Patterico's Pontifications

12/26/2008

Doug Ross on the Community Reinvestment Act

Filed under: Politics — DRJ @ 7:16 pm



[Guest post by DRJ]

Doug Ross has a wealth of charts demonstrating the tragic results of the Community Reinvestment Act. It’s interesting and easy to follow, and he concludes with this paragraph:

“All that said, these factors pale in comparison to the underlying instigator: a changed policy within the Clinton administration. Andrew Cuomo’s HUD and Janet Reno’s Justice Department threatened banks with a variety of sanctions unless they loosened underwriting standards. Their aim: to hit certain thresholds for loans to the urban poor. Securitization, leverage and poor ratings were all built upon the underlying subprime rot caused by the Clinton administration’s egregious experiments.”

I understand the urge to give money and benefits away but, at some point, politicians in every Party must accept this simple fact: People and societies succeed when they earn what they have, not when it’s given to them.

— DRJ

87 Responses to “Doug Ross on the Community Reinvestment Act”

  1. It’s a shame the MSM did not do its job in being critical of “hte One”, of course BDS prevented any of this and I hope America thanks the MSM properly by causing them to completely disappear like the dinosaur.

    ML (14488c)

  2. A contrasting view from Fed Governor Randall Kroszner is at the link below. Worth reading for those who want to formulate a view based on understanding both pro and con arguments…

    http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm

    Tim McGarry (9fe080)

  3. sorry Tim, but i already got the other side of the argument from the NYT…..

    surprisingly enough it was fairly straight forward:
    “It’s all Bush’s fault.”

    /paraphrased

    redc1c4 (27fd3e)

  4. Tim McGarry,

    Thank you for the link. Like you, I’m interested in pro and con arguments. As I read it, the author of the linked Federal Reserve article uses an analysis of loans originating in 2005 and 2006 (see footnote 4) to support the conclusion that the CRA had no adverse impact on lending or the subprime mortgage crisis. Compare that time frame to the charts at the Doug Ross link that look at home prices when the bulk of the CRA loans occurred (1977 to 2004, but primarily the 1990s). Doesn’t it make you wonder why the author chose 2005-2006 for the Federal Reserve loan analysis?

    DRJ (30954e)

  5. Rim – Not a very persuasive presentation from Kroszner. I think I saw something similar recently. He talks about how regulators don’t impose any penalties regarding CTA compliance or performance, but they track it and evaluate it. Well why do they do that if they don’t use it as a club to hold over bankers when approving acquisitions and such, or publish for community organizing groups to do the same? His argument makes absolutely no sense.

    He also can’t imagine how, since what he defines as CRA loans only make up a small part of the subprime market, they could have caused a crisis. He shows very little imagination here in the way markets develop and grow.

    I much prefer the following very prescient article from 2000 about the CRA shakedown racket:

    http://www.city-journal.org/html/10_1_the_trillion_dollar.html

    daleyrocks (5d22c0)

  6. Tim not rim

    daleyrocks (5d22c0)

  7. My understanding is that loans originated in 2005 and after account for the bulk of the toxic originations that underlie the credit crisis. The sharp jump in foreclosures relates to loans originated in 2005 and after. These loans comprise the crop dominated by such private sector innovations as teaser-rate underwriting, 2/28 adjustables, option ARMs, no-interest loans, and no-doc loans. This is the same crop, originated mostly by lenders not subject to CRA, that were securitized by Wall Street and formed the basis of the CDOs distributed worldwide to such toxic effect.

    Tim McGarry (9fe080)

  8. Tim,

    I’m no expert but that’s not my understanding. I think the questionable Fannie Mae and Freddie Mac accounting practices came to light in 2004. By 2005, mortgage underwriting was contracting and failed to meet its CRA home-ownership goals. It seems to me borderline or questionable loans would be the first dropped, making an analysis of 2005-2006 look much better than prior years would look.

    DRJ (30954e)

  9. Narrow data selection is always a prime indicator of a cooked study.

    SPQR (26be8b)

  10. I think the critical point is the development of an active primary and very much more importantly, an active secondary market for subprime loans. To the extent that banks were actually coerced or felt coerced into expanding subprime lending by the CRA, that is the relevant point, and the role those loans played in developing what later became an out of control feeding frenzy in the market. Koszner’s analysis ignores the history.

    daleyrocks (5d22c0)

  11. DR, I disagree. The point Koszner makes (and it’s well supported by the data he cites) is that subprime lending had little to do with CRA. The bulk of subprime loans were made by entities not subject to CRA. Re the GSEs, they didn’t securitize subprime loans — their charters wouldn’t permit it. Their recent troubles came the same way the troubles of investors the world over came — they purchased toxic securities from the private sector (and, yes, like a lot of purely private sector entities, they were clearly undercapitalized). As to their accounting troubles in 2004, I seem to recall the heart of the matter was financial reporting as it related to executive compensation. It was not about originations or securitization.

    Kroszner’s focus on 2005 and 2006 makes sense in light of the “reset” problem. The largest number of subprime loans originated in those years were fixed for an initial two years, then adjusted to market rates thereafter. Payment shock set in after the loan “reset” following the end of the teaser period. That’s why the delinquency numbers started getting so huge early in 2007. It was in June 2007 that the Bear Stearn’s CDO pools began to collapse.

    Tim McGarry (9fe080)

  12. Tim –

    Would you happen to be Tim McGarry, late, or current, employee of Washington Mutual?

    Adriane (497622)

  13. Interesting way to put it, Adriane, but “late” is correct.

    My posts here are simply my personal views and are unrelated to the corporate views of past employers.

    Tim McGarry (9fe080)

  14. Tim – I believe we’ve had this discussion before and your version of it doesn’t conform to reality, either in Fannie or Freddie’s SEC filings or other published sources.

    “Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.”

    http://www.nytimes.com/2008/10/05/business/05fannie.html?

    daleyrocks (5d22c0)

  15. DR, here are a couple of paragraphs from a speech Ben Bernanke gave in March 2007, in which he discusses the two businesses the GSEs were in — securitization and investment. He clearly indicates that concerns related to the GSEs have to do with their second business, investment (i.e., the purchase of mortgage-backed securities created by others).

    I will begin by discussing GSE operations and some issues of public policy raised by these activities. Broadly speaking, Fannie Mae and Freddie Mac each run two lines of business. Their first line of business involves purchasing mortgages from primary mortgage originators, such as community bankers; packaging them into securities known as mortgage-backed securities (MBS); enhancing these MBS with credit guarantees; and then selling the guaranteed securities. Through this process, securities that trade readily in public debt markets are created. This activity, known as securitization, increases the liquidity of the residential mortgage market. In particular, the securitization of mortgages extended to low- and middle-income home purchasers likely has made mortgage credit more widely available.

    The GSEs’ second line of business is the main focus of my remarks today. It involves the purchase of mortgage-backed securities and other types of assets for their own investment portfolios. This line of business has raised public concern because its fundamental source of profitability is the widespread perception by investors that the U.S. government would not allow a GSE to fail, notwithstanding the fact that–as numerous government officials have asserted–the government has given no such guarantees. The perception of government backing allows Fannie and Freddie to borrow in open capital markets at an interest rate only slightly above that paid by the U.S. Treasury and below that paid by other private participants in mortgage markets. By borrowing at this preferential rate and purchasing assets (including MBS) that pay returns considerably greater than the Treasury rate, the GSEs can enjoy profits of an effectively unlimited scale. Consequently, the GSEs’ ability to borrow at a preferential rate provides them with strong incentives both to expand the range of assets that they acquire and to increase the size of their portfolios to the greatest extent possible.

    The entire speech can be found on Fed’s site, under “News and Events — Speeches and Testimony — 2007.”

    Tim McGarry (9fe080)

  16. Doesn’t it make you wonder why the author chose 2005-2006 for the Federal Reserve loan analysis?

    Well, it sure made me wonder.

    According to these sats foreclosures in 2007 increased by 148.83% over 2006 and 75% over 2005, based upon that data the stuff had yet to really hit the fan.

    ML (14488c)

  17. One additional note, DL. The same NYT story you cited includes an especially revealing anecdote from Daniel Mudd, Fannie Mae’s former chief:

    Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.

    But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.

    Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

    “You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

    “You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”

    Then Mr. Mozilo offered everyone a breath mint.

    Tim McGarry (9fe080)

  18. The left can’t even ply their sacred cows the right way. Equal opportunity doesn’t mean that everyone gets a loan; it means that everyone that qualifies gets a loan.

    Icy Texan (b7d162)

  19. While I don’t doubt the serious nature of Clinton’s creation of the subprime mess, I wonder why Bush’s HPD Secretary did nothing for eight years to rein in the excesses of the Clinton Administration. Surely there were some regulatory actions the Bush Administration could have done to stave off the crisis in the absence of full fledge legislation. Why weren’t those actions taken?

    eaglewingz08 (c46606)

  20. My understanding is that loans originated in 2005 and after account for the bulk of the toxic originations that underlie the credit crisis. The sharp jump in foreclosures relates to loans originated in 2005 and after.

    That’s an excellent spotlight on the fact that the subprime market had been growingly entered by speculators. They could ‘get into’ a property with nearly no investment, and if they could hang on for sufficient duration, sell and get out with a profit. Just in this 2005-2006 period, the weakness in the assumption of ‘ever-increasing values’ came to light, and it was those insincere buyers that first bailed since they’d never be able to make the payments. As soon as the market levelled out and nosed down, the game was up for everyone, but those speculators proved to be the canary in the coal mine.

    Insufficiently Sensitive (673620)

  21. “In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.”

    Tim – The mortgage business became a best execution strategy for the originators for unloading their subprime business. That meant comparing the cost of unloading the loans to Wall Street conduits, selling them to the GSE’s, purchasing various forms of credit enhancement, etc. When the music stopped, it was the ones left holding the loans who paid the price.

    daleyrocks (5d22c0)

  22. #17, Aye, Texan, and there you have it. The CRA was designed and enforced to make sure buyers who couldn’t qualify for a mortgage loan got one anyway. If those many thousands of unqualified buyers couldn’t make their payments, no problem, the taxpayers were on the hook and would have no choice but to suffer the accumulated loss. Now, if that isn’t bad enough, we have taxpayer funded bail-outs to delay the inevitable and further compound the problem.

    Clinton’s CRA made a sham of underwriting safe guards and demanded significiently incerased lending to the very categories of buyers least able to meet monthly mortgage obligations. Our country’s enemies don’t need WMD’s, they only need to support more politians for public office who think like Bill Clinton, Andrew Cuomo, Janet Reno, Barney Frank, Chris Dodd, et al.

    #18 eagle asked, “Surely there were some regulatory actions the Bush Administration could have done to stave off the crisis in the absence of full fledge legislation. Why weren’t those actions taken?

    Right on! eagle, that’s a key question. The possible answers range from incompetence to agreement and everything in between. But why ask why here? George W Bush had 8 years to do something to prevent the financial meltdown but didn’t do it. He’s the one who should be explaining why he didn’t do his job, and he should be doing it under oath. I consider it malfeasance in office.

    Ropelight (d40bc3)

  23. For anyone so inclined to dump on Bush for this fiasco, Clinton was telling everyone in the MSM during the campaign that he (along with Bush and most of the GOP congress), tried to rein in the excesses of Fannie and Freddie:

    http://sooshisoo.wordpress.com/2008/09/25/bill-clinton-on-abc-democrats-at-fault/

    Dmac (e30284)

  24. Ropelight and Eaglewingz – There is an an answer why Bush’s repeated efforts to rein in the excesses of Fannie and Freddie went nowhere during his administration – fierce opposition and demogoguery from Democrats supported by big lobbying dollars from the GSE’s. It’s easy to read up on the details if you have an interest.

    daleyrocks (5d22c0)

  25. BTW, McCain also made many attempts at preventing the loose lending standards at Fannie/Freddie, but was also stymied by Frank and his cohorts (along with some Republicans):

    http://corner.nationalreview.com/post/?q=YTBiMjNlZjQzNTM4OGIwMTE3YTU5MjM2ZGVhYzY4NWU=

    Dmac (e30284)

  26. Daley, the GSE’s are also linked in the National Review article – let’s see if they bother to read either sources.

    Dmac (e30284)

  27. So let me get this — the CRA vreates the entire base of the pyramid from 1997 to 2004 but the private lenders get the wrap for 2005 and 2006 loans.

    Interesting analysis by a partisan pretending to be an economist.

    Anyone with two brain cells realises those “subprime slime loans” came about because the “unwashed masses” got into the real estate game which they should not have been in to being with.

    qThank you CRA.

    Da'Shiznit (d0f5bf)

  28. Here’s another NYT reference from 1999 to the government pushing Fannie into the subprime market:

    http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all

    daleyrocks (5d22c0)

  29. I have discovered, at Christmas, that almost no one knows about this side of the story. If you don’t read blogs, you don’t know about it.

    Frightening.

    Patricia (89cb84)

  30. Patricia – Also, what incentive does Kroszner, speaking on behalf of the government, have to admit that the government fucked up. We did nothing wrong!!!!! What other conclusion did you expect him to reach?

    daleyrocks (5d22c0)

  31. Morning, DR, and thanks.

    I read the NYT piece that you linked to and noted that it described a 1999 test program featuring a loan with a higher-than-market rate that went down rather than up after two years, so long as the borrower made his payments on time.

    I think you will agree that this provides a sharp contrast to the hybrid loans that dominated private subprime lending in the 2005-2006 period — a fixed, artificially low rate for two years, followed by a sharp increase in rate and monthly payment size that overwhelmed borrowers no longer in a position to refi their way out of trouble.

    If that 1999 loan had dominated the market, there would probably have been no crisis.

    It’s a beautiful day in L.A. and I’m going to go out and enjoy it. Hope you’re having a good day, too.

    Tim McGarry (9fe080)

  32. Tim – Again, I’m focused on the development or evolution of the subprime market rather than the specific products in vogue at the time of the collapse. If a market hadn’t developed over time there would have been no place to sell zero down option arms from SISA or NINA borrowers. That’s my point. It was an originate to distribute market rather than an originate to hold market. A secondary market was a condition precedent for expansion.

    daleyrocks (5d22c0)

  33. I wonder why Bush’s HPD Secretary did nothing for eight years to rein in the excesses of the Clinton Administration.

    Almost every major blunder of a president who has been Republican (and/or supposedly conservative) can be traced to when they’ve gone against their ideological grain, if you will, and fallen for some concept or policy generally associated with liberal sentiments.

    And so for Ronald Reagan, it was his mimicing something that otherwise would have been attributed to his predecessor (Jimmy Carter) by allowing certain staffers to deal secretly with a hostage-taking nation (ie, leading to the fiasco of Iran/Contra).

    For Bush Sr. it was his upending his own statement of “read my lips…” and raising taxes.

    For Bush Jr. it has been his embrace of things like bloated budgets and feel-good, do-gooder policies along the lines of encouraging every Tom, Dick and Harry — no matter whether it makes more sense for some people to stick to being renters instead of owners — to buy a house.

    Now that people of the out-and-out, 100% left — thanks in part to a lot of voters — have become more pervasive throughout the government — on the local, state and federal levels — expect to see even bigger bonehead decisions and policies start working their way through the system and society.

    Mark (411533)

  34. Dmac and daleyrocks, it’s not that I’m unaware of the facts expressed in your linked articles, I know Bush and others made efforts to correct the excesses of Fannie and Freddie. That’s indicated in the first two paragraphs of my comment at #21 above, and in my previous comments on this topic for months.

    I’m critical of the Bush Administration for not doing more to prevent the crisis. Sure, they talked the talk, but when they had time to actually accomplish the task, they came up short, and in my book that’s just not good enough.

    The taxpayer’s deserve more than words and good intentions. Bush had the bully pulpit and didn’t use it effectively. He could have called for Franklin Raines to step down, he could have gone on national TV and explained the dangers and then demanded Congress act.

    All Bush can say now is that he tried to do something but the Democrats wouldn’t go along. So, while the words are clearly true, in hindsight they don’t seem to rise to much more than an “I told you so.”

    This crisis hit the national news during the election, McCain suspended his campaign and returned to Washington. President Bush called a high level meeting at the White House. Obama attended, along with Majority and Minority Leaders from Congress. Also, included where Barney Frank and Chris Dodd, the two most responsible for the meltdown. Frank, Dodd, and Obama were identified as big-time recipients of campaign contributions from Fannie and Freddie.

    Not only did McCain fail to make an issue of it, Bush, McCain, and the entire GOP establishment sat still, almost silently, and let the Democrats blame the crisis on Republican’s refusal to allow more stringent regulation of the secondary mortgage market. If that wasn’t laughable enough, I don’t know what is.

    So, yes, I blame George W Bush. But, not for causing the crisis, it was Bill Clinton who initiated it. Nor do I blame Bush for failing to try to do something about it, he did try. No, I blame Bush for failing to do more to prevent it, for failing to identify the Democrats as the prime movers behind the crisis, and for allowing Democrats to blame the GOP during an election and get away with it.

    Additionally, eagle’s question remains unanswered, “Surely there were some regulatory actions the Bush Administration could have done to stave off the crisis in the absence of full fledge legislation. Why weren’t those actions taken?”

    Ropelight (d40bc3)

  35. Did GWB fail to use the Bully-Pulpit to focus the American People’s attention on the crisis at the GSE’s and in the home-mortgage market?
    Absolutely!

    But, he also failed to use same in explaining the ins-and-outs of his policies vis-a-vis Iraq, Afghanistan, and the general War-On-Terror, which was the major foreign (and domestic) policy of his Administration.

    The Bush Administration generally, and the President specifically, will go down in contemporary history as one that was unwilling to openly confront its’ critics, and to tell the American People what it stood for, and where it wanted to lead us, and why.

    That is THE failure of this Administration, the rest are just symptoms of the disease.

    Another Drew (who will be known as AD in the coming year) (56c081)

  36. George W Bush had 8 years to do something to prevent the financial meltdown but didn’t do it. He’s the one who should be explaining why he didn’t do his job, and he should be doing it under oath. I consider it malfeasance in office.

    Actually, the author of the above comment should be hauled in front of a Congressional committee and asked why he/she/it could make such an unfounded comment. It is intellectual malfeasance, in the face of the more than 20 attempts the Bush administration made to tighten regulations on the ‘subprime’ mortgage industry beginning in 2001. A history of the Democratic tactics preventing such tighter regulations would be a more honest comment at this point.

    Insufficiently Sensitive (673620)

  37. A history of the Democratic tactics preventing such tighter regulations would be a more honest comment at this point.”
    Comment by Insufficiently Sensitive — 12/27/2008 @ 10:57 am

    Yes, it would.
    But, it would be ignored again, just as it has been in real time, and in the many times that it has been recounted.

    As JD would famously say…It’s teh narrative.

    Another Drew (who will be known as AD in the coming year) (56c081)

  38. Bush should have been as hard headed (or more hard headed) about certain issues of greater mainstream conservative worth — for instance, budgets being full of red ink, excessive illegal immigration, irresponsible lending practices — as he has been about, for example, stem-cell research.

    I suspect one of his weaknesses — which is a common trait in most people — is a desire to not cross swords with (or challenge) people he’s dealing with directly and personally. Symbolic of that are things such as what’s described below.

    Merely another example of what happens when a president soothes his “compassionate” side (“Every American should buy and own a house!!!”) and the results running counter to common sense—-which is why when people have asked me whether I’ve ever regretted voting for Bush, I’ve quickly envisioned what a Gore and Kerry White House would have been like over the past 8 years, and I immediately say, “hell, no!!”

    Guardian, May 2002:

    At a historic summit in Moscow this week, President George Bush will mark what he claims is the final putting to rest of the cold war, by shaking hands with his new best friend, Pootie-Poot. That, according to today’s issue of Time magazine, is the president’s nickname for the Russian president, Vladimir Putin. At times of tension between the two countries, we are told, Mr Bush is known to tell his staff: “Get me Pootie-Poot on the phone.”

    Since his days as head cheerleader at a private academy in Andover, Mr Bush has prided himself on his bonhomie, which relies heavily on the use of nicknames.

    Before the Ljubljana encounter, the Bush administration dismissed Mr Putin as a Soviet throwback, but afterwards Mr Bush claimed: “I looked the man in the eye. I was able to get a sense of his soul.”

    Mark (411533)

  39. #35, InSuff, GWB had 8 years to do something about the GSE’s, and despite his efforts nothing was accomplished to prevent the inevitable meltdown.

    Some of us expect our leaders to accomplish necessary reforms, even if it requires they overcome opposition from corrupt Democrats. If not, then we expect our leaders to raise hell, point fingers, and scream bloody murder.

    If such notions make me subject to inquisition by the Thought Police, so be it. See you in hell.

    Ropelight (d40bc3)

  40. It was an originate to distribute market rather than an originate to hold market. A secondary market was a condition precedent for expansion.

    This is the key factor. I had a couple of posts on my blog about this when the crisis hit. Here is one. The CRA effect was to provide a mechanism by which banks could be sued into lending to non-credit worthy borrowers. It is a bit like the quotas in the Civil Rights Act. Hubert Humphrey, during the debate on the Act in 1964, said that:

    If the Senator can find in Title VII … any language which provides that an employer will have to hire on the basis of percentage or quota related to color, race, religion, or national origin, I will start eating the pages one after another, because it is not in there.

    We all know how that turned out. The pernicious effect was that it allowed ACORN and other groups to sue banks for failure to lend freely enough to these groups covered by CRA. Once that began, it was easier to lend and accept a certain risk of loss than to fight the suits and pay legal expenses.

    The result, which took years to develop, was inflation of housing prices as demand at the bottom pushed everyone higher. CRA was not responsible for every bad loan but it set the tone, which was then picked up by the GSEs and people like Raines and Gorelick who made hundreds of millions.

    The “tulip mania” started slowly, as well. All such bubbles accelerate as they mature. I’m not the only one who thinks this was the problem.

    Mike K (2cf494)

  41. Smart guy in 05

    Another smart guy’s comments in 08

    This one can be just fun.

    Boils down to the majority of the taxpayers money will go to fill the air voids created by many. Could have instead to paying off every home mortgage in the nation instead.

    TC (0b9ca4)

  42. Tim,

    I’m glad it’s a pretty day in LA. It’s a little windy where I am.

    Here are some of the points I take away from your recent comments:

    In 2004 or 2005, Wall Street jumped in and expanded the mortgage-backed securities programs that had originally been overseen by Fannie Mae/Freddie Mac.

    In the process, programs or rules designed to safeguard homeowners were eliminated or reduced.

    Did I grasp your points correctly? If not, please point out where I’ve misunderstood.

    Also, could you clarify for me why you think Fannie Mae/Freddie Mac saw a decline in its market share of mortgage-backed securities if it was not due to the 2004 accounting scandal? I’m also curious why you think home prices began to decline in 2005 if the mortgage market was actually expanding because of Wall Street’s involvement.

    DRJ (30954e)

  43. The New York Times has an article on WaMu:

    http://www.nytimes.com/2008/12/28/business/28wamu.html?em

    The dates are interesting, although no specific pointer to the CRA is mentioned…

    Other articles in the series:
    http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html

    Apologies if these have been linked on other housing bubble threads.

    Adriane (497622)

  44. —Additionally, eagle’s question remains unanswered, “Surely there were some regulatory actions the Bush Administration could have done to stave off the crisis in the absence of full fledge legislation. Why weren’t those actions taken?”

    Because any attempt to reform Fannie Mae Freddie Mac made by the administration was termed “RACIST” by Barney Frank and the Black Caucus. (Was it racist to point that out?)

    red (f1df56)

  45. AD – Tim is good at servicing Teh Narrative TM.

    Racists.

    JD (0232da)

  46. Tim,

    This thread is slowing down so I’ll cut to the bottom line, at least from my perspective.

    Let’s agree that, over time, banks and mortgage companies became more aggressive at marketing home mortgages and refis to underqualified borrowers. I think the CRA and the weakened lending procedures at Fannie Mae/Freddie Mac were the precursors to those policies. Where do you think these institutions got the idea banking regulators would let them get away with increasingly lax lending practices?

    DRJ (30954e)

  47. “AD – Tim is good at servicing Teh Narrative TM.”

    JD – We’ve also ploughed this field with Tim before.

    daleyrocks (5d22c0)

  48. When the mortgage crisis started and I started reading about the whys and wherefores, I called my friend who is the VP of a small town bank that has only two branches. I wanted to understand the CRA and it’s impact on lending institutions. Now, not being as articulate as some on this board, I will try to explain what he told me:

    every bank that issued mortgages were required to operate within the guidelines of the CRA. Demographics come into play. If the market area of the bank has 20% Hispanics, 15% blacks and 65% white, the bank was required to grant 20% of it’s mortgage loans to Hispanics, 15% to blacks. If the bank did not comply with those regulations, then they were often blocked from purchasing another bank, expanding it’s market area through branches, or many other things that banks often do. The bank is given a CRA “rating” that allows for them to expand. If the CRA rating is too low, they are denied expansion by federal regulators.
    Now, the bad thing is that it did not matter if the applicants for mortgages were capable of making the payments or not, the bank was still required to qualify for the 20% Hispanic, 15% black quota. Think of it as financial affirmative action.

    Fortunately for my bank, where my friend is VP, it is privately owned. Not one of the big dogs. It had already opened two branches, all in the same county, and the board had decided not to try to open more or grow to a size where they could not back mortgages with the banks own capital. Shares in the bank are privately held (not on the open market) and the decision was to keep it that way. So the bank board decided that to keep the bank sound, it would stick to standard lending practices that have proven to work. 20% down on all home mortgages, a certain credit rating, the ability to pay, length of time on a job, and a reasonable debt/income ratio which placed my bank in the “non-compliant” column with the Feds under CRA guidelines.

    Last week my bank posted on it’s website that it will take no federal “bailout” money. Thanks, government, but no thanks. According to our state (Texas) banking agency, the bank is rated in the top 1% of stable banks.

    To say that the mortgage meltdown is not a Democrat problem can be argued by pointing out one thing; there are currently no Congressional/Senatorial investigations into the problem. None. While Henry Waxman wants to investigate the current administration for everything from global warming to dandruff, we hear no Democrats demanding that the cause of the mortgage meltdown be investigated. That, friends, should tell you all you need to know. We were told by Barney Frank that the CSEs were sound. Frank is a clown that should be the subject of a Congressional investigation, as should Dodd, but when Democrats are at fault, they will shift the blame to someone else, and that will be the last you hear of it. There will be no investigations into those who were responsible for the meltdown in the first place.

    Professor Stan Liebowitz of UT, Arlington, wrote about this in 1999, predicting the impending doom. He has a book, co-written with another economics UT professor on the start, middle and end of this mess. He was also the one who questioned the tactics and method of the study done by the Boston Fed claiming “redlining” against minorities and says that the method the Boston Fed used was faulty as best. The Boston Fed study is what put the CRA on steroids. I advise all of you to read Professor Liebowitz’s analysis of the CRA and it’s lead to the mortgage meltdown. I believe his article is entitled The Trillion Dollar Meltdown.

    retire05 (8b1389)

  49. Racist

    JD (0232da)

  50. Despite evidence that plenty of people in the mortgage business were quick to be making loans with little to no standards, people keep pushing this CRA line. If the CRA is as described — forcing banks to make less profitable or even loss-making loans — then the effect would be to lower the amount of credit available, not to create more. People were happy to be lending with little standards. You don’t force a boom, you don’t force a bubble. You can fuel it. And you can fail to stop it.

    “Narrow data selection is always a prime indicator of a cooked study.”

    So’s poorly waving away inconvenient facts — like he does with the rating business.

    But the CRA explanation is just so good! Its got democrats, poor people, minorities! What more could you ask for? All its missing is some gay sex and you’d have all the explanation wignuttia wants. Oh wait, barney frank! there you go. Case closed.

    imdw (eaf75c)

  51. DRJ, I’m going to refer you to a New York Fed staff report, “Understanding the Securitization of Subprime Mortgage Credit,” by Adam Ashcraft and Til Schuermann (March 2008). Table 1, Section 2, (link below) tells the story better than I can. . In just five years, the GSEs lost their dominance of the MBS world as private labels grabbed the lion’s share in origination and issuance. By 2006, subprime more than tripled in volume. During the same period, conforming volume from the GSEs declined absolutely.

    http://www.newyorkfed.org/research/staff_reports/sr318.pdf

    It’s my understanding that some three-fourths of subprime loans originated during the 2004-2007 period were what lenders and Wall Street called “hybrids” or “2/28s” — loans offered at an artificially low teaser rate that remained fixed for the first two-years, but gave way to a rate that adjusted every six months and included a built in premium, reflecting the borrower’s subprime status.

    Nearly all lenders qualified hybrid borrowers using the teaser rate. This made the loans different in kind from other mortgages, in that the borrower’s ability to repay was basically treated as unimportant. What mattered was the value of the underlying collateral. The loan was in effect structured to encourage borrowers to refinance before the teaser period ended. Not so incidentally, this benefitted lenders by allowing them to charge additional fees and points with every refi. It was also a structure that would only work in an environment of home-price appreciation.

    However, home prices began their retreat in the second quarter of 2006, probably reflecting overbuilding in some areas, as well as the fact that the bubble had reached the limits of expansion and prices had just gotten much too far ahead of what buyers could afford.

    But despite the warning signs, Wall Street plunged ahead with very little hesitation. Here’s an NYT story from the time that seems utterly chilling now, a little more than two years later.

    http://www.nytimes.com/2006/09/06/business/06place.html?scp=1&sq=Wall+Street+subprime&st=nyt

    It really was private sector greed driving events. Hybrids, no-interest, no-doc and option ARMs were all private sector innovations designed to serve lender and investor interest, rather than borrower interest. I’ve heard some describe hybrids as built to resemble derivatives – a very unpleasant thought.

    The GSEs were limited by their charters to the securitization of prime loans. As I noted in an earlier post, they did get themselves into trouble by investing in Wall Street-issued CDOs (and doing it on the basis of too little capital), but as the Angelo Mozilo anecdote I cited earlier shows, they weren’t pulling the train even here.

    Re the Fannie Mae accounting scandal in 2004, which primarily involved manipulating financial reporting to maximize executive bonuses, it doesn’t seem to have influenced secondary market developments very much as far as I can see. Certainly it was much less influential on Wall Street than considerations related to yield.

    Tim McGarry (9fe080)

  52. And Fannie Mae and Freddie Mac had nothing to do with any of that, right Tim? It was all Bush’s fault.

    The Narrative must be serviced.

    JD (0232da)

  53. JD, I try to state my reasoning as clearly as possible, I link to my sources, I keep it civil, and I do it with my real name.

    A genuine exchange of views might involve suggesting where my facts are wrong or my reasoning is faulty. My experience, however, is that you don’t seem up to it.

    Tim McGarry (9fe080)

  54. “If the CRA is as described — forcing banks to make less profitable or even loss-making loans — then the effect would be to lower the amount of credit available, not to create more.”

    imdw – I’m having trouble deciding whether you are pretending not to understand what you are reading or whether you are genuinely at a loss. O suspect the former since obtuse commenting is one of your specialties.

    Can you point to any sources or commenters suggesting that all subprime loans were CRA loans? Can you point to evidence that sauggests that the banks intended to keep the subprime loans they originated, CRA or otherwise? If they were such fantastic money makers, not defaulting at rates higher than prime loans as Kroszner suggests and they could charge higher rates for the loans, wouldn’t banks load up their balance sheets with those babies instead of selling them off? If an originator can wrap a little credit enhancement around a subprime loan in the form of PMI. pool insurance, a financial guarantee insurance policy and sell the individual loans or a pool of loans to the GSE’s or Wall Street aand avoid hits to their own capital for holding risky assets, why wouldn’t they?

    Think originate to distribute and think the process through next time, then your comment might be more intelligent and the snark might actually make sense.

    daleyrocks (5d22c0)

  55. Tim – My experience with you is that your point of view is unwavering, despite any facts to the contrary. This is based on your writings on this site on a number of topics. Like this one. CRA had nothing to do with it. Fannie Mae and Freddie Mac had nothing to do with it. It is all greed, greed I tell you. And Bush, and his mythical deregulations that led to all of this.

    As you might suspect, quoting the NY Times is viewed, on a good day, with a healthy dose of skepticism round here.

    As has been pointed out above, limiting the time frames from which you view things, focusing only on years like 2004-2007 above, tends to paint a picture convenient for your narrative. Ignoring the roles of Freddie and Fannie, and the roles of Barney Frank and Christopher Dodd also is convenient. When you start looking at all of the things that have been conveniently left out of the position, it can no longer be considered convenient, it is intentional.

    JD (0232da)

  56. “Hybrids, no-interest, no-doc and option ARMs were all private sector innovations designed to serve lender and investor interest, rather than borrower interest.”

    Tim – I disagree with this statement. These innovations are designed for the convenience of the borrower as opposed to the investor, all to make it easier to qualify for a mortgage. The imbedded options are in the hands of the borrower as opposed to the investor, which is why your statement doesn’t make sense to me. Why would investors demand no doc loans?

    daleyrocks (5d22c0)

  57. “The GSEs were limited by their charters to the securitization of prime loans.”

    Tim – I’ve already provided a couple of links on this thread indicating they purchaed nonprime loans from originators in addition to the secondary market. You keep repeating the charter point, which I understand, but their mission was also seen by Congress as promoting affordable housing, which was one of the primary reasons for interference in their business.

    Why not provide a link to the charter section you keep referring to?

    daleyrocks (5d22c0)

  58. daleyrocks, subprime and CRA are actually two separate categories. “Subprime” refers to lenders with poor credit. “CRA” refers to loans to low-to-moderate neighborhoods in which federally insured banks and thrifts take deposits.

    CRA loans are usually to prime customers in low-to-moderate income neighborhoods. Subprime loans can be to borrowers in any income group — flawed or insufficient credit history is the key.

    There are many reasons beside credit risk to sell loans rather than keep them in portfolio. Selling fixed rate loans made to prime customers reduces interest rate risk. It also creates an income stream and creates liquidity to increase loan volume.

    PMI was basically unavailable to subprime borrowers (although some insurors provided pool coverage subsequent to origination, much to their later regret). Subprime lenders got around this by layering risk, putting second mortgages on top of first mortgages. This turned out to be especially disastrous.

    I do get the point about originating to distribute. When you don’t have a stake in the outcome, it’s easy to get careless. However, mortgage loan securitization (and origination to distribute) has been around since the early 1980s, at least. We need to identify why things came apart in the 2005-2007 period. I don’t think your rubric does the job.

    Tim McGarry (9fe080)

  59. Tim,

    Thanks for the link. I’ll try to read it tonight or tomorrow.

    DRJ (30954e)

  60. Daleyrocks, see the link to the Fed Staff report I provided above.

    Tim McGarry (9fe080)

  61. #59

    Take your time DRJ. I’ll be spending tomorrow with my family, enjoying life.

    Tim McGarry (9fe080)

  62. Tim, you don’t know what came apart in 2005 to date? Really? You don’t know.

    You see everyone else knows. The housing price boom ended and the combination of excessive subprime, poor credit risk, marginal neighborhood and people living by borrowing against paper equity collapsed with it. That collapse pulled the props out from under the inflated ratings of MBS’ as people had been predicting for some time.

    SPQR (26be8b)

  63. Tim – You are aware that the PMI companies begain segregating their delinquency stats between prime and subprime loans seven or eight years ago aren’t you? Your explanation in #58 just doesn’t fly.

    daleyrocks (5d22c0)

  64. Nothing before 2005-2007 is relevant to Teh Narrative.

    JD (228b75)

  65. Those darn old poor people! Indeed they are the root of all evil. And the Banks and Wall St guys with the $20 Million bonus’s are the real victims
    here.

    Mary (65f0aa)

  66. Lenders increasingly made shakey loans once they knew GSE’s wouldn’t force them to buy back bad paper, which is the key check on excess in the mortgage industry. Once the deal closed, lenders took their hefty cut and went on to the next application and never looked back, never had to collect the monthly payments, never had to face the risk of loss for unsupportable loan approvals.

    Once you remove the adverse consequences from very profitable, but clearly unsound lending practices, you’ll get more of the sort of behavior lenders had developed strict underwriting guidelines to prevent.

    Ropelight (d40bc3)

  67. Mary clearly intentionally did not understand, or is simply not capable. Either way …

    But she does have a point, and illustrates the Leftist mindset nicely. It can never be a person’s fault, unless that person is of the wrong school of political thought. Individual responsibility for one’s choices is thrown out in favor of demonization of a sitting President and the housing/mortgage industries.

    JD (228b75)

  68. One of the Immutable Laws of human behavior:

    If there’s money on the table, someone is going to grab for it.

    Ropelight (d40bc3)

  69. Tim – I looked through that Fed staff study you linked. What am I supposed to take away that would change anything that I have said? Am I missing something?

    daleyrocks (5d22c0)

  70. “Nothing before 2005-2007 is relevant to Teh Narrative.”

    See Tim, the way it works is you’ll be gone, and JD will still be here, saying things like this. And JD will be right, because there won’t be any arguing against this. Nor this:

    “As you might suspect, quoting the NY Times is viewed, on a good day, with a healthy dose of skepticism round here. “

    imdw (eaf75c)

  71. Tim,

    I don’t have time to read your link now because I have a lot of real-life work to do. However, I will read the article and put up a new post so we can discuss it.

    DRJ (30954e)

  72. OK, so please provide proof of the objective and verifiable reportage of the NYT over the past few years. Shall we discuss the flagrant lies and misstatements that the NYT has printed over that time period? Would you like to examine the tenure of Raines? How about Pinch’s predelictions?

    Do you even have any idea what I’m talking about?

    Dmac (eb0dd0)

  73. That last comment was directed at imdw, btw.

    Dmac (eb0dd0)

  74. Like I said. There’s no arguing against it. You put up a link to a 2006 story and you get this:

    “As you might suspect, quoting the NY Times is viewed, on a good day, with a healthy dose of skepticism round here.”

    And there’s no arguing it.

    imdw (513533)

  75. Daleyrocks:

    I pointed you to the staff report from the Federal Reserve because it very clearly distinguishes GSE-issued mortgage-backed securities from “non-Agency” issue, as follows (from Sec. 2, Overview):

    Until very recently, the origination of mortgages and issuance of mortgage-backed securities (MBS) was dominated by loans to prime borrowers conforming to underwriting standards set by the Government Sponsored Agencies (GSEs). Outside of conforming loans are non-agency asset classes that include Jumbo, Alt-A, and Subprime. Loosely speaking, the Jumbo asset class includes loans to prime borrowers with an original principal balance larger than the conforming limits imposed on the agencies by Congress;2 the Alt-A asset class involves loans to borrowers with good credit but include more aggressive underwriting than the conforming or Jumbo classes (i.e. no documentation of income, high leverage); and the Subprime asset class involves loans to borrowers with poor credit history.

    http://www.newyorkfed.org/research/staff_reports/sr318.pdf

    This is consistent with language from Fannie’s charter that limits loan purchases to conventional mortgages with a loan-to-value ratio of at least 80 percent (or 90 percent with PMI).

    Language in the charter governing Fannie’s secondary market operations is significantly different, however. In purchasing mortgage-backed securities for its own account, Fannie need only conform to the standards observed by “private institutional mortgage investors.”

    Link to the charter is below. Sections 301 and 304 are particularly relevant

    http://www.fhfa.gov/GetFile.aspx?FileID=29

    Understand that I’m not trying to defend the GSEs against all criticism. They made significant mistakes and were certainly undercapitalized and their shareholders have paid the price. What I’m doing is simply following Bernanke in distinguishing between their distinct roles as MBS issuer and investor, and pointing out that their role in subprime relates to the latter. Like other investors, they purchased toxic paper from Wall Street, with predictable results. But subprime was a private sector invention and its meltdown a free market failure.

    Tim McGarry (2774d5)

  76. #71

    DRJ —

    No problem. Real life is my priority, as well.

    I only recommend the Introduction and Overview sections of the staff report (the rest is highly technical).

    The NYT story is highly readabe.

    Have a good week.

    T.M.

    Tim McGarry (2774d5)

  77. #70

    Noted, imdw. Some here seem interested in rational exchange. Others not so much.

    Tim McGarry (2774d5)

  78. Tim – Here’s a paraphrase of the applicable Charter provisions from Fannie’s 2007 10-K for those who don’t want to read the actual document:

    • Quality Standards. The Charter Act requires that, so far as practicable and in our judgment, the
    mortgage loans we purchase or securitize must be of a quality, type and class that generally meet the
    purchase standards of private institutional mortgage investors. To comply with this requirement and to
    operate our business efficiently, we have eligibility policies and provide guidelines both for the mortgage
    loans we purchase or securitize and for the sellers and servicers of these loans.

    • Loan-to-Value and Credit Enhancement Requirements. The Charter Act generally requires credit
    enhancement on any conventional single-family mortgage loan that we purchase or securitize if it has a
    loan-to-value ratio over 80% at the time of purchase. We also do not purchase or securitize second lien
    single-family mortgage loans when the combined loan-to-value ratio exceeds 80%, unless the second lien
    mortgage loan has credit enhancement in accordance with the requirements of the Charter Act. The credit
    enhancement required by our charter may take the form of one or more of the following: (i) insurance or
    a guaranty by a qualified insurer; (ii) a seller’s agreement to repurchase or replace any mortgage loan in
    default (for such period and under such circumstances as we may require); or (iii) retention by the seller
    of at least a 10% participation interest in the mortgage loans. We do not adjust the loan-to-value ratio of
    loans bearing credit enhancement to reflect that credit enhancement. Regardless of loan-to-value ratio, the
    Charter Act does not require us to obtain credit enhancement to acquire two types of loans that are often
    described as “conventional mortgage loans”: home improvement loans and loans secured by manufactured
    housing.

    The 90% LTV limit you mention went out the window in the 90s provided the GSEs obtained more (read deeper coverage) credit enhancement from MI companies. The charter provisions above and from your link certainly do not preclude the purchase of subprime loans as you were asserting, unless you would like to point to a specific reference.

    daleyrocks (5d22c0)

  79. The staff report from the Federal Reserve, seems to back up what was revealed in my post #41, from very different times and sources, all credible and backed by history.

    None of them actually support or deride either line of political thought either.

    Oh and besides, I’d bet as many lib’s are gittin torched by what is happening as conservatives.

    Face it, the greedy assholes from all sides will pay for this, the greedy bastards that actually caused it, will continue to profit from it! That you can put in your mattress, cuz aint a bank left worth trusting.

    TC (0b9ca4)

  80. Thanks, daleyrocks. The 10K doesn’t seem to comport with the Charter. I don’t know how to resolve that.

    If the GSEs were responsible for a sizable portion of the subprime origination and issuance in Table 1 of the Fed staff report, I would clearly have to revise my overall view of the situation. More research, then…

    Tim McGarry (d9c5fb)

  81. “The taxpayer’s deserve more than words and good intentions. Bush had the bully pulpit and didn’t use it effectively. He could have called for Franklin Raines to step down, he could have gone on national TV and explained the dangers and then demanded Congress act.”

    And you would NEVER had stood by him if he took this route, as your previous comments attest. You expect people to take this sort of unpopular stand without explaining why it’s necessary, and then you sit on your thumbs when the inevitable blowback comes in.

    Howsabout YOU explain why such things as GSEs are such a threat to the commonweal. Or is there something about their goals that you have a problem with, but are too chicken to state?

    Brad S (9f6740)

  82. Tim – The 10-K clearly shows the purchasing 100% LTV loans in the primary market from lenders in the Risk Management section. Their discussion of subprime is muted as they appear to want to avoid annoying both Congress and HUD with a candid discussion of those operations. The same section, however, points to only 6% of originations in 2007 having FICOs of 620 of below.

    daleyrocks (5d22c0)

  83. “And Fannie Mae and Freddie Mac had nothing to do with any of that, right Tim? It was all Bush’s fault”

    JD, I’m pretty sure Tim is not saying it’s Bush’s fault. It seems to me that a lot of this securitization of subprime mortgages was to maximize profits to help compensate for less mortgage profit due to CRA regulations. It bit Wall Street and the banks in the rear because they made an extremely faulty assumption: That the default/delinquency rates would be the same (or slightly elevated) as with prime mortgages.

    Unfortunately, anyone with experience with subprime credit cards knew this to be buncombe. However, subprime mortgages (much like their credit card brethern) can still make huge profits, once delinquency/default rates stabilize.

    Repeat after me: Free market failure does not equal “It’s Bush’s fault.”

    Brad S (9f6740)

  84. “However, subprime mortgages (much like their credit card brethern) can still make huge profits, once delinquency/default rates stabilize.”

    Brad – Provided you get the pricing right up front. I submit the products were underpriced because the originators planned on laying off the risks to others and had not priced it as if they had to retain it on their own books. A differential default rate started emerging very early on if you look at the quarterly earnings releases of the MI companies.

    daleyrocks (5d22c0)

  85. daleyrocks,

    The business model the MI used for Subprimes was the same sort of business model used by Capital One and First Premier Bank to market their subprime cards: Use a teaser rate, sock the consumer with higher rates later on (and in the case of First Premier, continual fees that may be the same thing). Credit card debt is securitized in the same manner, and Capital One is still issuing teaser rate cards.

    Brad S (9f6740)

  86. “The business model the MI used for Subprimes was the same sort of business model used by Capital One and First Premier Bank to market their subprime cards”

    Brad – You’re full of it. The premiums rates for an MI insurance customer didn’t change once they started paying as far as I’m aware. They are life of the loan policies that remained in effect as long as the consumer was making payments. The MI companies underpriced the product as you can tell from their stock prices.

    daleyrocks (5d22c0)


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