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Posted on 09/30/2008 12:40:10 PM PDT by agooga
Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
(Excerpt) Read more at businessweek.com ...
Hey, Mr. Brilliant Economist, we need less regulation, not more!
I believe it's criminal to mention "Barney Frank, mounting Fannie" in the same sentence...
Open a MySpace account and put them in your photo album. Then you can hotlink to them like this:
By STEVEN A. HOLMES
Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region —will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.
Fannie Mae officials say they hope to make it a nationwide program by next spring. Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,”said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer (and current Obama advisor ) “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”
THANK YOU MR. RAINES!!
These words are just as bad..."Barney Frank mounting Herbert M. Moses' behind..."
1. The Community Reinvestment Act (CRA), enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 563e, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate.
This is the soil where the GLBA was planted and started to grow
2. The Gramm-Leach-Bliley Act, enacted in 1999 is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies.
Technically, this is the Act which gave banks the ability to compete with insurance companies and opened up a huge niche market for Credit Default Swaps and puts us where we are today as regards the subprime mortgage mess.
3. The Board of Directors of FNMA and FHLMC saw fit to 'cook the books' to inflate the worth of their held assets in order to garner much larger bonuses than they were due. Jamie Gorelick was among those responsible.
This exacerbated the problem created by the repeal of part of Glass-Steagall.
So technically speaking, Aaron Pressman is correct. The CRA did not cause the current problem. But without it, we would not be in this mess today. Which means, at the best, Mr. Pressman is being disingenuous. At worst, he's a moron.
Fooman, You nailed it.
That's telling only half of the truth in order to perpetuate a lie.
#1 above: the 1977 law wasn't seriously enforced until the end of the Clinton Administration in 2000.
#2 above: most subprime loans *weren't* made by firms subject to CRA, but *were* sold on the mortgage Secondary Market to such firms.
So claiming that most sub-prime loans weren't made by banks subject to Community Reinvestment Act enforcement **omits** that to meet CRA requirements, such banks were buying those sub-prime notes from exempt mortgage originators.
So there's the answer...omitted by the spin doctor who pressed out the above article.
Mortgages get bought and sold all day long. The author pretends that mortgages are only originated...never bought or sold. But financial firms buy mortgages made by others...and a lot of times those "others" are exempt from the CRA (as if that matters when there is a bank or Fannie Mae who will buy the note from you).
I figure this entire thing with Barney and Fannnie might blow up in their faces.
Funniest headline since ESPN had a headline, "Nutt to Replace Dick with Johnson Against Cocks."
The headline was referring to an upcoming game between Arkansas and South Carolina.
This stuff just writes itself ... In addition to being a corrupt communist, Barney Frank is himself a sick joke.
This was caused by three things: 1) People being stupid enough to be goaded by realty agents into paying more than a house should be worth, 2) People using their homes as cash machines with frequent refinances, goaded by the values set by people in #1, 3) Securitizing mortgages so fancifully that no one can possibly recognize them anymore as the solid investments they used to be for folks trying to beat the interest rate at the bank.
Although Bus Week certainly has writers more educated in business than writers at non-business publications, this does not mean Bus Week articles are unbiased presentations. This is a good example of slant. Of course, the 1977 law did not immediately lead to the current credit problem. The current problem is the cumulative effect of 31 years of the law, its inherent political flaws, late 90s modifications (that ARE ESPECIALLY PREDICTIVE), and external events including changes in interest rates and increased aggressiveness among mortgage sellers. Increased aggressiveness in sales tactics is typical of behavior once an economic phenomenon has past its peak and those who depend on earnings and seek continuance of unsustainable earnings growth take excessive risks and scrape the barrel for that last dime of mortgage sales.
Politicians who got money from Fr Mae and Fr Mac had an incentive to ride the wave and so are neither objective nor likely to call for greater care. When the good times are rolling, who is all of a sudden going to put the brakes on and urge caution? Well, the Wall St Journal and some Republican Congressmen did call for greater caution and predicted the problem we now experience. That is provable. However, the politicians in charge of oversight had personal traits that made them poor overseers. Foxes in charge of the henhouse, if you will.
The CRA is inherently designed to promote lesser quality business actions. Otherwise, why would there be a CRA. You can see a similar looming problem with Social Security. That problem has been predicted for many years and there are many Congressmen who have fought attempts to avoid disaster. Will we hold them accountable when the problem erupts? Are we holding those responsible for the credit problem up to scrutiny now? Is Bus Week spinning this away from the source of the problem? You bet it is! FrMae and FRMac were central to this problem. Mortgage sellers acted like mortgage sellers. Congressmen acted like congressmen. Home buyers acted like home buyers. The CEO’s did what some CEO’s would do when paid to crank out earnings while knowing they had a collaborating gov’t ready to catch them if they fell. The human greed was as it always has been. The CRA provided two casinos with loose rules. It didn’t all happen in 1977—it has been evolving and several factors came together in a not-so-perfect storm. Some folks saw it coming—they deserve recognition.
Please. Even if CRA “had nothing to do with subprime” mess, it had a lot to do with the mentality in the market that the government was backing these dumb loans. This led to the first “moral hazard” that distorted the market.
Good catch!
Business journals covering business fannies.
Bottom line: They made bad loans and now they want taxpayers to pay for their poor judgment.
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits.....
Someone please help me understand why this in itself isn't incriminating evidence that the act: 1-meddled in normal bank decision making, 2-required them to make loans they would not have made.
How about this:
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans
So, not only did they have to put, by mandate, loans they didn't want on the books, their profit margins were cramped by the same legislation.
Anyone who has ever run a lending business would see right away that at some point, someone would have to pay the piper. I realize that subsequent laws made things worse, by actually incentivizing these loans by giving banks a way to sell the paper and book their profits with no risk, but it all began in 1977 with the CRA.
Mr. Calomiris is a professor of finance and economics at Columbia Business School and a scholar at the American Enterprise Institute. Mr. Wallison, a senior fellow at the American Enterprise Institute, was general counsel of the Treasury Department in the Reagan administration.
The CRA was the vehicle used to pack Fanny/Freddie balance sheets with a trillion in junk. To say the CRA had nothing to do with the market meltdown is a lie. The banks had CRA target to meet, if they did not they faced sanctions. Fanny/Freddie were encouraged to bad the crap with bonus targets and intervention from the Democrats in Congress, especially the Black Caucus. These are facts. They are not opinions.The mishmash of irrelevant nonsense in the Business Week article is nothing but a none too clever smokescreen.
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