
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I think the 3 Cs took me back to one of her classic posts.
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It's true.
Whenever Barney Frank was not trying to seduce truckers in parking lots, he was calling up banks ordering them to completely abandon all underwriting principals to give loans to America-hating illegals who would destroy our neighborhoods and reduce the US to a third-world dystopia that wold be much easier for al qaeda to integrate into the caliphate.
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Don't be. T'was masterful exposition.
corntrollio says
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APOCALYPSEFUCK says
It was well-written indeed. The only part I didn't like were the pesky facts. Also, some of the words were too big.
I am an American after all! If it doesn't fit on a bumper sticker so I can read while stuck in traffic in my S.O.B, then I can't be bothered! :)
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The govermment policy encouraged loaning to everyone. There are several presidential speeches on the subject you can listen to.
Fannie and Freddie were complicit.
Acorn sued Citibank in Chicago (Obama was one of the lawyers) for not loaning enough to the poor. "Racism" was the typical charge. Citi settled and agreed to loan to anyone who could hold a pen.
The perfect storm developed. The loans were made to tens of thousands of illegal aliens and others. A bubble ensued. Govt. repeal of controls on bank behavior and on derivitave trading in 2000 created a nice environment for banks to gamble.
As the asset bubble popped, those gambles lost so much that the ripples extended far and wide.
Since I personally know both illegal aliens and several others who should not qualify for a used car loan, (but who got mortgages) I believe that the whole mess began with lax rules of lending. Who started the trend was people like Bawney Fwank, but later many others got involved.
Don't worry. If interest rates are kept artifically low, some other scheme will attract money that wants more yield and another asset bubble will form somewhere.
In China it's probably apartments for example.
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Government did not mandate it, they forced it. They deregulated the industry to a point where fraud was acceptable, in fact they encouraged it. Bush and Greenspan made several speeches to that detail. Fannie and Freddie were participating in that scam as well. Once fraud is acceptable those who commit it win. Everyone jumped into the game of free money while the average american simply looking for a home got screwed royally in the process.
Everyone up there participated and was complicit, which is why no-one went to jail.
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ChrisLA says
Interesting. So when government deregulates, it encourages fraud then?
Am I to understand that you are for more regulation then?
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ChrisLA says
Is this a joke? Have you suddenly abandoned every point you've ever made?
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I hear you but professions have their ethics - and the observation of those are what separate successful and maintainable societies from horrors like Soviet Russia, PRC and the Sudan. No one and no institution pressed banks to relax their standards of underwriting. Government programs jiggered, at most, income proportion standards within the larger cluster of underwriting criteria. The big banks should have been allowed to go under, slowly, and in a controlled take-down with their mortgage businesses being cut out and resolved by forcing them to sell those smoking portfolios at a loss to performing banks who retained the most rigorous standards of underwriting. The managers responsible for turning these mortgage divisions into printing presses should be doing long stretches in wedding dresses in federal penitentiaries, providing entertainment for neonazi serial killers. We'll be living with the horror they've all inflicted for generations.
ChrisLA says
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APOCALYPSEFUCK says
In Soviet Russia, you underwrite bank. No wait, that's the Soviet United States.
APOCALYPSEFUCK says
Exactly, we should have nationalized the insolvent banks, sold them off for parts like in bankruptcy, given shareholders and bondholders a massive haircut, and put the incompetent fraud-committing executives in federal PMITA prison, just like we would do with any other failed business with a failed business model and criminal executives. Instead, we rewarded these jerkoff rent-seekers and had them insult us with even bigger bonuses than before, all while they complain about a business-unfriendly environment and over-regulation.
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clambo says
Piffle. If Presidential speeches actually produced results, we'd live in a far different country than we do today, replete with universal health care, clean air and water, and a chicken in every pot.
This is a "connect the dots" mentality that relies heavily on anecdotes but light on reality.
Like the CRA argument: It only makes sense if you think that redlining was a practice we should have kept, or that racial segregation was better for society, in a separate but equal kind of way.
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CL says
Referring to speeches as the cost of a huge leveraging event is indeed silly. We didn't have an "Ownership Society" because Bush deemed it so. We had it because banksters gave out tons of private non-agency loans that made no sense.
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Loans to players owning multiple properties at the margins are what made, shall we say, an overheated market totally irrational. I'm willing to bet most of this mess could have been eliminated if there had not been a lot of "this will be my primary residence" fraud.
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EBGuy says
It's possible. That would have at least made amateur investors' cost of capital higher. The problem is that if you look at contemporary accounts, the amateur investors didn't really care about cost of capital or potential returns -- they were focused on appreciation. A good example is the FatWallet thread I referenced on Patnet recently:
http://patrick.net/forum/?p=816472
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iwog says
Is everything only black and white in your world?
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ChrisLA says
Government regulation isn't an ideological issue with me. I think it's warranted sometimes and not necessary other times.
However government regulation damn well IS a ideological issue with you.............at least it has been with every post you've ever made on the issue until now.
In fact you went one step further. You BLAMED GOVERNMENT FOR DOING NOTHING! You said government FORCED the fraud by not regulating the industry.
The desperation to somehow make this the fault of government is incredible. If it's not something government did do, it's something government didn't do.
I happen to agree that the mortgage industry should have never been deregulated. I happen to agree that an unregulated free market will eventually destroy this country just like it destroyed Russia and France and a 100 other places and times.
I just don't understand how you're suddenly an FDR reformist after everything you stand for, everything you've voted for, has been exactly the opposite.
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Why did ACORN win? The Boston Fed published reports that there was discrimination in the MA housing market back in the early 90s. The data was flawed. The study was a crock.
It did not matter. The Fed published it. The banks know they cannot win a war against the Fed. They kneel and concede.
I do not consider the Fed to be the government. It's a private institution. Ergo, that is why I do not agree with a statement that "the government mandated that banks made bad loans". Banks dare not cross their liquidity golden parachute.
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This is the big problem with this whole topic. The presumption is that redlining WAS racial. The data does not prove that it was racial.
The data proves that bankers are still the same. They won't make moves their lender of last resort doesn't condone.
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wtfcapinv says
Do you have that data?
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Teetering industries like banking or insurance have only one leg of support - get swallowed by a bigger fish. That rule hasn't changed since the 16th century.
Fraud was not encouraged. Risk taking was encouraged so long as their were still methods to roll the risk taking into further securitization.
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tatupu70 says
http://www.becker-posner-blog.com/2011/06/capture-of-regulators-by-fannie-mae-and-freddie-mac-becker.html
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There was no mandate to make out bad loans...at least from the government. But...
let's say a bad loan is made out..foreclosure and now the bank owns a house that it wouldn't have otherwise. It now bought a free house. Now in a market that goes up of course you can throw caution into the wind and lend money out because if they default you have something going up in value.
Now you don't..now the backlog can take years to sort out..now there's 19 million empty homes in the country.
There was a long article I remember reading that actually tried to link the dot com crash with housing. Basically that various firms wanted something solid to put their money in. That coupled with the whole cocoon effect after 9/11 aimed it right at housing.
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You don't need an article. Here's the short short version. Or the Mel Brooks version.
Labor Bubble 1: Financial Deregulation, risk taking, credit expansion - 10 million jobs created
Labor Bubble 2: dot com, credit expansion with stock options, underwriting, IPOs, etc - 8 million jobs created
Labor Bubble 3: Construction, real estate speculation due to easy money credit expansion from the Fed depressing the US Dollar to expand export markets for US goods and services - 12 million jobs created
Labor Bubble 4: To be determined. Most likely profession will be health care services with labor supply controlled by government mandates in health policy with the passing of the PPACA.
The genesis of the great big bubble blowing machine is the addition of the Fed's 2nd mandate to achieve full employment by which they gave up secrecy and accepted congressional oversight.
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wtfcapinv says
Just for future reference--an opinion piece on a blog does NOT qualify as data.
I'm looking for the actual data showing racial background by neighborhood with acceptance/refusal, credit score, loan to income ratios, etc. That is data.
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https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=44+Syracuse+L.+Rev.+1197&srctype=smi&srcid=3B15&key=aadede1ea2c2bd110920d026b77ae950
Pay.
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wtfcapinv says
That article is 18 years old. Not sure how any data in that article could possibly relate to the CRA or recent housing bubble.
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Do you remember your original question?
Because your statement is a strong indicator that you don't.
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wtfcapinv says
I asked if you had data to back your statment saying redlining wasn't racially motivated. The topic was the CRA, so I expected that the data was somewhat relevant, but perhaps I assumed too much.
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I didn't say anything about CRA. I said the argument that loans were not being extended to borrowers based on racial criteria is not sound. There is no data to support it that is not rigged for a predetermined conclusion.
I linked you to the Posner blog for the free analysis. I linked you to "18 year old" data for the thorough analysis.
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wtf--
Here's another take on the data.
http://archives.hud.gov/news/1999/newsconf/stage3.html
There is definitely data to support redlining. You may not agree with all of the interpretations, but the data is there.
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iwog says
so with you world is black and white.
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tatupu70 says
It seems Andrew Cuomo felt that way back in 1998 and slapped billions of fines on banks. Pick your poison fines using affermative action or defualting loans prejected into the future. See 3:00
"sub prime loans were a good idea" See 6:30
http://www.youtube.com/watch?v=ivmL-lXNy64
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thomas.wong1986 says
I think you are making some faulty assumptions. Redlining is completely different than subprime.
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okie dokie! For andy cuomo its all the same...
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thomas.wong1986 says
That video cracks me up. Does whoever put that together realize that the loans made under CRA or "government mandated" loans failed at a lower percentage than those not under the CRA?
I know you like to give innuendo and "connect the dots" references, but that is the bottom line.
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tatupu70 says
Yeah, that's why people making the assertion are clueless. The CRA loans perform better because they had underwriting standards! The private non-agency loans didn't have underwriting standards.
The government-mandated loans were also government-guaranteed, weren't they? In that case, why would the banks suffer? The banks suffered because they made the loans on their own account.
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"The banks frankly own the place" --Dick Durbin
It's really a question of power. Who holds the strings in this puppet show?
Does anyone here really think that Congress can powerfully mandate that the banks lend to the poor despite established lending criteria? And that the banking lobby wouldn't respond in kind by flooding the congress with their filthy lucre? Who evokes change on the Hill?
The banks write the laws, and they write them in their favor. Unless you believe that the downtrodden in America really have representatives, that those representatives are not simply paying lip-service to that constituency, and that these representatives are the most powerful members of congress, and that their numbers are large enough to even get a simple majority, much less a supermajority.
"The banks frankly own the place" They do. Witness the CPFB and Warren. Tell me how easy it is to get legislation passed that would force the banks to do what they believe to not be in their self-interest.
Piffle.
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Every day bank lobbyists walk from K Street to the Congress, drop trou and take a satisfying crap on your representatives' faces. The members of Congress so graced unfailingly hand the lobbyist a towel, thank him for his attentions and clean his asshole clean with his or her tongue.