Be careful of buying into explanations that are driven by political gamesmanship. The crowd that I now hear pushing a CRA FNMA theme are people who never saw the bubble growing, who claimed that that the “collapse of the bubble” was a media plot to talk down the economy, but who now offer themselves up as experts on the cause of the bubble.
Fanny Mae and Freddy Mac could only buy ‘conforming loans’. This is the sort of loan that requires a downpayment, proof of income, the usual sort of criteria that had been required to get a mortgage. The yield on this paper was low. Fanny Mae and Freddy Mac had made a decent living on it since 1935 and 1970 respectively. Both companies were on the New York stock exchange.
The CRA had been around since 1977. It wasn’t addressed by the Reagan administration, GHW Bush, Newt’s 1994 Republican Congress, nor Dubya (in fact Dubya added fuel to the fire by sponsoring the American Dream Downpayment Initiative). If CRA was going to cause the bad loan bubble it took nearly 30 years to play itself out. CRA was a misguided nuisance for lenders that was working in the same direction as the larger forces that provided the real power for the bubble, but the quantity of CRA loans didn’t have anything near the size sufficient to cause the credit bubble. It’s a matter of scale. Simple math alone prevents CRA from being the prime mover.
The major forces were Wall Street investment banks seeking investment themes that would yield high returns. Industrial lending had been disappearing as American industry moved offshore, and Wall Street was looking for new places to invest. There had always been a tiny market of very high yield retail loans to homeowners, a market serviced by the likes of Beneficial, Aames Home Loans, HFC, and the like. Very high yield on very small loans to customers with less than stellar credit.
But one bright Wall Street guy figured out that this high yield market could get much bigger. What if loans were made to all the people who wanted to by real estate but who didn’t qualify for traditional loans? What if these loans didn’t have any of the safeguards that were contained in conforming loans? What if these loans were bundled and securitized and sold off to investors?
This was the genesis of the bad loan tsunami. It could have been stopped if Glass-Steagall had been enforced, since these investment banks weren’t allowed to make retail loans. But instead of enforcing G-S it was scrapped.
The volume of subprime loans went up exponentially. Wall Street provided warehouse loans to storefront mortgage brokers, who initiated the loans for a fee and sold the paper back to Wall Street. No one in this process was regulated by the CRA. They were making these subprime loans for their own profit. And these loans proved to be enormously riskier than subprime conforming loans. In the idea of removing risk from their creation the derivatives market grew on top of this lending. The numbers involved in all of this grew into the trillions of dollars. If you were aware of this as it was happening you could see the train wreck coming.
No one in this process was regulated by the CRA.
But CRA was attached to the GLB-act. If these institutions wanted to benefit from GLB they had to be in compliance with CRA. That’s one thing I can’t get past.
And...I can’t believe anyone who has looked into this cannot tell this bubble was going to pop no matter what.
I’ve seen TWO instances where the Clinton Admin made changes to the CRA, one being the Cuomo announcement, and the other being that CRA was attached to GLB in order for Clinton to sign it.