patrick.net

It is bogus. There's very little substantiation of any of those claims. Ask them to provide any proof of this, and the claim falls apart.

Ideologues sometime say the CRA resulted in this, but they don't know what they're talking about. The CRA was passed in 1977 and then magically 27 years later it caused a housing bubble. Yeah, that's plausible, right?

If you look at statistics during the boom, you can see that non-agency loans went up significantly during the heart of the boom, and it had nothing to do with the government. The banksters were trying to reap massive fees from securitization and used crappy loans to back their bond issuances -- in some cases they actually analyzed their own portfolios and discovered they were crap, but didn't disclose this when issuing the bond.

http://www.nytimes.com/2008/12/21/business/21admin.html

absolutely not. the gov't never mandated banks hand out bad loans. what it did do is create and environment where banks could become extraordinarily profitable by doing so.

do you know a guy or gal who barely graduated from h.s. and had the intelligence of algae but made north of 6 figures for a couple of years?

if you do, they were a few of the people who benefited for that short period of time before over-extending themselves and filing for bankruptcy.

what most people will never understand is, industry is "manufactured" all over the world.

what do i mean? well, take germany for example. they have "beer purification" standards in each individual state.

why?

because a company making beer in one state would be at a complete disadvantage to sell beer in another. that allows each state to have their own, thriving beer industry; thus creating a viable employer that doesn't have the constant threat of competition and need to lay off workers.

so, in america, replace beer with housing. we are the only country on the planet that places such an emphasis on home ownership.

why?

becuasue it "improves society" by creating a multitude of jobs- from the builders to to the sellers to the bankers to the etc...

plus, it was thought that owners tend to create better communities than renters (since proven to be false).

did that answer your question?

swebb says

“The government had made it a priority to give away loans to anyone and everyone.

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES
Published: September 30, 1999

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

thomas.wong1986 says

Fannie Mae Eases Credit To Aid Mortgage Lending

Yes, but if you look at statistics the heart of the boom, Fannie Mae (and Freddie Mac) lending was down, and private lending was way way up.

In addition, the CRA assisted lending in poor neighborhoods in legacy large cities like Chicago. The housing bust affected sunbelt places like Nevada, Arizona, and Florida (and obviously California). CRA loans also had lower default rates than the crappy private bank loans.

The charts have been published for several years now, and bloggers like Barry Ritzholtz have been writing about this for several years:

http://www.ritholtz.com/blog/2008/10/misunderstanding-credit-and-housing-crises-blaming-the-cra-gses/

Again, it's an ideological argument, not one based in fact or analysis.

bjones says

do you know a guy or gal who barely graduated from h.s. and had the intelligence of algae but made north of 6 figures for a couple of years?

This pretty much describes every real estate agent I've met in the last 10 years

Did the government "mandate" that banks made bad loans?

Define a "bad loan".

This is really a trick question. It's usually something posited by a charlatan.

The only thing that make a loan a "bad loan" is when nobody will buy the loan to take it off your books.

swebb says

Did the government "mandate" that banks made bad loans?

By the way, I don't know why people assume that CRA loans are bad loans. As I mentioned earlier, they had a lower default rate than the typical non-agency loan that was available during the boom (teaser, IO, Option ARM, etc.). Here's why:

A *traditional* subprime loan, such as used for the CRA, has three components -- the 3 Cs, which are the same 3 Cs as for *traditional* prime loans, although 1 has a different standard:
1) Capability to pay: this means you have adequate income/assets to pay the loan, perhaps you meet the 28% of gross income ratio for PITI and 36% of gross income for all debt, but the loan has full documentation.
2) Collateral: the property must be good collateral -- it must be inhabitable, not a below-market rate unit with restriction, must be in a stable condo development if it's a condo, etc.
3) Credit: this is the only factor that is different from traditional prime lending. Traditional prime lending requires a top credit rating, and is often referred to as "A" paper. Traditional subprime lending allows a lower credit rating in exchange for a higher interest rate, and could be "B" paper or "C" paper.

#1 and #2 are exactly the same as traditional prime lending. #3 is slightly different, and a higher interest rate compensates for the additional risk of a lower credit score.

Traditional subprime lending, as might be the case under the CRA, has a predictable default rate and is easy to securitize because it has a predictable default rate, and you know your portfolio has particular characteristics.

What happened during the boom is that the label "subprime" got used for non-traditional subprime lending, such as Option ARM, Alt-A (which was supposed to resemble "A" paper but doesn't), interest only, teaser, etc. The types of non-traditional lending that occurred during the boom did not ensure that someone had the three Cs.

For example, Alt-A only ensures that someone has #3 -- a good credit score was a proxy for the other two factors, and sometimes people without capability to pay and with uncollaterizable properties were given Alt-A loans. Of course, they failed and had unpredictable default rates and had unpredictable characteristics

During the bust, people started using the word "subprime" generically to mean anything that wasn't traditional prime, but it is a term of art and had a specific meaning before the current crisis. This is why all the CRA nonsense is just that -- nonsense. Anyone saying that traditional subprime loans caused the crisis doesn't know what they're talking about.

Sorry for the long post.

Remember Alan Greenspan asking wall street to provide any kind of creative loans possible just to keep the bubble going?

Government had a lot to do with this. It was a clusterfuck of failure.

Tanta Vive!

EBGuy says

Tanta Vive!

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.

I think the 3 Cs took me back to one of her classic posts.

APOCALYPSEFUCK says

Don’t be. T’was masterful exposition.
corntrollio says

Sorry for the long post.

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! :)

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.

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.

ChrisLA says

Government did not mandate it, they forced it. They deregulated the industry to a point where fraud was acceptable, in fact they encouraged it.

Interesting. So when government deregulates, it encourages fraud then?

Am I to understand that you are for more regulation then?

APOCALYPSEFUCK says

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.

In Soviet Russia, you underwrite bank. No wait, that's the Soviet United States.

APOCALYPSEFUCK says

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.

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.

clambo says

The govermment policy encouraged loaning to everyone. There are several presidential speeches on the subject you can listen to.
Fannie and Freddie were complicit.

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.

CL 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.

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.

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.

EBGuy says

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.

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/?p=816472

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.

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.

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.

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.

wtfcapinv says

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.

Do you have that data?

They deregulated the industry to a point where fraud was acceptable, in fact they encouraged it.

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.

tatupu70 says

wtfcapinv says

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.

Do you have that data?

http://www.becker-posner-blog.com/2011/06/capture-of-regulators-by-fannie-mae-and-freddie-mac-becker.html

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.

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.

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.

wtfcapinv says

tatupu70 says

wtfcapinv says

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.

Do you have that data?

http://www.becker-posner-blog.com/2011/06/capture-of-regulators-by-fannie-mae-and-freddie-mac-becker.html

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.

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.

wtfcapinv says

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.

That article is 18 years old. Not sure how any data in that article could possibly relate to the CRA or recent housing bubble.

That article is 18 years old. Not sure how any data in that article could possibly relate to the CRA or recent housing bubble.

Do you remember your original question?

Because your statement is a strong indicator that you don't.

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.

Do you remember your original question?
Because your statement is a strong indicator that you don’t.

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.

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.

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.

tatupu70 says

I asked if you had data to back your statment saying redlining wasn’t racially motivated.

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

thomas.wong1986 says

tatupu70 says

I asked if you had data to back your statment saying redlining wasn’t racially motivated.

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

I think you are making some faulty assumptions. Redlining is completely different than subprime.

okie dokie! For andy cuomo its all the same...

thomas.wong1986 says

okie dokie! For andy cuomo its all the same…

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.

tatupu70 says

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?

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.

"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.