One of our faithful readers has continually commented on the housing crisis and he blames the banks, however, we have argued that it was the responsibility of the Community Reinvestment Act (CRA). This legislation was passed in 1977 under the Carter Administration in an effort to prevent "red-lining" a practice where a bank would put a red line around an area into which it would not sell mortgages.
As with all well intended legislation this one's original intent was modified when the regulators of the banks used CRA as an "incentive" to obtain certain bank behavior.
In the following post, John Carney, tells the story of how the Act ended up causing the 2008 Housing "Bubble." By the way, he did not believe the CRA was the cause until he did his research. It is interesting reading as it confirms what we have been saying for years.
Conservative Tom
Here is the link:
http://articles.businessinsider.com/2009-06-27/wall_street/30009234_1_mortgage-standards-lending-standards-mortgage-rates
As with all well intended legislation this one's original intent was modified when the regulators of the banks used CRA as an "incentive" to obtain certain bank behavior.
In the following post, John Carney, tells the story of how the Act ended up causing the 2008 Housing "Bubble." By the way, he did not believe the CRA was the cause until he did his research. It is interesting reading as it confirms what we have been saying for years.
Conservative Tom
Here is the link:
http://articles.businessinsider.com/2009-06-27/wall_street/30009234_1_mortgage-standards-lending-standards-mortgage-rates
There is nothing factual in this guy's article to refute my point that the vast majority of the subprime loans that were used to build the massive mortgage-back securities mountain of "toxic" derivatives (thousands of times larger than all their mortgages combined!) were created in the shadow banking system by mortgage lenders not subject to CRA regulation. They used lending standards that would not be allowed under CRA, and there was no regulation of their activity (unlike CRA banks). This is why they had much higher default rates than CRA loans. All of this is undisputed by this guy (or anybody else who has studied it).
ReplyDeleteBasic facts on the mortgage situation…
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinvestment_act_had_nothing_to_do_with_subprime_crisis.html
But this is NOT even close to the crux of the problem. The financial crisis was not caused by the mortgages. It was caused by the derivatives. The derivatives were a creation of Wall Street that had nothing to do with CRA. In the financial environment post-2000, Wall Street and the non-CRA lenders had everything they needed to run their derivative scams. I suggest you read the full report of the House Committee on Financial Services regarding the cause of the 2008 financial crisis….
http://fcic.law.stanford.edu/report
The commission's statement on the CRA…
"The Commission concludes the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same
neighborhoods by independent mortgage originators not subject to the law."
The commission's statement about Wall Street derivatives…
"• We conclude over-the-counter derivatives contributed significantly to this crisis. The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.
From financial firms to corporations, to farmers, and to investors, derivatives have been used to hedge against, or speculate on, changes in prices, rates, or indices or even on events such as the potential defaults on debts. Yet, without any oversight, OTC derivatives rapidly spiraled out of control and out of sight, growing to $673 trillion in notional amount. This report explains the uncontrolled leverage; lack of transparency, capital, and collateral requirements; speculation; interconnections among firms; and concentrations of risk in this market."
--David
David, you never answered my question--do you know what a derivative is? Ranchers and farmers have used them for years as a hedge against prices.
ReplyDeleteAs far as the rest of these points, your first article was written before the crisis really hit, so it is unresearched and would not be a reliable source.
The report "Stanford" does not blame the banks as you are so convinced of it says that Washington was responsible. Here is the quote:
Despite the expressed view of many on Wall Street and in Washington that the
crisis could not have been foreseen or avoided, there were warning signs. The tragedy
was that they were ignored or discounted. There was an explosion in risky subprime
lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household
mortgage debt, and exponential growth in inancial irms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red
lags. Yet there was pervasive permissiveness; little meaningful action was taken to
quell the threats in a timely manner.
The prime example is the Federal Reserve’s pivotal failure to stem the low of toxic
mortgages, which it could have done by setting prudent mortgage-lending standards.
The Federal Reserve was the one entity empowered to do so and it did not. The
record of our examination is replete with evidence of other failures: inancial institutions made, bought, and sold mortgage securities they never examined, did not care
to examine, or knew to be defective; irms depended on tens of billions of dollars of
borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major irms and investors blindly relied on credit rating agencies
as their arbiters of risk. What else could one expect on a highway where there were
neither speed limits nor neatly painted lines?
The following article points out in 1994, there were people inside the government who saw that the Community Reinvestment Act should have been repealed. It was a poorly written bill that allowed regulators to tell banks how to lend. This is 14 years before the problem reached its peak. Too bad we did not listen.
ReplyDeletehttp://www.cato.org/pubs/regulation/regv17n4/vmck4-94.pdf
Huh? The mortgages that went into the derivatives that caused the financial crisis were already on record long before the article was written. But, if you insist, here you can have have a source that is completely researched and dated November, 2011 that reaches the same conclusions as the House Financial Services committee report….
ReplyDeletehttp://www.ritholtz.com/blog/2011/11/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/
The simple fact is that, whatever you want to say about CRA, it cannot possibly account for the 2008 collapse because CRA banks did only 6% of the subprime loans and had a default rate far lower than non-CRA lenders who did the other 94% of the mortgages. The second, and MORE important point, is that the mortgages in TOTAL were nothing in magnitude compare to the trillions of dollars in derivatives that Wall Street sold all over the world to crash the global credit markets.
What the report concludes (summarized in the quote you cited) is that there was a systematic failure by government to regulate Wall Street. That was the government's contribution to the problem. As I told you, Wall Street runs the government. Nobody, including me, is going to excuse the government for their neglect of the public trust. However, the Wall Street bankers knew exactly what they were doing, and knew that it would crash the economy. They didn't care because they were all getting filthy rich with their derivative securities frauds, and knew they would get a government bailout instead of the prison sentences they all deserved. Those who continue to perpetuate the CRA myth are just trying to deflect criticism of Wall Street.
--David
P.S. I know what a derivative is. There has never been a problem with traditional derivatives as used by farmers, etc., but the OTC financial derivatives were specifically designed for the shadow banking system for the purpose of securities fraud on a monstrous scale. The $500 million fine against Goldman Sachs, for example, was less than half their profits in that lawsuit. Crime on their scale pays big dividends.
--David
Here is some more for you to chew on....
ReplyDeletehttp://www.ccc.unc.edu/cra.php
--David