Good Intentions behind subprime mess.

[2centsworth]

So far the IBD series has been excellent. So we're in a mess, but it's not because our hearts weren't mostly in the right place.

http://www.investors.com/editorial/I...issue=20080923

Good Intentions Paved The Road To Subprime-Stoked Meltdown


BY TERRY JONES
INVESTOR'S BUSINESS DAILY
Posted 9/23/2008
For those looking for a real start to today's financial meltdown and government rescue, you need to go back — way back — to 1977, and the Jimmy Carter presidency.
It was then, for the best and purest of reasons, that well-meaning Democratic members of Congress brought the Community Reinvestment Act into being.
The main idea, as the late Democratic Sen. William Proxmire said on the Senate floor in 1977, was "to eliminate the practice of redlining by lending ins utions."

That term — "redlining" — seems quaint today. But in the 1970s, it was widely seen as the cause of housing disparities between white and black Americans. The redlining theory went thus: Banks set up shop in low-income areas, took deposits, then lent the funds to richer areas — leaving poor and minority communities starved of housing and capital.
President Carter, a reformist former governor from the racially aware "New South," embraced the 1977 CRA as a way to end the supposed practice of redlining.
Coming as it did just years after other major civil rights legislation — including the 1964 Civil Rights Act, the Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974 — community activists and others viewed it as essential to bringing African-Americans into the American dream.
At the time, the U.S. was in the middle of what came to be known as stagflation. After the first oil embargo in 1973 sent prices spiraling upward, the economy struggled to emerge from a vicious two-year recession in 1974 and 1975.
By 1977, inflation hit 7% — on its way to 14% in 1980. A year earlier, in 1976, 30-year mortgage rates crested 9% for the first time ever.
Meanwhile, the jobless rate stood at 7% — 14% for blacks. Many African-Americans felt frozen out of homeownership. As home prices soared, affordability became a crisis for black families.
In such a nasty economic environment, it's easy to see why something like the CRA got passed.
Good intentions, bad results.
Unfortunately, this well-intended law eventually led to a housing boom based on shoddy loan practices, a subsequent bust, and the financial mess we are in today.
Initially, the CRA was supposed to not just lend to poor areas, but to do so "consistent with safe and sound lending practices." That latter key proviso was ignored as CRA was implemented.
As IBD has already shown, the CRA forced banks and savings ins utions — then, far more heavily regulated than today — to make loans to poor, often uncreditworthy minority borrowers.
Banks were required to keep extensive records of their minority lending practices. Those that didn't pass muster could be denied the right to expand their branches, merge with other banks, or boost lending in new markets.
Regulators didn't need to do much policing; they let that job fall to radical community groups, such as ACORN and NACA, which siphoned literally billions of dollars from banks and lent the money in poor communities.
It wasn't entirely altruistic.
The community groups booked thousands of dollars in fees for every loan. And loans often required recipients to become active in radical causes — what's today called "community organizing."
If a community group decided a bank was operating in bad faith, it could affect the bank's "CRA rating" — the scorecard for how well it was doing as a minority lender.
Banks became pliable, easy targets. No bank CEO wanted to be mau-maued as an enemy of the poor. They became shakedown targets, channeling billions of dollars to groups that had, at best, meager results to show for it.
That's how it began. Later, in the Clinton era, Fannie Mae (FNM) and Freddie Mac (FRE) got involved — buying up bad loans from banks, and securitizing them for sale on world markets. The seeds of the subprime meltdown were planted.
As of last year, the homeownership rate among all Americans was 68.1% — up from 63% in 1970. For black Americans, it's up from just below 42% in 1970 to 47.2% last year. It's still below 50%, and still the lowest of any minority group.
Today, Americans might rightly ask 31 years after the CRA was passed whether the more than $1 trillion lent under its au es did what its proponents promised.
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Copyright 2000-2008 Investor's Business Daily, Inc.

[ElNono]

LIBERALS AND THE SH*TPILE.

It's got to be a scary moment if you're a conservative. The economy is in a meltdown that can be directly traced to insufficient regulation. In other words, it's in meltdown because you suck at running it, and refused to listen to warnings that subprime loans required more oversight, Glass-Steagall made sense, and somebody should really be keeping an eye on these increasingly odd financial instruments and the obvious housing bubble that was feeding them. There's only one thing to do: Blame liberals.

The new line we're hearing is that the financial meltdown was really the product of the Community Reinvestment Act, a piece of legislation from the late-70s that required federally-insured banks to lend throughout the areas from which they take deposits, including poor neighborhoods, which were being systematically excluded from credit. The legislation, by all accounts, worked. Now, however, conservatives are trying to argue that it's behind the crisis: If the CRA hadn't been pushing these banks to make all these unsafe loans, then the birds would still sing and Alan Greenspan could still start each morning by being anointed with the oil of the purest, youngest, olives.

As Robert Gordon shows, however, this is crap. First, there's the timing. CRA came in 1977. The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened the CRA -- and after that (though not, presumably, because of it), bubble lending really took off. Further, CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure. For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms. Which basically leaves a stake in the heart of this particular theory. Indeed, until now, some conservatives have been moaning that no one is talking about the CRA part because it's so racially charged. Poppy . It's just a false charge that's not worth talking about. As Gordon says, in one of my favorite kickers in some time, this "is not political correctness. It is correctness."

LINK

[ElNono]

Did Liberals Cause the Sub-Prime Crisis?

Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It's a useful story for them, but it isn't true.

Robert Gordon | April 7, 2008 | web only



The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Ins ute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."

Last week, a more careful expression of the idea hit The Washington Post, in an article on former Sen. Phil Gramm's influence over John McCain. While two progressive economists were quoted criticizing Gramm's insistent opposition to government regulation, the Brookings Ins ution's Robert Litan offered an opposing perspective. Litan suggested that the 1990s enhancement of CRA, which was achieved over Gramm's fierce opposition, may have contributed to the current crisis. "If the CRA had not been so aggressively pushed," Litan said, "it is conceivable things would not be quite as bad. People have to be honest about that."

This is classic rhetoric of conservative reaction. (For fans of welfare policy, it is Charles Murray meets the mortgage mess.) Most analysts see the sub-prime crisis as a market failure. Believing the bubble would never pop, lenders approved risky adjustable-rate mortgages, often without considering whether borrowers could afford them; families took on those loans; investors bought them in securitized form; and, all the while, regulators sat on their hands.

The revisionists say the problem wasn't too little regulation; but too much, via CRA. The law was enacted in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it's conceived as a quid pro quo for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.)

The law imposes on the covered depositories an affirmative duty to lend throughout the areas from which they take deposits, including poor neighborhoods. The law has teeth because regulators' ratings of banks' CRA performance become public and inform important decisions, notably merger approvals. Studies by the Federal Reserve and Harvard's Joint Center for Housing Studies, among others, have shown that CRA increased lending and homeownership in poor communities without undermining banks' profitability.

But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the ins utions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

Yellen is hardly alone in concluding that the real problems came from the ins utions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."

It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did.

And that is not political correctness. It is correctness.

LINK

[Yonivore]

Nice spin El Nono but, we don't need to go back to 1977 -- just the Clinton Administration.

Jennifer Rubin reports that During Obama’s tenure on the board of the charitable Chicago Woods Fund, he helped channel funds to the notorious socialist activist group, ACORN:

During Obama’s time on the Woods Funds ACORN received grants of $45,000 (2000), $30,000 (2001), $45,000 (2001), $30,000 (2002), and $40,000 (2002) from the Woods Fund. (Obama in the early 1990’s helped train ACORN organizers and later served as counsel in 1995 for ACORN in a “motor voter” registration lawsuit.) And ACORN certainly appreciated whatever assistance Obama afforded the radical organization over the years.

Offers Eric at Classical Values:

No doubt Obama is very proud of his role as a “community activist” for ACORN.

If ACORN were merely another whiny left-wing group that never did anything, it might be something we could all laugh off as cute. But alas, ACORN is neither cute nor laughable; it is a very determined, very powerful outfit which believes in implementing socialism, and works hard to create the right conditions to make socialism inevitable, and ineradicable

Rubin offers even more irregularities Obama’s Woods activities where the organizations he channeled grants in turn donated to his senate and presidential campaigns. Naturally, as Senator Obama, he made sure these same organizaions received earmarks.

[quote=Rubin]The pattern of funneling money to political allies and their allies is evident throughout Obama’s tenure at the Woods Fund. Tens and tens of thousands of dollars were granted to organizations including the Brighton Park Neighborhood Council, Business and Professional People for the Public Interest (BPPPI), the Center for Neighborhood Technology, Centers for New Horizons, the Chicago Jobs Council, the Chicago Education Fund, the Chicago Ins ute on Urban Poverty, the Chicago Urban League, The Gamaliel Foundation. Dozens of the board members and officials from these organizations in turn would donate money, in many instances up to the legal limit, for Obama’s Senate and Presidential races between 2004 and 2008.

For example the Woods Fund between 1999 and 2002 granted $60,000 to BPPPI. Board member and executives donated at least $16,950 to Obama’s political campaigns. The Woods Fund granted the Center of Neighborhood Technology $150,000 between 1999 and 2002. Obama received over $24,000 in campaign donations from its officials. And in turn Obama made sure to seek earmarks on their behalf once he reached the U.S. Senate.

Classical Values reminds of Sweetness and Light’s link to a February 2008 article in the NY Post by Economics Professor Stan Liebowitz about the link between ACORN and the mortgage crisis.

In the 1980s, groups such as the activists at ACORN began pushing charges of “redlining” - claims that banks discriminated against minorities in mortgage lending. In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation.

In fact, minority mortgage applications were rejected more frequently than other applications - but the overwhelming reason wasn’t racial discrimination, but simply that minorities tend to have weaker finances.

Professor Liebowitz offers more details in his article involving Countrywide Mortgage, which is now ‘hurtling toward bankruptcy” and its role in granting mortgages now in default on an amazing scale. The Obama campaign had to distance itself from its one-time VP vetter Jim Johnson whom received questionable loans from Countrywide. Intrestingly, the Obama campaign had been critcal of Hillary Clinton for its relationship with Countrywide. See Jim Geraghty’s 2008 post for more.

In Liebowitz’ February piece he noted how ACORN was touting CRA loans on its website:

Flexible lending programs expanded even though they had higher default rates than loans with traditional standards. On the Web, you can still find CRA loans available via ACORN with “100 percent financing . . . no credit scores . . . undo ented income . . . even if you don’t report it on your tax returns.” Credit counseling is required, of course.

Today on its website, ACORN has a Stop Forclosure link

ACORN'S EXPLOITATION OF THE COMMUNITY REVITALIZATION ACT IN EXTORTING SUPER-HIGH-RISK LOANS OUT OF MORTGAGE LENDERS IS THE REASON WE'RE IN THIS MESS. PERIOD.

ACORN IS TO MORTGAGE LENDERS WHAT JESSE JACKSON, AND HIS RAINBOW COALITION, WAS TO CORPORATE AMERICA AT THE HEIGHT OF THE AFFIRMATIVE ACTION CRAZE, WHEN HE WAS EXTORTING COMPANIES INTO RACIAL QUOTAS TO AVOID BEING DECRIED AS RACIST.

[ElNono]

Nice spin El Nono but, we don't need to go back to 1977 -- just the Clinton Administration.

Well, just showing there's two sides to every story. We already agreed both sides are at fault here.

[Yonivore]

Well, just showing there's two sides to every story. We already agreed both sides are at fault here.

Yeah...only one is true, though.

[PixelPusher]

A word search in this thread found the word "securitized" only occured in ElNono's articles. No mention of it whatsoever in any of the conservative agitprop.

[Mr. Body]

CRA has utterly nothing to do with this. It didn't require bad loans to be made, nor did it create securitization and mortgage derivatives.

Fanny and Freddie strayed from their mandates and started getting into that stuff, true.

But blaming this on liberals is idiotic. A number of things happened, and if this were just a matter of trying to get more people into homes, we wouldn't even be talking about it. The question was, what happened next. A lot of the junk debt instruments coming due now, like the prime-As, have more to do with idiots refinancing their mortgages so they could buy more useless or dumbass would-be yuppies buying far too large a house than they could afford, or buying more houses for rental properties.

The CRA and minority/po' folks story either has nothing to do with it (for the former) or only a small part (the latter). Or do you think poor folks are sitting in $700 billion worth of homes right now?

[boutons_]

Nobody forced the rich white folks to make risky loans to poor black folks.

[PixelPusher]

Nobody forced the rich white folks to make risky loans to poor black folks.

or package those loans and sell them on Wall Street, which is why this is now everybody's problem.

[Yonivore]

CRA has utterly nothing to do with this. It didn't require bad loans to be made, nor did it create securitization and mortgage derivatives.

Fanny and Freddie strayed from their mandates and started getting into that stuff, true.

But blaming this on liberals is idiotic. A number of things happened, and if this were just a matter of trying to get more people into homes, we wouldn't even be talking about it. The question was, what happened next. A lot of the junk debt instruments coming due now, like the prime-As, have more to do with idiots refinancing their mortgages so they could buy more useless or dumbass would-be yuppies buying far too large a house than they could afford, or buying more houses for rental properties.

The CRA and minority/po' folks story either has nothing to do with it (for the former) or only a small part (the latter). Or do you think poor folks are sitting in $700 billion worth of homes right now?

If the CRA hadn't been "strengthened" to mandate relaxed loan qualification, none of the sub-prime mess would have happened. The people now dumping bad debt back on Fannie and Freddie would have never gotten loans in the first place.

The CRA (and it's ACORN written amendments) have UTTERLY everything to do with this.

[ElNono]

If the CRA hadn't been "strengthened" to mandate relaxed loan qualification, none of the sub-prime mess would have happened. The people now dumping bad debt back on Fannie and Freddie would have never gotten loans in the first place.

The CRA (and it's ACORN written amendments) have UTTERLY everything to do with this.

Did you read the article I posted? Specifically where it says that only 25% or less of the current ty debt is from CRA loans?

[Crookshanks]

Save your breath, Yoni. No matter how much information and proof is presented, the libs will find a way to spin it or discredit it. They will never admit responsibility for this mess - and we're never going to change the minds of the lib posters on this site.

Maybe if people start going to jail, minds will be changed, but probably not even then.

[PixelPusher]

Save your breath, Yoni. No matter how much information and proof is presented, the libs will find a way to spin it or discredit it. They will never admit responsibility for this mess - and we're never going to change the minds of the lib posters on this site.

Maybe if people start going to jail, minds will be changed, but probably not even then.

from AHF's thread:

The Sub-Prime Mortgage Crisis explained with stick figures

Ok, now to see Yoni's version of why this happened, simply click on the above link again, only this time stop reading after page 5 and ignore the rest of the 45 page explaination.

[tonylongoriafan]

what about living beyond your means...just because you can doesn't mean you should...aren't they more at fault, you know, people who actually default on loans...

maybe i don't understand because i've never been in that situation.

[DarrinS]

This is the fault of people living beyond their means and not understanding ARM loans.


It's also the fault of greedy, incompetent investors that took bad risks (especially since the govt had the GSE's back). The same dip s cooked the books to make their financial statements look better than reality.


So, the people that really get screwed in this whole mess are the average, hard-working tax payers.


This in sucks ass.

[cool hand]

www

[boutons_]

Princeton and Harvard Alumnus Eliot Spitzer Predicted the Economic Crisis, Tried to Stop It and Was Subsequently Removed From Office


The latest conspiracy theory buzzing around the Internet suggests that former New York State governor Eliot Spitzer was deposed from office, not for taking part in a pros ution ring but for speaking out against the Bush administration.

Let me explain: In February 2008, Spitzer, who was still governor at the time, published an article in The Washington Post en led “Predatory Lenders’ Partner in Crime: How the Bush Administration Stopped the States From Stepping In to Help Consumers.” In this article, Spitzer claimed that – for years – consumer protection agencies have been trying to curb the shady lending practices of many mortgage lenders.

Apparently, many banks were (are?) luring in unsuspecting consumers by “misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, [and] making loans with deceptive "teaser" rates that later ballooned astronomically.” When Eliot “Ness” Spitzer and his band of freedom-fighting consumer rights advocates attempted to intervene, the Bush administration curbed their efforts.

From the article:

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government… Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response?

[…] Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

As Americans presently find themselves in a national financial crisis, it appears Spitzer was on to something – something that could have possibly prevented the current economic downturn and exposed the corruption of the Bush administration.

But -- less than a month after the publication of his pseudo-expose, Spitzer found himself in the middle of a pros ution scandal that would ultimately lead to his removal from office.

Is it merely a coincidence? Perhaps, but the sequence of events, as well as the fact that the discovery of Spitzer’s involvement with the pros ution service Emperors Club VIP came from federal wiretapping, suggests otherwise.

Still, even if the tin foil brigade are reaching with their latest accusatory theory, it doesn’t make the conclusion to Spitzer’s article any less chilling, haunting or prophetic:

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

http://www.collegeotr.com/college_ot...m_office_12164

===========

Spitzer's article claiming how the feds stopped the states from stopping predatory lenders.

http://www.washingtonpost.com/wp-dyn...021302783.html

Spitzer also went after a lot of Wall St honchos, and took some down. He made a lot of enemies on Wall St.

[Oh, Gee!!]

blame the poor

[Yonivore]

blame the poor

I blame Democrats.

[Oh, Gee!!]

I blame Democrats.

you would

[Yonivore]

you would

You would too, if you were honest about it. , Franks and Dodd alone almost double-handedly exacerbated the problem to crisis proportions, just in the past few years.

[Oh, Gee!!]

by trying to calm fears? you're right they shoulda done like your boy last night and all but declared a depression.

[KenMcCoy]

^^ No, they should have recognized the situation and fixed the problem

[Yonivore]

by trying to calm fears?

By obstructing ALL efforts to reign it in.

you're right they shoulda done like your boy last night and all but declared a depression.

Had he done that, the markets would have responded differently this morning.