Did Liberals Cause the Sub-Prime Crisis? (Barf)

Still trying to understand all this- very complicated for non-financial types such as me.

I continued to read the article linked for this thread and found this- until I read it- I assumed the CRA affected all mortgage lenders..

~snip~

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 institutions 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.”

~snip~

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.

The fundamental cause of this problem long predates CRA; it is a consequence of FDR era laws (the creation of FNM and its implied backing by government) combined with Clinton era corruption.

The problem is that when LBJ "privatized" FNM, their ability to obtain low interest government funds was not removed. This resulted in two distortions in the market. The first is that it allowed FNM to unfairly compete with other lenders since their source of capital was cheaper, and the second is that it placed in the minds of many investors that FNM was still a government institution, which meant that their debt instruments were rated AAA despite their actual financial situation. Investors (including many foreign investors who didn't fully grasp the nature of American capitalism, such that it is...or was) that normally would have been very skeptical of such instruments instead bought them without reservation. This gave FNM more money to loan (and money to "buy" loans from other institutions, which encouraged them to relax lending requirements since they could simply sell the loan to FNM or FRE). This allowed an economic bubble to form.

This was combined with fraud, specifically fraud on the part of the "private" FNM, which published whatever numbers necessary to get the maximum executive bonuses. This is simple fraud, but unfortunately these people are above the law because of their economic status and political connections.

Interestingly, this results in a situation where the blame is derivative. There is MORE than 100% of the blame that can be placed:

1. Obviously this problem wouldn't have happened if FNM hadn't committed fraud. FNM is 100% to blame, and instead of being bailed out it should be shut down. But of course the likelihood of that happening is about the same as FNM executives (past and present) serving the jail time they so richly deserve.

2. FDR and the new deal created FNM. Like most of the problems America faces today, FDR is to blame for sowing the seeds, and this problem wouldn't have happened in the first place without him.

3. LBJ is to blame; he is the one who "privatized" FNM (in an attempt to hide budget issues), but still allowed it to have access to government credit.

4. Things like the CRA played a minor part as well, because they created the idea in the collective American mind that universal home ownership was such a vital objective that it should override economic realities.

5. Finally, the Republicans in Congress are guilty of the sin of omission; there were a number of Republicans who saw this problem years ago, including Bush, Ron Paul and even John McCain, but they were ineffective in convincing their colleagues to act. Nearly all were intimidated by Democrats (such as Frank) who insisted that there was no such problem and that Republicans just didn't want poor people to own homes.

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