Required reading

[unixronin]

Still think Obama is a moderate?  Want to see what kind of change he might bring?  Read all about it here.  Among other things, it turns out the Great New Hope Of The Left was personally instrumental in priming the banking crisis we're facing right now, representing ACORN in the lobbying drive that forced the strengthening of the Community Reinvestment Act and started the whole subprime-mortgage ball rolling.

(Pointer from the esteemed radarrider)

Comments

[skellington.livejournal.com]

After really extensive research, I've come to the conclusion that anyone who mentions the CRA as a proximate cause of the current credit crisis doesn't know what they're talking about.

Nothing personal, but your sources suck if they say otherwise.

[radarrider.livejournal.com]

Your comment is equivalent to saying "You're wrong, and you're a fool." You can't get away with throwing that out there without anything to back it up. Nothing personal but, unless you can provide an argument to support your position, your comment is meaningless and should rightly become the object of ridicule.

[skellington.livejournal.com]

I haven't heard a single serious economist say the CRA had anything to do with the bubble and quite a few have laughed at the suggestion. (I'd make snide comparisons to other unsound theories pushed by the Republicans, but I'm going to keep this purely factual. But debunking it for the 37th time has gotten tedious.)

In no particular order:

A) Sub-prime always existed. People with questionable credit history, but decent income, etc. could pay higher rates and get a loan. This is not a CRA phenomenon. (The banks just wouldn't offer them to people in "that part of town.")

A2) Sub-prime has limited correlation with income or neighborhood. A person with limited income can have some assets and a good credit score. A doctor with a great income can have a bankruptcy and crummy credit. A baseball super-star spending in excess of his salary can be a terrible credit risk and have a negative net worth. A small business loan (over half the CRA loans are small business) can be "prime", even if it is for a business in a poor neighborhood.

B) Banks have generally been more willing to issue credit to questionable borrowers in the last 20 or 30 years, but this has been across the entire credit spectrum. i.e. credit cards and auto loans which are not part of CRA, in addition to mortgages and small business loans. This is not a CRA phenomenon.

C) Redlining (not giving loans to people who live in certain neighborhoods) really was happening. Even when the applicants were "prime". Now that banks are being "forced" to make loans to people in CRA neighborhoods, over 25% of the CRA loans are "prime", and almost 90% are loans under terms offered to any customer. (The other 10%, representing less than 1% of bank loans in the late '90s, involved having charities co-signing for loans and other special community outreach programs, that have been "profitable" according to a survey by the federal reserve.)

D) Sub-prime loans were being securitized before the 1995 law changes. The 1995 law changes allowed banks to securitize the CRA loans and sell them to each other to earn "CRA rating points" rather than actually having to make the loans themselves. This was mostly a non-issue and CRA loans represent very few of the sub-prime mortgages.

E) Over half of the sub-prime loans issued during the bubble were by organizations not governed by the CRA. i.e. mortgage brokers. These are also generally going bad faster than loans originated by the banks.

E2) There was widespread fraud, including collusion with appraisers, by many mortgage brokers, especially in the bubble areas.

F) Sub-prime mortgages expanded to almost 30% of the loans issued in 2006. This was largely because almost no one, even with good credit, had the income to purchase a house with a prime loan in the bubble markets (i.e. California.) So they resorted to various "Alt-A" (i.e. not prime) and true sub-prime mortgages to get loans, betting that house prices would spiral ever higher. These loans, especially the large ones, were not in "CRA" neighborhoods (i.e. the bad part of town) and were not to poor people (i.e. income below half the median). They were to people of moderate to above average income, buying nice houses in the 'burbs and exurbs, who still couldn't qualify for a regular mortgage.

G) All asset classes had their risk premiums driven down during the bubble (esp 2004-2006), due to lots of free cash, and no good sources of return. This included all the leveraged buyouts, which jacked stock prices further, commercial real estate (which is starting to crash), junk bonds, etc. Sub-prime interest rates dropping to really low levels, and not compensating for the risk, was a symptom of the entire credit bubble. (And even prime mortgage interest rates dropped to absurd levels, which made houses more affordable and drove up prices.)

G2) We had lots of free cash because the fed lowered interest rates to 1%, and almost simultaneously in 2004, the SEC permitted the big 5 investment banks to borrow an extra $2T. (They permitted the leverage ratio to increase from 12:1 to 30:1.) (See recent press releases and related articles by the SEC.)

(continued)

[skellington.livejournal.com]

H) The mortgage products that caused the problems, including interest only and option arm mortgages, were created entirely for rich people, with irregular income, or lots of investments. They were not created for the CRA programs at all.

So the CRA has existed for 30+ years, the changes to the CRA last happened over 10 years ago, (except for some recent Bush changes to further weaken reporting requirements), and nothing bad happened.

And none of the other proximate causes listed above were CRA related.

CRA is just a bank pet peeve, because it adds extra costs to track their compliance and to pay off "shakedowns" by community organizers if they don't meet their targets.

CRA is a republican pet peeve, because they consider it an affirmative action program. And because those community organizers tend to do things like register poor, democratic voters.

I have no idea if the CRA is a good or bad idea at this point. There is some evidence in the reported data, but it is not conclusive, that there is still racial (although perhaps not geographic) and income discrimination on both getting loans and the rate paid. But the situation *is* much better than the 70's and it might be interesting to track more data (i.e. credit quality, which is not currently tracked), and otherwise repeal the CRA and see if there's evidence for continued discrimination.

But the CRA isn't the cause of the credit crisis. #1 and #2 are probably Greenspan and the investment banks (enabled by the SEC.)

[skellington.livejournal.com]

Here's some more references from that bastion of liberalism, Business Week:

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

[ilcylic.livejournal.com]

Thanks! This is a lot more useful than the "You're not only wrong, you're an evil racist fucktard for even suggesting this might be proximate" I got elseweb.

[jmkelly.livejournal.com]

Thanks for posting all this. This base canard against the CRA has been festering in my mind all day, and you saved me the trouble and embarrassment of going off on an ill-informed rant.

I would add that it's easy to see how deregulation of the banking industry -- in particular, allowing banks to buy and sell bundles of mortgages and other debt just like securities -- furnished a constant powerful incentive for banks to write risky mortgages. Any time you set things up so a toxic product can easily be made someone else' problem, you're asking for trouble, whether it's nuclear waste, mine tailings, or a bundle of several thousand mortgages. A bank officer who refused to take part in the subprime-mortgage free-for-all would be passing up obvious short-term profits (i.e. asking to be fired and replaced by someone more aggressive). The ability to buy and sell bundles of mortgages meant that the risk was, if not invisible, much less obvious than the profits, and at least theoretically something you could pass on to someone else.

[unixronin.livejournal.com]

Deregulation is a MAJOR part of the problem, yes. Probably the predominant part of the problen. But it's also a not-insignificant factor that ACORN used lawsuits based on the CRA to force banks to issue subprime loans that they otherwise would not have issued because they were bad risks. One can argue (soundly, I think) that this set the stage for the later bundling of the bad loans. Deregulation of how they could sell subprime loans wouldn't have become an issue has they not been issuing subprime loans in the first place.

It'd be sort of like going to a vegetable stand and telling them,
"We're now going to allow you to sell hamburger that's up to three days past its marked 'Sell By' date."
"...Uh, that's, uh, nice, I guess ... but we don't sell hamburger. We sell vegetables."

[skellington.livejournal.com]

Banks have ALWAYS given sub-prime loans. People with credit cards with 29% interest rates would be a sub-prime loan. This is a really great article about what sub-prime actually means, and why a bunch of the bubble loans, especially "Alt-A" loans, were absurd. (Note, it doesn't mean loans to low-income people or minorities.)

http://calculatedrisk.blogspot.com/2008/08/reflections-on-alt.html

And from this article at the St. Louis Fed:

http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf

"The subprime loan securitization
rate has grown from less than 30 percent in
1995 to over 58 percent in 2003. The securitization
rate for conventional and jumbo loans has
also increased over the same time period.5 For
example, conventional securitization rates have
increased from close to 50 percent in 1995-97 to
more than 75 percent in 2003."

So by 1995, sub-prime loan securitization already existed, and the first CRA securities weren't issued until November 1997 according to this article:

http://www.allbusiness.com/personal-finance/real-estate-mortgage-loans/677967-1.html

Short answer, blaming the CRA even for securitization of sub-prime is wrong. During the 1990's EVERY kind of loan was securitized, including car and credit card and every possible grade of mortgage.

The CRA also does not require banks to issue loans that are "bad risks" (i.e. don't have a sufficiently high interest rate to cover the risk.) Somewhere I've got a link to a survey of banks by the Fed that basically says "yes, CRA loans are profitable or very profitable to our bank."

From the second article above, which is basically an ad for selling securitization services:

Three important bits:

"Under the Community Reinvestment Act guidelines, a bank gets credit for originating loans or buying on a whole loan basis; but you get no credit for holding the loans. Conversely, if you sell your loans through a securitization, a buyer can get CRA investment credit if a percentage of the loans is based in the buying bank's trade area."

and a bit earlier in the article:

"Was it banks seeking CRA investment credit? No, it wasn't. The overwhelming participants were money managers and insurance companies buying the loans strictly because of their investment appeal."

and a bit later:

"the credit scores were fairly evenly dispersed along the four standard quartile levels (620 or less, 620-659, 660-719, 720 or more)."

So they're not even necessarily to people with bad credit either. A school teacher, policeman, or fireman, who is earning half the median wage in San Francisco, with perfect credit, counts as a CRA loan.

And the only point of doing CRA securitization, compared to normal sub-prime securitization, is to let banks earn brownie-points so they don't have to pay blackmail to ACORN, etc.

There may be some effects of HUD pushing lenders to write more low-income loans, but that's _NOT_ part of CRA.

[unixronin.livejournal.com]

You appear to be deliberately avoiding addressing the specific point I cited.

[skellington.livejournal.com]

Which point is that?

But it's also a not-insignificant factor that ACORN used lawsuits based on the CRA to force banks to issue subprime loans that they otherwise would not have issued because they were bad risks.

This? I have seen no evidence that CRA loans in general, or sub-prime CRA loans in specific, were given better terms than other sub-prime loans. And I've seen no evidence that CRA sub-prime loans default at any higher rates than sub-prime loans for other populations.

If you can find default data on CRA loans that shows is significantly higher than comparable sub-prime loans, especially during the 1998-2003 time period, I'd love to see it because everything I've seen says it is comparable or better given loan quality.

One can argue (soundly, I think) that this set the stage for the later bundling of the bad loans.

And this is another point where your logic chain breaks down. Banks were issuing sub-prime mortgages before the CRA, and were securitizing sub-prime mortgages before the special CRA mortgage backed securities were created in 1997. Details listed in my response.

Is there another point I'm missing?

[jmkelly.livejournal.com]

The main point of CRA was to stop the practices such as redlining -- refusing to make loans for properties in certain areas (or for applicants of color), no matter how good the applicant's credit was.

The main point of deregulation was to let bankers and brokers be as clever as they could be with securities, including mortgage-based securities and mixed bags of securities, credit-debit swaps, etc. They predictably out-clevered themselves, as they did in 1929.

I would like to see documentation for your contention that ACORN forced banks to take on bad risks. The CRA didn't force banks to disregard reasonable ways of assessing a loan applicant's likely ability to pay.

My take on it is, once banks didn't have to hold on to the mortgages they wrote, any loan officer who didn't write all the mortgages he could was a damned fool. In the short term, they'd be money for him; in the long term, they'd be Somebody Else's Problem. It turned real-estate loans into an extractive industry like logging or whaling, where it can be shown that absent regulation the winners will be those who quickly get in, grab all they possibly can, and get out. The "losers" are left holding bad securities. The real losers (we taxpayers) are bailing out the "losers," some of whom are paid more per hour than I am per year.

[unixronin.livejournal.com]

I would like to see documentation for your contention that ACORN forced banks to take on bad risks. The CRA didn't force banks to disregard reasonable ways of assessing a loan applicant's likely ability to pay.

No, it didn't. The article I posted the other day included a number of citations to ACORN slapping banks with lawsuits alleging that loan refusals were CRA violations. In a case like that, sometimes it doesn't matter whether you actually did what you did for the reasons you're accused of doing it, as long as you can't prove that you didn't have that motivation.

To put it another way, it wasn't CRA's fault per se, but CRA was misused by ACORN as a big stick to beat the banks up with.

My take on it is, once banks didn't have to hold on to the mortgages they wrote, any loan officer who didn't write all the mortgages he could was a damned fool. In the short term, they'd be money for him; in the long term, they'd be Somebody Else's Problem.

And that is the heart of the problem, isn't it? That's how we got into this mess — "Somebody else's problem."

In the end, we're all "Somebody else". To paraphrase, "It's not the bullet with your name on it that gets you, it's one of the fifty thousand marked 'To whom it may concern' or 'Somebody Else's Problem'."

[jmkelly.livejournal.com]

I read as much as I could of that article, and I have to caution you about that website: my tinfoil-hat alarm went off immediately, and never stopped. The author weaves a bunch of disparate facts into a single conspiratorial narrative -- and that's bullshit no matter who's doing it. It's bullshit when the Spartacist Youth League does it, it's bullshit when LaRouche does it. Real life is not that simple. I'm aware that the network the author describes looks complicated -- but compared to real life, it's way too simple.

[jmkelly.livejournal.com]

And yes, I'm sure ACORN used CRA to beat up banks that appeared to be denying loans to deserving minority applicants. That was part of ACORN's raison d'etre. Just like a loan officer that refused to take part in the deregulated-lending orgy, an ACORN organizer that declined to smack a bank with any weapon available to get loans for ACORN's constituency would be a damn fool, soon replaced.

And the banks had no incentive to fight back -- they could securitize the loans and palm them off on someone else. So the applicant got the loan, ACORN looked like a hero, the bank looked like it finally saw the light, and if the loan didn't perform, who cares, it's Someone Else's Problem now.

[unixronin.livejournal.com]

People who push things off as Somebody Else's Problem need to remember that there's roughly 300 million people in the US, and to more than 299 million of those people, THEY are Somebody Else.