Blame the poor and minorities!? You’ve got to be kidding me!
The thesis is laid out almost daily on The Wall Street Journal editorial page and in the National Review. Washington Post columnist Charles Krauthammer provides an excellent example, writing that “much of this crisis was brought upon us by the good intentions of good people.” He continues: “For decades, starting with Jimmy Carter’s Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac”which in turn pressured banks and other lenders”to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity.” The subtext: if only Congress didn’t force banks to lend money to poor minorities, the Dow would be well on its way to 36,000. Or, as Fox Business Channel’s Neil Cavuto put it: “I don’t remember a clarion call that said: Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.”
Republicans in their continuing mendacity and racism, are now blaming the poor and minorities for the financial crisis that is hitting our country. Nice.
Maybe we should take a look at another view from Newsweek’s Daniel Gross:
Starting with the Community Reinvestment Act:
The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply. There’s much more. As Barry Ritholtz notes in this fine rant, the CRA didn’t force mortgage companies to offer loans for no-money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on subprime debt.
And Gross ends with who the real culprits are:
Look. There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb lending virus originated in Greenwich, Ct., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington. Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them” frequently using borrowed capital.
Barry Ritholtz from the blog – Big Picture asks the right questions:
- Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:
- Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?
- 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?
- What about “No Money Down” Mortgages (0% down payments)? Were they required by the CRA? Fannie? Freddie?
- Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?
- Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?
- Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
- How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?
- What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?
- Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)
- The four biggest problem areas for housing (by price decreases) are: Phoenix,Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?
- Did the GSEs require banks to not check credit scores? Assets? Income?
- What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood
- What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?
- Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?
The answer to all of the above questions is no, none, and nothing at all.
The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron’s, there is plenty of things to be angry at D.C. about — but this ain’t one of them.
Read the whole post
Well not quite actually. Just saw this post by Barry – The Big Picture blog. It helps conclude the argument:
To repeat my prior arguments, the proximate cause of the Housing crisis were 1) Ultra-low rates; and 2) Abdication of traditional lending standards, thanks to 3) originators ability to resell mortgages for securitization purposes, and hence, 4) not have to worry about loan defaults.
The credit crisis was caused by 1) the above securitized mortgage paper, that was 2) rated triple AAA by Moody’s and Standard & Poors, which then 3) Which was then “insured” by credit default swaps (CDS) — the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.
If you are going to blame Fannie/Freddie/CRA, or George Bush or Barney Frank, you are missing the big picture.
UPDATED – 10/23/08
“It’s Fannie and Freddie’s fault.”
Yeah, whatever you want to rationalize to your own ideology. Try reading this and then say that again.
Some people actually look at the data, while others foolishly parrot talking points. Consider this Federal Reserve Board data, compiled by McClatchy. It shows that:
- More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.
- Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.
- Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;
- Only commercial banks and thrifts must follow CRA rules. The investment banks don’t, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
- Mortgage brokers, who also weren’t subject to federal regulation or the CRA, originated most of the subprime loans.