“Unfortunately because they were probably afraid of being branded “racists”.”
Try again. The CRA only covered deposit takers like retail banks and S&Ls. The number of loans required by the CRA was quite small and they didn’t have to be mortgages. Reagan and both Bush Administrations were not concerned with the CRA.
“You mean like WAMU or Countrywide?”
Funny that you should mention Countrywide. Countrywide began as a pure mortgage lender, meaning that it got its capital from investors, not depositors. And as so it was not covered by the CRA. Later on it acquired an S&L and that did bring it under the CRA. WAMU would have been under the CRA. But the two very largest subprime lenders who got this all rolling, Argent and Ameriquest, were not.
“Yes, bankers, like you and me are greedy, but I would venture to guess that the vast majority of them are not stupid.”
Then in this instance you guess wrong. They were all using a pricing model based on the flawed Gaussian Copula Function which blew up in their faces and wrecked their own companies.
“If you were a banker would you make a loan that you knew there was a 90% chance that it wouldn’t be repaid?”
Sure I would, because I know something about financing those loans that you don’t. Unlike in all previous decades of mortgage lending I had no intention of holding onto the loans. I would collateralize them and sell them off as CDOs, CMOs, CDOs squared all of the other extremely lucrative derivatives that generated income for me and passed all of the risk off to the investors who bought them.
“Also please tell me, who bought most of the securitized loans?”
Investors looking for yield. Insurance companies, retirement funds, foreign banks, mutual funds, money markets. Subprime CDOs provided high yield at a time when T-bills were paying 1%.
“Also please tell me, why did the top rating agencies give AAA ratings to these securitized subprime loans?”
Because they were paid by the firms who manufactured the CDOs, a classic conflict of interest, and because the financial firms creating the derivatives misled the rating agencies about just what they were stuffing into these derivatives. For one thing the rating agencies assumed that the loans were conforming loans like the ones that Fanny and Freddie crank out, but they weren’t- they were vastly more risky, the no docs, no downs, no income, all of the crazy lending designed solely to generate more subprime paper to feed the derivatives market. By the end of the bubble the need for derivatives fodder was driving the lending process.
“You use a lot of handwaving in your arguments,”
No, I use a lot of facts that you are unfamiliar with so you now think that a bit of ad hominem is going to help your case. Try again junior, I knew a lot of people involved in this industry and I was one of a small number here at FR warning that disaster was coming from the housing market. So try patronizing someone who knows as little as you do about what happened, because that crap doesn’t work with me.
CRA was not the only factor, but it along with other government interventions in promoting “affordable” housing and home ownership in general, by browbeating banks and using relaxed underwriting standards on the part of HUD, Fannie Mae, Freddie Mac, etc. definitely were major players in the crisis. And yes so were the quants with their theories and models on how to price risk, which they obviously got very wrong. And of crucial importance were the rating agencies. If they had rated the risks correctly, none of this would have happened, because the demand for junk would have never risen to the level that it did.
I found this entry in Wikipedia fairly balanced and quite thorough in summarizing the various takes on the causes. Not surprisingly, it contains a lot of political axe grinding on both sides.
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis