The argument goes that the government forced banks to reduce their requirements for mortgage borrowers, thus flooding the secondary market with bad paper that prudent bankers would never have written except under coercion.
RtO has given numerous examples why this cannot make sense, ranging from mortgage collapses in places where US law does not run, like Spain; to the fact (and it is a fact) that although the CRA is a national law, the distribution of bad paper was nowhere near uniform -- lots of lousy mortgages in Phoenix, very few in South Dakota.
As far as RtO is concerned, the disagreement is settled. But from time to time, a factoid comes along reinforcing the notion that whatever was going on, the CRA wasn't forcing it. Today's example, reported by Bloomberg News, concerns a lawsuit vs. Bank of America alleging (again) misrepresentation to secondary buyers, in this case, of $850 million in debt.
Bad stuff, if true, but down in the story is this graf:
The company failed to disclose that more than 22 percent of the mortgages in the pool were made to borrowers who were self-employed and that its own standards weren’t followed to verify their income and assets, the department said in its complaint.
More than 40 percent of the 1,191 mortgages in the pool didn’t “substantially comply” with the bank’s underwriting standards, the Justice Department claimed. Employees who worked on the origination of the mortgages admitted that the bank “emphasized quantity over quality” and that they were instructed by supervisors that it wasn’t their job to discover mortgage fraud, according to the Justice Department’s complaint.
Since Bloomberg didn't do the math, RtO will do it for you: Those mortgages averaged about $775,000. Even at California prices, hardly entry-level housing for immigrants from Guatemala.
UPDATE: Saturday
Bloomberg has a followup story, which repeats a statement from the first one, one I should have pinpointed in the original post, since it nails down the fact that the bankers did not regard these loans as CRA garbage:
Federal Home Loan Bank of San Francisco bought about $600 million of the pool while Wachovia Bank purchased about $235 million, according to the complaint.
Little as I regard the smarts of bankers, I think even the dumb ones would know enough to stay away from loans they regarded as legal setups imposed by the Democrats. That they were trading these as good paper just proves that the rightwing narrative about the CRA is hooey.
The argument goes that the government forced banks to reduce their requirements for mortgage borrowers, thus flooding the secondary market with bad paper that prudent bankers would never have written except under coercion.
ReplyDeleteThe reason that the argument goes that way is because that is precisely what happened: the entire point of the CRA was to reduce mortgage requirements, and that when the banks failed to toe the line, the government resorted to coercion.
Although, really, that isn't an argument, but rather a simple observation of the facts.
What you have to explain is why the CRA did not require: a vast expansion of GSEs and the secondary market; bundling of mortgage backed securities; and, the hiding of high risk mortgages within those bundles.
Which is going to be a tough row to hoe, because those things are precisely what the CRA caused.
The data shows that the principal buyers [of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages] were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
That's the problem with reality: sometimes it bites.
In contrast to clear evidence, you offer up this perfect example of a non sequitur: RtO has given numerous examples why this cannot make sense, ranging from mortgage collapses in places where US law does not run, like Spain ... Correlation? Causation? Post hoc? Domino? Irrelevant? Who the heck knows, because you never even bother to try linking your superficial assertion in any other way than that it involves mortgages.
As far as RtO is concerned, the disagreement is settled.
That is because as far as RtO editorial policy is concerned, if reality contradicts the narrative, so much the worse for reality.
The CRA did not address secondary markets, so whatever happened there was not a result of CRA. It was, as everyone knows, the result of the financial musical chairs in which the crooks were all thinking, 'Hey, it's gonna crash, but I'm so smart I'll cash out before it does,' only they weren't that smart.
ReplyDeleteThe biggest writer of subprime loans was NOT covered by CRA, so the statement that that paper was required is false. There is an obvious (to me anyway) bait and switch in your citation.
There is another false statement. Fannie and Freddie were quasi-government agencies. They bought bad paper for the same reason Deutschebank did -- to buoy their stock prices, they had to show comparable returns to other stock companies, and the only way anybody could show that kind of return was by participating in the bubble.
The CRA did not address secondary markets, so whatever happened there was not a result of CRA.
ReplyDeleteThat, right there, is where you leave the rails.
Because of the elimination of down payments and risk pricing, one of the inevitable consequences of the CRA was a huge increase in the secondary market.
Your position is like saying that because the design of a car doesn't mention traffic lights, traffic lights can't be a result of cars.
Unless there was some other reason for an increase in secondary markets, and, no surprise, there was -- the elimination of safe banks, which was what Phil Gramm was after. How's that workin' out for ya, Phil?
ReplyDeleteAll banks had to compete for hot money, and they couldn't if they were tying up capital in long mortgages. Not only that, they all had to match the instantaneous returns of the most reckless banks, which were places like Bear Stearns and RBS. Neither of which was even remotely affected by CRA.
It was a system designed to fail and it failed. It would have failed if there had never been a CRA. I know, you think somehow requiring residential borrowers to put 20% down would have changed things; but the banks were not requiring 20% (or any%) of commercial borrowers and the CRA could not have affected that.
Blaming CRA is a smokescreen for a classic market failure, which is the inevitable result of unregulated markets. The free marketeers will do anything to avoid that.
Reality bites:
ReplyDeleteIn October 2000, to expand the secondary market for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of "MyCommunityMortgage" loans.[98][99] In November 2000 Fannie Mae announced that the Department of Housing and Urban Development ("HUD") would soon require it to dedicate 50% of its business to low- and moderate-income families." It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion.[95] In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period.
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... but the banks were not requiring 20% (or any%) of commercial borrowers and the CRA could not have affected that.
Wonderful. Keep in mind that I the discussion here is the CRA and its effect on the residential real estate market.
To that end, you need to take on board what the consequences of the CRA had to be.
Do you realize how small a proportion of the home loan market $20 billion is?
ReplyDeleteIn the neighborhood of 25,000-30,000 loans.
In Las Vegas, an $800 million condo tower was torn down because somebody forgot to stabilize the foundations. What were the liabilities of Lehman? Over $650 billion.
Even if we admit (which I don't) that CRA loans were worse paper than ordinary loans, they were not large enough to matter.
Do you realize how small a proportion of the home loan market $20 billion is?
ReplyDeleteReality bites:
HUD increased Fannie Mae and Freddie Mac affordable-housing goals for next four years, from 50 percent to 56 percent, stating they lagged behind the private market; from 2004 to 2006, they purchased $434 billion in securities backed by subprime loans.
Instead of tossing out irrelevancies and anecdotes, how about an accurate history of the CRA, and then use that history to demonstrate that the CRA could not have undermined the residential real estate market?
I'll bet you can't do it. Just as with the Zimmerman case, when facts collide with religion, so much the worse for religion.
Let's see, that works out to about $3 billion a month. Nowhere near enough to be felt in the multi-tens of trillions residential real estate market.
ReplyDeleteWhat undermined the financial markets (residential real estate was not alone) was overleveraging.