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Anger over pinning the subprime crisis on CRA
Activists Angered By Blame For Crisis
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/02/AR2008100204115.html
The head of the National Urban League is calling on Treasury Secretary Henry M. Paulson Jr. to refute statements by conservative politicians and pundits that subprime mortgages provided to minorities led to the financial crisis and a $700 billion federal rescue of Wall Street.
In a strongly worded letter to Paulson this week, Marc H. Morial said Paulson has "an obligation to correct the misinformation that is spread concerning the root cause of the current financial crisis."
Morial, a former mayor of New Orleans, said in an interview yesterday that the effort "to pin the subprime crisis on African Americans and Latinos" is a "big lie."
"It's an effort to shift the climate away from deregulation and the lack of oversight," he said. "The numbers are becoming clearer each day that a large number of people who ended up with a subprime loan could have qualified for a prime loan. That's the abuse that's inherent here."
Morial said he has not heard from Paulson. A spokeswoman at the Treasury Department was forwarded an electronic copy of the letter but did not respond.
On the House floor, on cable network television and in Internet blogs in recent days, conservative politicians and commentators have traced the problem to the Community Reinvestment Act, or CRA, enacted in 1977 to extend loans to minorities who were historically denied homeownership.
Rep. Michele Bachmann (R-Minn.) lashed out against the act, reading from an from Investor's Business Daily article that said banks made loans "on the basis of race and little else." Neil Cavuto, a business news anchor on Fox News, recently made a similar statement. In an exchange on television with Rep. Xavier Becerra (D-Calif.), Cavuto noted that the congressman pushed for more minority lending to "folks who heretofore couldn't get mortgages" and asked, "Are you totally without culpability here? Are you totally blameless?"
Defenders of the act say claims that it encouraged risky loans and caused the foreclosure crisis do not square with the facts of subprime lending.
Only a tiny fraction of subprime loans made since 2000 were ever generated to meet the goals of the act, which requires banks and savings-and-loan institutions to provide credit to their lower-income clients as well as their wealthy ones, they said.
John Taylor, president and chief executive of the National Community Reinvestment Coalition, an umbrella group that promotes access to credit and affordable housing, said such claims "are on the level of Swift boat advertisements, except they are even less factual."
"People who are saying this don't understand lending, but they sure do understand the political process," he said. "They are trying to blame the victim, which is an old strategy that moneyed corporate interests always employ."
Profit, he said, was the motive.
"People did not do this lending for CRA purposes. They did it because it was profitable."
Re: Anger over pinning the subprime crisis on CRA
They're only angry b/c they need to do a major CYA in order to deflect the public ire, which is well placed on the CRA. The foreclosure crisis is in the subprime market. The CRA required subprime loans. Anyone who can't connect those two things doesn't understand what's going on. Freddie/Fannie were the enablers of the idea behind this legislation, they spread out the risk of these types of loans. Without the CRA forcing some banks and Freddie/Fannie enabling them with securitization, thereby creating an entire gov't-backed market for these loans, this never would have happened. The CRA isn't the only piece of this puzzle, but it is a big one.
Oh and when you read this stat about the "tiny fraction" keep in mind no one wants to talk about what percentage of that "tiny fraction" defaulted (only a "tiny fraction" of all mortgages have defaulted but that doesn't mean a problem doesn't exist), nor do they want to talk about how mortgage companies (not CRA-regulated and thus not included in that stat) were middlemen who simply arranged subprime loans for CRA-regulated banks that then defaulted. Fannie Mae held up one mortgage lender as the prize jewel of CRA lending. That lender was Countrywide.
It wasn't specifically geared for minorities (although that was the idea in the background), it was geared to poor people.
I was referring to the comments, similar to the one quoted in the article, where people make statements banks were forced to lend to minorities regardless of their qualifications.
They're only angry b/c they need to do a major CYA in order to deflect the public ire, which is well placed on the CRA. The foreclosure crisis is in the subprime market. The CRA required subprime loans. Anyone who can't connect those two things doesn't understand what's going on. Freddie/Fannie were the enablers of the idea behind this legislation, they spread out the risk of these types of loans. Without the CRA forcing some banks and Freddie/Fannie enabling them with securitization, thereby creating an entire gov't-backed market for these loans, this never would have happened. The CRA isn't the only piece of this puzzle, but it is a big one.
The CRA required subprime loans towards certain individuals to achieve the objectives under the Act. CRA did not force banks to provide subprime loans to individuals that would have qualified for prime loans. The point the article is making is that the subprime loans that are in foreclosure are mostly those marketed to people who were not even in a subprime loan pursuant to CRA.
I understand what you are trying to say about the origins of the CRA, Fannie and Freddie and how it initially created a subprime market. But other banks decision to apply the relaxed guidelines to prime loan applicants had nothing to do with furthering the objectives of CRA and everything to do with increasing their own ability to become more profitable. For that I don't see why CRA should take the fall.
Because private banks needed to compete with the government by offering the same range of products. People wanted sub-prime mortgages, there was demand, there was a market. Banks made that option available. They all should have had better foresight, but they didn't. That's how I understand it, at least.
I don't think CRA is in and of itself the problem. I believe it is the groups and some banks that took advantage of its structure. Some groups almost strongarmed banks to lower their standards for providing credit (not in all instances, but it did happen) and, thus, is one of the reasons we are having problems right now.
The birth of the Act was not the biggest issue, but rather the changes that took place under Clinton--the process was streamlined to make it easier for banks to comply, more money was available for lending, but money was to readily available to borrowers that probably would not otherwise qualify for a mortgage. I am not blaming Clinton, please don't take it as that, but rather the regulation and reformation under his watch. Of course, this is only one of the many factors that have played into the current crisis.
I couldn't get past Marc Morial, my wonderful past mayor. Everyone in his adminstration has been found guilty of corruption and is serving time. Everyone but him. His cronies took the fall but most people are still waiting to see if he gets served with some kind of criminal charge.
I know this has nothing to do with this issue but it is hard to respect this man knowing his history. And what he is saying is pretty much true from other things I read but ugh!
But this article doesn't even mention how many of those subprimers- -who-were-really-primers actually defaulted. A vast majority of all subprime loans haven't defaulted so a stat on who obtained a subprime loan may or may not reflect those who foreclosed. The number of foreclosures is highest in two types of areas - low-income areas and highly speculated areas. The CRA is responsible for the low-income mortgage push. So it cannot possibly be divorced from this crisis.
Because private banks needed to compete with the government by offering the same range of products. People wanted sub-prime mortgages, there was demand, there was a market. Banks made that option available. They all should have had better foresight, but they didn't. That's how I understand it, at least.
They needed to compete or they wanted to compete? Those are two separate things imo. For increased liquidity to bolster their lending business banks were motivated to originate and securitize as many loans as possible. By applying the relaxed standards they were able to do this. But it does not appear that these banks were competing to give loans to people that actually qualified under the CRA, instead they lobbied to apply the lowered standards of the CRA to loans because they were more profitable than a conventional mortgage.
I am cross posting some info below that was posted on E08 as well.
There was also a study done on the CRA.
Summary Conclusions Our study concludes that CRA Banks were substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis. Specifically, our analysis shows that: (1) CRA Banks were significantly less likely than other lenders to make a high cost loan; (2) The average APR on high cost loans originated by CRA Banks was appreciably lower than the average APR on high cost loans originated by other lenders; (3) CRA Banks were more than twice as likely as other lenders to retain originated loans in their portfolio; and (4) Foreclosure rates were lower in MSAs with greater concentrations of bank branches. source: http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdfI just addressed point 1 in this thread. That stat classifies other types of mortgage companies as "other lenders" even when they're just middlemen getting subprime loans for CRA-regulated banks. So it's not accurate.
I don't need to around and around with this. We all know Fannie/Freddie went bankrupt b/c of their bad subprime assets. And we all know the types of loans they dealt with. Countrywide, the prize jewel of the CRA is also bankrupt.
I don't need to around and around with this.
Alrighty then.
At the end of the day it seems like many (not all) conservatives are saying this disaster is largely the fault of A) poor people or
people who want to help poor people. I know that lacks the nuance of the arguments, but that's what it feels like in layman's terms.
Whenever I've talked about this to people IRL, I've prefaced it with, 'the original intentions were good. However, the policies wound up hurting the people it originally intended to help.' And that's how I feel about a lot of liberal legislation. I rarely disagree with the intent but I think in the long-run (or even the medium-run), it ends up doing more harm than good.
My main frustration with legislators in general (not just congress but any legislative body) is that they don't often enough look outside the intent of their legislation at the plausable side-effects. The people who are drafting the rules really should have more foresight.
Like the other day I posted an apartment for sale in New York City that had a maximum income requirement. The intent is great - give people who can't compete against millionaires a chance to own property in Manhattan. And if they make the top income and get a mortgage with a low interest rate, they'll be spending less than they would on rent today. But what if this person loses his/her lower-middle income job? What if property values decrease? What if the occupant dies and the family needs to sell it in order to pay the estate tax but they can't sell it because nobody's buying? These people got a helping hand to get their place, but where will that hand be if that makes them wind up in over their heads?
In a similar vein, let's look at rent control apartments in NYC. Intent is to make living in NYC more affordable. A number of people who have lived here for a long time benefit. Great. But when they die, people like Charlie Rangel and Christine Quinn and my sorority adviser (who's kind of a big deal) occupy these places when they could afford regular apartments. It's people with connections and good real estate agents who move in. Meanwhile, this decreases the total supply of apartments in the city, increasing competition and thus contributing to the skyrocketing rents.