CRA Not to Blame for Housing Debacle

[GWV5903]

Blaming society? FHA DPA was a direct result of Clinton turning up the heat on banks with the CRA, Sub Prime prior to this was a 20%+ DP with rates at 4 to 5 percent above par.....

Those individuals you're describing wouldn't be Clinton, Greenspan, Summer, Rubin and Levitt? Didn't they claim Brooksley Born was way off about the derivatives market? That didn't hold water either....

The goal to open up housing to anyone that could put fog on a mirror was a bad idea, and they used every means possible to do it, the CRA is we’re it all started, don't stay in denial too long....

If a car speeds by you 50 mph above the speed limit, it doesn't force you or everyone else to drive 50 mph above the speed limit either. You make a choice to do so.

Individuals made conscious decisions of their own volition to extend horrendous loans that had absolutely zero, zip, nada to do with the CRA. A sliver of the mortgage market did NOT cause bank executives and lending officers to start acting like madmen. Credit standards always wax and wane in the cycle, but no government policy forced banks and other mortgage providers to extend NINJAs to speculators flipping condos.

How about this analogy, lets put a 55 gallon barrel full of jelly beans in a class room of 8 year olds and tell them they can't have any, in 24 hours half will be gone and everyone of them will swear they don't know what happened....

This is a over simplification of the CRA effect on the industry, but it makes it easier for people outside of the industry to understand....

I worked for one of the largest builders in the nation during this time, I am still in the industry today. Our COO met quarterly with Raine's and annually with Greenspan, Raine's did not have another agenda, but to open the doors to low income minority home ownership.....

Here is a clear and factual point to CRA's effect on the industry, you can debate this all you want....

These three loan types helped the GSEs meet their affordable housing (AH) mandates under the "Federal Housing Enterprises Financial Safety and Soundness Act of 1992" (GSE Act). They were materially assisted in this effort by big banks and thrifts originating trillions in high risk loans to meet another mandate established under the federal Community Investment Act (CRA).

Speaking of CRA, let us not forget Krugman's assertion that CRA's involvement in the financial crisis is a myth. Over the 17 year period 1992-2008, there was a total of $6 trillion in announced CRA commitments, covering all types of CRA lending. Ninety-four percent of this $6 trillion in commitments were issued by four banks or banks these four ended up purchasing by way of merger. The banks were Wells Fargo, JP Morgan Chase, Citibank, and Bank of America. As a result, CRA single family origination volume over the period 1993-2008 also exploded, totaling an estimated $2.7 trillion.

RealClearMarkets - How Did Paul Krugman Get It So Wrong?

Edward Pinto is a consultant to the mortgage-finance industry and was the chief credit officer at Fannie Mae in the 1980s

I have seen this on a day to day basis for the last 18 years.....

On 1/15/2011 Wells Fargo introduced FHA lending starting at 500 to 579 FICO scores with 10% DP, 580 to 599 with 5% DP and 600+ (lowest in the industry by 20 points) with 3.5% DP. All of this is per the FHA regs. It will be interesting to say the least how the nation’s 4th largest bank will do this, they are going to get slammed with loan apps....

 

[finebead]

The original post says CRA was not a BIG contributor to the financial crisis. I agree with the original post. What were the big contributors?

1. Greenspan set rates too low in 2003 and 2004, fully 3 years after the 2001 recession ended when fed funds was at a 40 year low of 1%. Congress had given Bush his tax cut in 2001 and more tax cut in 2003, but they failed to adequately stimulate the economy, he was in danger of losing the election in 2004 and Greenspan continued to lower rates to levels not seen since the Kennedy years. This enabled lenders to offer ARM's with very low 2 year teaser rates, people could afford the first 2 years and they were lied to about what the rate would actually rise to, so they bought the house hoping it would go up in value and they would sell it in 2 years (the greater fool theory, I will find a bigger fool than me to buy it in 2 years). Excess liquidity directly contributed to the crisis in a BIG way.

2. Excess bank leverage at the 5 big investment banks, Lehman, Merrill, Bear, Goldman, and Morgan. The SEC in 2003 relaxed the Net Capital rule to allow those 5 banks to expand their leverage from 15:1 to 45:1. The SEC was to provide oversight to the banks own internal risk mgmt, but the SEC never provided it, and the banks did lever themselves up to 30 or 40 to 1, killing Lehman, and fire sales on Merrill and Bear. Goldman was dead but was bailed out by the TARP money that AIG got, which funded to payment to Goldman on their Credit Default Swaps at AIG. This excess leverage was what provided the DEMAND for the garbage mortgages. The investment banks could "securitize" them, get them rated AAA, and sell them to dupes all over the world. This vastly expanded their profits and earned all their CEO's huge bonuses and gains on stock option packages, right up until the companies were dead meat, bankrupt or sold for pennies on the dollar, or rescued by the govt. (Goldman via AIG).

3. Fraud at the Rating Agencies. The rating agencies were rating bundles of junk mortgages as AAA debt, when none of the debt in it was AAA. The rating agency said this was OK because since WWII, there was never a year when housing prices in the US fell. Well, whoopie doo, in the great depression housing prices in the US fell for over a year. This was a huge problem, alchemy turning junk into AAA.

4. Unscrupulous mortgage companies making loans to people who clearly would never be able to repay the loan after the low initial teaser rate reset to a higher rate. This was NOT caused by CRA, not at Countrywide, nor at New Century (the two largest issuers of subprime mortgages from 2002-2006), nor at countless others mortgage companies. Why were those loans made? They were made because Wall St. (Lehman, Merrill, Bear, Goldman, Morgan) WANTED those bad loans, to "securitize" them, take them to the rating agencies, pay them to rate the junk as AAA, and sell them and make a big profit.

5. The failure of the Federal Reserve to adequately regulate mortgage lending and bank reserves. Greenspan had the authority to regulate much of this activity already if he chose to use it, but he did not. He testified before congress that he made a mistake, that he believed the banks internal instinct for self preservation was adequate for the bank to regulate themselves. Clearly the greed of the CEO and executive team to enrich themselves, at the ultimate expense of all the rest of the shareholders who eventually got trashed, was a stronger incentive, and the CEO's and executive team trashed the shareholders while they all enriched themselves. Greenspan failed big time.

6. Stupid people paying too much for a house, not understanding what they can afford in the long run, not understanding the terms of the mortgage documents they signed, and putting too much faith in the words of the mortgage company sales person selling them the mortgage (who clearly was lying to the purchasers).

7. Failure of the congress to regulate Fannie and Freddie, the last opportunity to avert a crash was 2005, with HR 1461 that passed 331-90 in the house, and S 190 which Bill Frist R-Tenn. as senate majority leader refused to even let the bill be voted on by the full senate after is was passed out of committee.

When I look at my top 5 causes of the crisis, CRA is not in the top 5. Therefore it is not a big cause of the crisis. Therefore, the original poster is correct, CRA was not a big cause of the financial crisis.

Was it a contributor? Probably so. Was it a BIG contributor? No, not in the top 5 to my way of looking at it. CRA was only a minor contributor, but it probably played a role, just not a big role.

 

[Toro]

How about this analogy, lets put a 55 gallon barrel full of jelly beans in a class room of 8 year olds and tell them they can't have any, in 24 hours half will be gone and everyone of them will swear they don't know what happened....

This is a over simplification of the CRA effect on the industry, but it makes it easier for people outside of the industry to understand....

Except that we are grown adults, not eight year-olds.

I worked for one of the largest builders in the nation during this time, I am still in the industry today. Our COO met quarterly with Raine's and annually with Greenspan, Raine's did not have another agenda, but to open the doors to low income minority home ownership.....

Here is a clear and factual point to CRA's effect on the industry, you can debate this all you want....

These three loan types helped the GSEs meet their affordable housing (AH) mandates under the "Federal Housing Enterprises Financial Safety and Soundness Act of 1992" (GSE Act). They were materially assisted in this effort by big banks and thrifts originating trillions in high risk loans to meet another mandate established under the federal Community Investment Act (CRA).

Speaking of CRA, let us not forget Krugman's assertion that CRA's involvement in the financial crisis is a myth. Over the 17 year period 1992-2008, there was a total of $6 trillion in announced CRA commitments, covering all types of CRA lending. Ninety-four percent of this $6 trillion in commitments were issued by four banks or banks these four ended up purchasing by way of merger. The banks were Wells Fargo, JP Morgan Chase, Citibank, and Bank of America. As a result, CRA single family origination volume over the period 1993-2008 also exploded, totaling an estimated $2.7 trillion.

RealClearMarkets - How Did Paul Krugman Get It So Wrong?

Edward Pinto is a consultant to the mortgage-finance industry and was the chief credit officer at Fannie Mae in the 1980s

I have seen this on a day to day basis for the last 18 years.....

On 1/15/2011 Wells Fargo introduced FHA lending starting at 500 to 579 FICO scores with 10% DP, 580 to 599 with 5% DP and 600+ (lowest in the industry by 20 points) with 3.5% DP. All of this is per the FHA regs. It will be interesting to say the least how the nation’s 4th largest bank will do this, they are going to get slammed with loan apps....

Fine. Then there must be some data out there demonstrating that the rate of default and nonperformance was higher for CRA loans than non-CRA loans. So show it.

In 2005, subprime lending shot up to $795 billion, representing 24.13 percent of the $3.3 trillion in total residential home loan lending volume.

A year later, production fell to $674 billion, but still accounted for more than 20 percent of the $3.3 trillion in originations.

Residential Subprime Lending Volume Over the Years

And to repeat as has been mentioned earlier, of the $1.2 trillion issuance of subprime loans in those two years, 24 of the 25 largest lenders had no CRA mandate, and CRA loans accounted for only 6% of those loans in 2006.

I work in the financial industry. I am a money manager and a fiduciary for a large fund. If I were to flame out and use the excuse "Everyone else was doing it," I would be fired and would almost certainly would be violating my duty to act as a fiduciary for those who entrusted me with their capital.

It is no excuse for individuals to throw prudence and standards out the window simply because they have the tools to do so. The guy who invented the match and the guy who invented kerosene are not responsible for the guy who douses the forest and sets it on fire. Or for an analogy those on the right can really understand - guns don't kill people, people kill people. It is not the fault of the CRA that shops like New Century decided to recklessly abandon sound lending practices by extending garbage loans to middle class folks in the suburbs buying condos with no money down in Naples because banks had a government mandate to extend credit in redlined areas.

We have a sizable fixed income team that invests a lot of money in bonds and structured products. I have been exposed to deals in structured finance. My group in 2006 looked at entering into a multi-billion dollar swap whereby the underlying collateral was a mezzanine subprime "AAA" CDO. I passed. That POS was trading at pennies on the dollar a few years later. I am responsible for my actions as an investment professional. The individuals who decided to throw sound practices out the window in the pursuit of profit are responsible for their actions, not the CRA.

 

[American Horse]

The original post says CRA was not a BIG contributor to the financial crisis. I agree with the original post. What were the big contributors?

<SNIP>
When I look at my top 5 causes of the crisis, CRA is not in the top 5. Therefore it is not a big cause of the crisis. Therefore, the original poster is correct, CRA was not a big cause of the financial crisis.

Was it a contributor? Probably so. Was it a BIG contributor? No, not in the top 5 to my way of looking at it. CRA was only a minor contributor, but it probably played a role, just not a big role.

You missed REAL-ESTATE appraisals tailored to fit selling prices to make sure that deals would get lending and would go forward the closing table.

 

[GWV5903]

How about this analogy, lets put a 55 gallon barrel full of jelly beans in a class room of 8 year olds and tell them they can't have any, in 24 hours half will be gone and everyone of them will swear they don't know what happened....

This is a over simplification of the CRA effect on the industry, but it makes it easier for people outside of the industry to understand....

Except that we are grown adults, not eight year-olds.

Yes we are adults, but the evidence proves that many acted like 8 year olds....

I worked for one of the largest builders in the nation during this time, I am still in the industry today. Our COO met quarterly with Raine's and annually with Greenspan, Raine's did not have another agenda, but to open the doors to low income minority home ownership.....

Here is a clear and factual point to CRA's effect on the industry, you can debate this all you want....



RealClearMarkets - How Did Paul Krugman Get It So Wrong?

Edward Pinto is a consultant to the mortgage-finance industry and was the chief credit officer at Fannie Mae in the 1980s

I have seen this on a day to day basis for the last 18 years.....

On 1/15/2011 Wells Fargo introduced FHA lending starting at 500 to 579 FICO scores with 10% DP, 580 to 599 with 5% DP and 600+ (lowest in the industry by 20 points) with 3.5% DP. All of this is per the FHA regs. It will be interesting to say the least how the nation’s 4th largest bank will do this, they are going to get slammed with loan apps....

Fine. Then there must be some data out there demonstrating that the rate of default and nonperformance was higher for CRA loans than non-CRA loans. So show it.

You continue to miss the point, CRA was the basis, FHA DPA was a Zero Down / Zero Closing Cost Loan created under the Clinton Administration....

Detailed performance data for single-family CRA lending is rarely published. In a search of the top 25 banks by single family mortgage holdings, only Third Federal Savings & Loan reported on its CRA loans.

- Third Federal Savings & Loan reported that its "Home Today" community development program constituted just 3.2% of its owned mortgage loan portfolio ($299.3 million), yet these loans represented 32% of its 90+ delinquencies. Its Home Today delinquency rate is 33% vs. 2% on its non-Home Today portfolio.

In 2005, subprime lending shot up to $795 billion, representing 24.13 percent of the $3.3 trillion in total residential home loan lending volume.

A year later, production fell to $674 billion, but still accounted for more than 20 percent of the $3.3 trillion in originations.

Residential Subprime Lending Volume Over the Years

And to repeat as has been mentioned earlier, of the $1.2 trillion issuance of subprime loans in those two years, 24 of the 25 largest lenders had no CRA mandate, and CRA loans accounted for only 6% of those loans in 2006.

Corespondent lending spreads out to all the mortgage banks, even the small ones, as well as the ABA's from the major Commercial Banks, the largest independent mortgage banks are selling their originations to these banks, they are not servicing this paper....

I work in the financial industry. I am a money manager and a fiduciary for a large fund. If I were to flame out and use the excuse "Everyone else was doing it," I would be fired and would almost certainly would be violating my duty to act as a fiduciary for those who entrusted me with their capital.

Agreed, yet the Equal Housing Act would not allow a seller to deny a buyer when using any of these instruments to fund the purchase, it would be considered discrimination, we all knew this was crazy, but so did the Fed, SEC, HUD, Fannie & Freddie and the Executive Branch.....

It is no excuse for individuals to throw prudence and standards out the window simply because they have the tools to do so. The guy who invented the match and the guy who invented kerosene are not responsible for the guy who douses the forest and sets it on fire. Or for an analogy those on the right can really understand - guns don't kill people, people kill people. It is not the fault of the CRA that shops like New Century decided to recklessly abandon sound lending practices by extending garbage loans to middle class folks in the suburbs buying condos with no money down in Naples because banks had a government mandate to extend credit in redlined areas.

Look, you have always missed my point to this, Carter had good intentions with CRA, but you can not open the vault door and let everyone take what they want, this is what eventually happened, what further proof do you need? New Century & Countrywide are guilty as charged....

We have a sizable fixed income team that invests a lot of money in bonds and structured products. I have been exposed to deals in structured finance. My group in 2006 looked at entering into a multi-billion dollar swap whereby the underlying collateral was a mezzanine subprime "AAA" CDO. I passed. That POS was trading at pennies on the dollar a few years later. I am responsible for my actions as an investment professional. The individuals who decided to throw sound practices out the window in the pursuit of profit are responsible for their actions, not the CRA.

Good choice, but many others didn't resist, you're one of the few....

 

[Toro]

You continue to miss the point, CRA was the basis, FHA DPA was a Zero Down / Zero Closing Cost Loan created under the Clinton Administration....

I ask this question: Would the housing bubble and financial crisis have occurred had the CRA never existed? This is another way of asking if the CRA caused the crisis, which is the point of this thread. And this is what we know;

- The housing bubble was global. It wasn't just national. The CRA could not possibly have caused housing bubbles in other countries, of which many were relatively bigger than in America. How did the CRA cause an explosion of lending in Norway?

- The housing bubble followed the tech bubble. That is not a coincidence. We experienced one of the biggest financial bubbles of all time, only to be followed by an even bigger financial bubble a mere few years later. This was in big part a result of government, i.e. monetary, policy. Easy monetary policy was a reaction to the tech bubble as the Fed was trying to avoid a repeat of the 1930s. That easy money was channeled into the housing market. The tech bubble was not caused by the CRA, nor did the CRA cause the subsequent monetary response.

- The emergence of China, along with deflation in Japan, created a vast pool of savings in Asia looking for a safe home in dollars. That massive pool of capital was re-cycled into the US bond market, via purchases of Treasuries and agency mortgages, lowering interest rates across the curve. The economic condition of Asia had nothing to do with the CRA.

- Securitization exploded. Low interest rates caused asset/liability problems as pension plans and insurance companies which relied on bonds to generate their actuarial return, were falling short. Securitization created "AAA" products out garbage, which fed the Wall Street machine, as garbage in / garbage out created alchemy that investors swallowed whole. This is why Wall Street firms such as Merrill Lynch bought mortgage origination companies, so they had a steady supply of inventory to feed investors "AAA" rated product 20 to 30 basis points above Treasuries. Wall Street also created other products such as synthetic CDOs and CDO-squareds as financial alchemy to flog to investors. This explosion in financial "technology" happened independent of the CRA, and the demand for shitty subprime and alt-A loans was happening outside of the CRA. This was the dynamic that created all the crap mortgages, not the CRA. Had the CRA not existed, crappy liar's loans would have been created anyways.

- This housing bubble is not unique. Almost all housing bubbles throughout time look pretty much the same. The only difference this time was the scale, which was massive. Housing bubbles, as well as other asset bubbles such as the tech bubble, follow a pretty well-defined pattern. They are always a function of the excess creation of credit, they are usually followed by some period of prosperity, and there is usually some exogenous shock or change from outside the system. The CRA is so small relative to the forces that were and still are buffeting the global economy.

So I look at those factors and conclude that the CRA was inconsequential to the Financial Crisis. I'm not being dogmatic about it. If someone could provide evidence, I would change my mind. Nor am I arguing that the CRA was wise policy. I have no opinion on whether it was or not. But I do know that it didn't cause the Financial Crisis.

 

[Truthmatters]

There are some who hold to CRA as the cause of the crash as a religious belief.

They protect their party by swallowing the lies of its leaders no matter what the facts on the ground say.


They are hopeless causes and will believe it to their deaths Or two years from now they will believe something else because the right wing leaders tell them to believe something else and will pretend they NEVER believed it was CRA that caused it.

Look ar how many who voted for and defended Bush now claim they never voted for him or defended him.

 

[American Horse]

There are some who hold to CRA as the cause of the crash as a religious belief.

They protect their party by swallowing the lies of its leaders no matter what the facts on the ground say.


They are hopeless causes and will believe it to their deaths Or two years from now they will believe something else because the right wing leaders tell them to believe something else and will pretend they NEVER believed it was CRA that caused it.

Look [at] how many who voted for and defended Bush now claim they never voted for him or defended him.

Truth, back in the 90&#8217;s when we first got C-SPAN in our home, being an independent contractor, I watched or recorded for watching later in the evening all politically/economically relevant debates and hearings.

Once I had more time to take the time to read, I subscribed to the WSJ dropping &#8220;Time magazine&#8221; and &#8220;US News & World Report&#8221; as not being worth the cost of their subscriptions for lack of useful content.

Early on, in reading the WSJ, I came across warnings about Fannie Mae and Freddy Mac, of particular interest to me since I was a land developer and home builder, and my wife was a realtor. Both of us were dependent on the mortgage markets to sustain our livelihoods.

I began to follow all reports on F&F, and saw how, over time, the warnings turned into reality. At each phase of the development of the problem I asked &#8220;How the heck is this going to play out, that will be relevant to us in a practical way, and to our country?"

In my business I was always held to tough loan-to-value (LTV) ratios, but I benefitted from people on the other side of the transaction being able to get their loans with less and less stringent requirements. In the early days about everyone went to a local bank for their mortgage loans. But with the ever increasing availability of "specially taylored" financing to buyers in both my wife's and my areas of real-estate, we began to see so called Mortgage Brokers entering the market-place, configuring loans to people with ever looser standards for income, employment, credit-worthiness, and ability to repay. So much money was available for homes, everyone and his brother got into the action - for a generous fee, as "mortgage brokers".

The average buyer of questionable credit would, by going on the internet, find a &#8220;Mortgage broker&#8221; able to procure them a loan, almost always adding very large &#8220;loan procurement&#8221; fees to the price of the house to be financed at the closing table. In almost every case, if the person had had a sound credit rating in the first place (and for us most did) they could&#8217;ve saved themselves (or the seller) a large sum of money (5 to 8 points of loan value) which would have to be financed over the period of the loan, or kicked in by the seller so as to close the deal.

The purchasers seemed ignorant or unheeding that their local mortgage lending bank would willingly make the loan with only nominal closing costs for legal attorney fees, title insurance, recording fees, all usually totalling less than $300 vs. $8-10,000 per transaction; truly amazing! Unfortunately the average American is sadly lacking in any economic education, and is easily taken in by marketing, and their over-confidence in their own ability to get a really good deal on the internet.

Since appraisals, to facilitate business, were coming in at almost any increased amount that satisfied the (asking and bid) price, buyers on selling naturally wanted or needed to recapture their purchase price, a decent increase, plus the cost of the sales commission, and legal and closing costs. There was an ever greater pressure for prices to increase faster than normal. (your real estate bubble)

"Normal" in this case is what had existed back when more stringent standards disciplines were the practice such as 80% LTV, a decent job history, eligible income, and satisfactory credit rating/history for would be borrowers.

Back in the late nineties the WSJ began warning of the potential disastrous issues which would result from the GSEs F&F, comparing that potential with the earlier S&L crisis, or coming next their COUSIN in implied government guarantee, the PBGC (Pension Benefit Guarantee Corporation), the next foot to fall. =>WSJ Market Watch (Sept. 3, 2009) Pension crisis likely to hit taxpayers eventually


Fannie Mayhem: A History - WSJ.com
Here are two of the earliest headlines from this list of 30 articles in the WSJ:

&#8220;Inside Fannie&#8221; 03/19/02 &#8211; Fan and Fred don't function like other companies. They're allowed to pile up debt, implicitly guaranteed by taxpayers, without being held to even the minimum of corporate governance standards

&#8220;Frantic Fannie&#8221; 02/28/02 &#8211; Companies taking on so much risk and debt, and backed by taxpayers, ought to be more transparent in what they tell the world

Is the CRA the source of the financial crisis? Would it happened without it? Or is the implied guarantee in the two GSEs Fannie Mae and Freddie Mac closer to it?

I believe that if Fannnie and Freddy hadn&#8217;t existed, or been subdued, then what resulted from the implied guarantee (with its moral hazard) would not have happened. We exported to economies through our financial markets and then throughout the rest of the world, our greatly over-rated debt instruments. That risk was so great because it was based on the largest sector of our economy most, but any country&#8217;s economy, vis the home building and real-estate markets taken as to form a combined sector.

The CRA was a stimulus to the risk; it provided the demographic least able to repay, creating vast numbers of bundled loans going into the securities markets which would be over rated, and then sold worldwide to investors seeking a good return, with demand being stimulated because CD earnings dropped to about 1% or less, in turn because of the availabillity of money for about any purpose driving down those CD rates of return.

 

[GWV5903]

The CRA was a stimulus to the risk; it provided the demographic least able to repay, creating vast numbers of bundled loans going into the securities markets which would be over rated, and then sold worldwide to investors seeking a good return, with demand being stimulated because CD earnings dropped to about 1% or less, in turn because of the availabillity of money for about any purpose driving down those CD rates of return.

 

[Toro]

I believe that if Fannnie and Freddy hadn’t existed, or been subdued, then what resulted from the implied guarantee (with its moral hazard) would not have happened. We exported to economies through our financial markets and then throughout the rest of the world, our greatly over-rated debt instruments. That risk was so great because it was based on the largest sector of our economy most, but any country’s economy, vis the home building and real-estate markets taken as to form a combined sector.

The CRA was a stimulus to the risk; it provided the demographic least able to repay, creating vast numbers of bundled loans going into the securities markets which would be over rated, and then sold worldwide to investors seeking a good return, with demand being stimulated because CD earnings dropped to about 1% or less, in turn because of the availabillity of money for about any purpose driving down those CD rates of return.

I appreciate the effort you put into this post.

Research by Reinhart and Rogoff suggests that an implicit mortgage guarantee by the government has little bearing on the outcome of a housing bubble. Bubbles have occurred with no government backing. The best source is their book [ame=http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165/ref=sr_1_1?ie=UTF8&qid=1296701277&sr=8-1]This Time is Different[/ame], but Aftermath of Financial Crisis ([ame]http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf[/ame], and more [ame=http://www.economics.harvard.edu/faculty/rogoff/Recent_Papers_Rogoff]Harvard Econ Department - Kenneth Rogoff - Recent Papers[/ame]) is a short overview of their conclusions. This boom and bust is proceeding in a similar manner as prior real estate collapses. That doesn't mean the GSEs had no affect. They almost certainly exacerbated the situation. Rather, if asking the question "Would this have happened had the GSEs never existed," the answer is almost certainly "Yes."

 

[KissMy]

The Affirmative Action Lending / CRA did play a part. It may not have been the staring roll but the goal of having Fannie & Freddie drop their lending standards was to increase minority home ownership. There has to be something to it because blacks have defaulted at much higher rates than everyone else.

In the OP link to Sheila Bair, She lied when she said.

"The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lending practices."

New York Times 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.

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

NY Times

"But the storm has fallen with a special ferocity on black and Latino homeowners, the analysis shows. Defaults occur three times as often in mostly minority census tracts as in mostly white ones. Eighty-five percent of the worst-hit neighborhoods — where the default rate is at least double the regional average — have a majority of black and Latino homeowners."

PEW Research Study

"From 1995 through the middle of this decade, homeownership rates rose more rapidly among all minorities than among whites. But since the start of the housing bust in 2005, rates have fallen more steeply for two of the nation's largest minority groups -- blacks and native-born Latinos -- than for the rest of the population"

 

[Care4all]

The Affirmative Action Lending / CRA did play a part. It may not have been the staring roll but the goal of having Fannie & Freddie drop their lending standards was to increase minority home ownership. There has to be something to it because blacks have defaulted at much higher rates than everyone else.

In the OP link to Sheila Bair, She lied when she said.

"The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lending practices."

New York Times 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.

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

NY Times

"But the storm has fallen with a special ferocity on black and Latino homeowners, the analysis shows. Defaults occur three times as often in mostly minority census tracts as in mostly white ones. Eighty-five percent of the worst-hit neighborhoods — where the default rate is at least double the regional average — have a majority of black and Latino homeowners."

PEW Research Study

"From 1995 through the middle of this decade, homeownership rates rose more rapidly among all minorities than among whites. But since the start of the housing bust in 2005, rates have fallen more steeply for two of the nation's largest minority groups -- blacks and native-born Latinos -- than for the rest of the population"

from your new york times article from 2009

Black buyers often enter a separate lending universe: A dozen banks and mortgage companies, almost all of which turned big profits making subprime loans, accounted for half the loans given to the region’s black middle-income borrowers in 2005 and 2006, according to The Times’s analysis. The N.A.A.C.P. has filed a class-action suit against many of the nation’s largest banks, charging that such lending practices amount to reverse redlining.

the blacks, disproportionately, making over 68k a year in income, were sold by the banks, subprime mortgages when they qualified for conventional mortgages....

NONE of those subprime loans to them were done due to CRA....or fannie or freddie.....from what i can gather.

recent numbers show that CRA loans in foreclosure are minimal....90% of defaulted subprime loans are NOT in CRA areas.

 

[KissMy]

The Affirmative Action Lending / CRA did play a part. It may not have been the staring roll but the goal of having Fannie & Freddie drop their lending standards was to increase minority home ownership. There has to be something to it because blacks have defaulted at much higher rates than everyone else.

In the OP link to Sheila Bair, She lied when she said.

"The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lending practices."

New York Times Published: September 30, 1999


NY Times


PEW Research Study

from your new york times article from 2009

Black buyers often enter a separate lending universe: A dozen banks and mortgage companies, almost all of which turned big profits making subprime loans, accounted for half the loans given to the region&#8217;s black middle-income borrowers in 2005 and 2006, according to The Times&#8217;s analysis. The N.A.A.C.P. has filed a class-action suit against many of the nation&#8217;s largest banks, charging that such lending practices amount to reverse redlining.

the blacks, disproportionately, making over 68k a year in income, were sold by the banks, subprime mortgages when they qualified for conventional mortgages....

NONE of those subprime loans to them were done due to CRA....or fannie or freddie.....from what i can gather.

recent numbers show that CRA loans in foreclosure are minimal....90% of defaulted subprime loans are NOT in CRA areas.

True, that is because Blacks making over 68k a year in income have disproportionately worse credit than the average borrower. Their culture does not value financial responsibility. Their bad credit landed way more of them into subprime status. That was Clinton's goal, by pressuring Fannie & Freddie to lower their lending standards more Blacks would get home loans.

Blacks have worse credit than whites

A study by Freddie Mac, confirming earlier Federal Reserve and FDIC studies, contradicts race discrimination arguments for CRA. The study found that African-Americans with annual incomes of $65-$75,000 have on average worse credit records than whites making under $25,000, showing that the difficulty in qualifying was not because of race but because of bad credit records. The Federal Reserve Bank of Dallas accordingly entitled a paper "Redlining or Red Herring?"

 

[Ravi]

It is a bit odd that this conspiracy theory doesn't get much attention. It is as big a conspiracy theory as 9/11 was an inside job or the moon landing was faked.

 

[Toro]

Abstract: A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality. We rely on two empirical approaches. In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA's effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.

FRB: FEDS Abstract 2011-36

 

[Toro]

house-flippers were actually driving the price explosion. New research from the Federal Reserve Bank of New York indicates that flippers were in fact sufficiently numerous and active to make a major impact on prices, and that these facts have interesting implications for both monetary policy and bank regulation in the future.

The authors, Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw, were able to calculate how many home-buyers had multiple mortgages and thus how many people own multiple homes.

The data let us see that the growth of house prices in the first half of the aughts was closely associated with a sharp rise in the number of people owning multiple homes. In 2000, only 20 percent of mortgages were going to multiple mortgage holders and 75 percent of those were for second houses. By 2006, 35 percent of mortgages were multiples and more than 5 percent of all loans were going to people with four or more mortgages. What’s more, the trend was especially pronounced in what we now know to have been the prime bubble states of California, Florida, and Nevada. By 2006, at least 25 percent of mortgages in these states were going to people who already owned one home, and a further 20 percent went to people with at least two.

How small-time house-flippers made the housing bubble much, much worse. - Slate Magazine

At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half—45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with “just” two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000.

Investors Are Different from Owner-Occupants
Whether they were buying vacation homes or flipping houses, real estate investors behaved very differently from borrowers with just one first lien, a group almost certainly dominated by owner-occupants. For one thing, investors are very unlikely to move to the house they bought, especially if they own three or more properties. In rising markets, “buy-and-flip” investors typically want to hold properties for relatively short periods, and we show in our study that multiple-property owners in the mid-2000s tended to sell their properties much more quickly than those with just one first-lien mortgage. Importantly, we also show how buy-and-flip investors can make higher bids on houses, even if they had relatively little cash, by using low-down-payment loans. Nonprime credit—mortgage lending to borrowers who were unable or unwilling to qualify for cheaper, prime loans—enabled optimistic investors to speculate by making highly leveraged bets on house prices.

Because investors don’t plan to own properties for long, they care much more about reducing their down-payments than reducing their interest rates. The expansion of the nonprime mortgage market during the 2000s provided the perfect opportunity for optimistic investors to get low-down-payment credit, albeit at high interest rates.

“Flip This House”: Investor Speculation and the Housing Bubble - Liberty Street Economics

 

[Truthmatters]

To some its a religious like belief.

They love the republican party so much they will swallow whole whatever they are told no matter what the facts really say.

Party over country

 

[EdwardBaiamonte]

The idea that the CRA was a big contributor to the housing debacle keeps popping up. Thus, I'm creating a new thread to refute this assertion.

If true that it keeps popping up as a big contributor why not show where??

Who would say it was a big contributor when so much of the liberal Federal government in addition to CRA was organized to get people into homes the Republican free maket said they could not afford?

The greatest blame surely lies with Fanny Freddie( just got sued over it) and the Federal Reserve. The story in 400 pages is in "Reckless Endangerment."


The greatest irony is that the liberal will blame the free market for the housing crisis that got too many people into homes they could not afford when it was the Republican free market that said people could not afford the homes they bought.

Now we can understand why millions supported Hitler Stalin( liberals spied for him) and Mao. Thinking is not important to a liberal it would seem. God help us.

 

[Toro]

Yet another empirical study refuting the notion that the CRA caused the Financial Crisis.

Did Aordable Housing Legislation Contribute to the Subprime Securities Boom?

Abstract

No. ... We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises' (GSEs) affordable housing goals or the Community Reinvestment Act. Although the GSEs may have played a role in the crisis, our results indicate that it was not due to their affordable housing mandates.

To identify the effect of affordable housing goals, we use a regression discontinuity approach to ascertain whether the goals led to a difference in either mortgage rates or subprime loan volume. We look at the effects of the two main affordable housing policies enacted by Congress. The first policy we examine is the Community Reinvestment Act (CRA). The second policy we examine is the mandate of the two main GSEs to promote affordable housing. Importantly, the GSEs can satisfy their affordable housing goals by purchasing packages of securitized mortgages that they cannot otherwise purchase as whole loans. Indeed, the GSEs vastly increased their purchases of [Private-Label Mortgage Backed Securities] PLMBS during the subprime mortgage boom and Manchester (2008) and Frame (2008) show that the GSEs generally purchased "goal rich" PLMBS during the subprime boom. Depository institutions may also count PLMBS toward their CRA goals provided the MBS are structured as CRA-qualiffied securities.

In contrast to studies of the eect of aordable housing goals in the prime market (e.g., Ambrose and Thibodeau, 2004; Bhutta, 2010, 2011), we nd no evidence that aordable housing legislation aected the subprime market during the subprime crisis. Lending volumes, loan pricing, and default rates do not change in response to the goals. It remains possible that the GSEs encouraged subprime lending by purchasing large quantities of PLMBS. However, our results indicate that either any role the GSEs played in the subprime crisis was not due to their aordable housing mandates or that the GSEs' demand for these securities was not sucient to aect the overall PLMBS market.

http://erwan.marginalq.com/HULM12f/ag.pdf

And

These are originations for 2-28 subprime loans. Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income. If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically). They find the same result when looking at pricing and default.

Richard's Real Estate and Urban Economics Blog: Rub
en Herna
ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending.

There are several other similar graphs in the study to the one above.

 

[American Horse]

house-flippers were actually driving the price explosion. New research from the Federal Reserve Bank of New York indicates that flippers were in fact sufficiently numerous and active to make a major impact on prices, and that these facts have interesting implications for both monetary policy and bank regulation in the future.

The authors, Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw, were able to calculate how many home-buyers had multiple mortgages and thus how many people own multiple homes.

The data let us see that the growth of house prices in the first half of the aughts was closely associated with a sharp rise in the number of people owning multiple homes. In 2000, only 20 percent of mortgages were going to multiple mortgage holders and 75 percent of those were for second houses. By 2006, 35 percent of mortgages were multiples and more than 5 percent of all loans were going to people with four or more mortgages. What&#8217;s more, the trend was especially pronounced in what we now know to have been the prime bubble states of California, Florida, and Nevada. By 2006, at least 25 percent of mortgages in these states were going to people who already owned one home, and a further 20 percent went to people with at least two.

How small-time house-flippers made the housing bubble much, much worse. - Slate Magazine

At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half&#8212;45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with &#8220;just&#8221; two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000.

Investors Are Different from Owner-Occupants
Whether they were buying vacation homes or flipping houses, real estate investors behaved very differently from borrowers with just one first lien, a group almost certainly dominated by owner-occupants. For one thing, investors are very unlikely to move to the house they bought, especially if they own three or more properties. In rising markets, &#8220;buy-and-flip&#8221; investors typically want to hold properties for relatively short periods, and we show in our study that multiple-property owners in the mid-2000s tended to sell their properties much more quickly than those with just one first-lien mortgage. Importantly, we also show how buy-and-flip investors can make higher bids on houses, even if they had relatively little cash, by using low-down-payment loans. Nonprime credit&#8212;mortgage lending to borrowers who were unable or unwilling to qualify for cheaper, prime loans&#8212;enabled optimistic investors to speculate by making highly leveraged bets on house prices.

Because investors don&#8217;t plan to own properties for long, they care much more about reducing their down-payments than reducing their interest rates. The expansion of the nonprime mortgage market during the 2000s provided the perfect opportunity for optimistic investors to get low-down-payment credit, albeit at high interest rates.

â&#8364;&#339;Flip This Houseâ&#8364;: Investor Speculation and the Housing Bubble - Liberty Street Economics

So an overabundance of homes bought flippers and by that necessity owned by flippers, drove home prices up? Wouldn't an overabundance of homes owned by flippers do what surpluses do, and tend to drive the price of the surplus product down, or at least be a wash?

Prices were going up, and so independent of flippers saw the potential for profit from resale later. It's as reasonable and convincing to say the flippers were riding the rise in prices. If the prices were increasing (and doing so quite independent of the flippers) then more flippers would be attracted to jump in and buy.

The culprit was cheap money almost forced on buyers including flippers, not by banks, but by government policy to get more people of questionable ability to repay their loans into houses, (or to buy and flip) whether they could afford them or not.

If the repayment of the loans had been paramount in government policy, then those borrowers would've been excluded by regulation from variable rate loans which they would be less able to afford as time went on. They weren&#8217;t; they were in no way excluded from any loan that would get them into the most house for the least initial loan, never mind that those loans would cost them much more later. The most house for the least amount of initial loan allowed people to get into a home with larger living space for less than the cost of rent they would've been paying in their rental.

And the larger part of the housing market, those who move up to a larger home, or moved because of a transfer to another city and needed to sell no matter how short the time from purchase to sale, and needing to get their real estate sales commission, closing costs, and some repairs, and other costs needed to break even, priced their homes up. And the appraisers, aiming to please granted those prices as fair and reasonable as long as there was a willing buyer to match a willing seller - the same thing worked for builders. IMO that factored more to increasing prices than "flippers,&#8221; not even taking into account that people would take out a second mortgage to go on vacation, or borrow for something unrelated to the value of the house, and still base their sale price on their needs rather than the true value of their home, and in that same way, as above, the willing real estate appraiser comes into play. Prices could not rise without willing real estate appraiser.

I saw it cycling up in my building and my wifes real eastate career over a period of nearly 40 years, and in the latter years the real estate appraisals were almost an absolute given to match the willing buyer and the willing seller's purchase agreement (which they saw), while flippers would win some and lose some.