CRA Not to Blame for Housing Debacle

[Toro]

The biggest contributor to the Financial Crisis outside of the Fed was Wall Street, who securitized enormous amounts of crappy loans and packaged them to investors as "AAA" investments. As you can see here, Wall Street, i.e. "non-agency securitized" mortgages, dramatically gained market share at the expense of the GSEs, whose market share fell.

The volume of non-agency securitized loans went up by ~10x during the decade.

Economist's View: "Bankers Have Been Sold Short"

If, in fact, Fannie and Freddie were the primary causes of this mess, then their market share would not have fallen as dramatically as it did.

 

[Toro]

Here is the Fed study mentioned earlier in this thread absolving the CRA of responsibility for the Housing Bubble.

Since 1995, there has been essentially no change in basic CRA rules or the enforcement process that can be reasonably linked to subprime lending activity. ...

Analysis of 2006 Home Mortgage Disclosure Act (HMDA) data indicates that two-thirds of mortgage loans (first-lien home purchase and refinance loans for site-built properties) are entirely unrelated to CRA; these loans were extended to middle- or higher-income borrowers or to borrowers located outside of lower-income neighborhoods (table 1). These data also indicate that only ten percent of all loans are “CRA-related” — that is, lower-income loans made by banks and their affiliates in their CRA assessment areas.

More important for this discussion is CRA’s relationship to subprime mortgage lending. As shown table 2, in 2005 and 2006, the peak years of subprime volume, independent mortgage companies (institutions not covered by the CRA) accounted for about half of all higher-priced loans (our proxy for subprime lending derived from HMDA data).
Also, 57 percent of all higher-priced loans in 2006 were effectively unrelated to CRA because they were made to non-lower-income borrowers or neighborhoods (table 3).

Most importantly, only 6 percent of all higher-priced loans in 2006 were made by CRA-covered institutions or their affiliates to lower-income borrowers or neighborhoods in their assessment areas. As noted, CRA performance evaluations focus on lower-income lending in CRA assessment areas. ...

This analysis indicates that subprime loans in zip codes that are the focus of the CRA (those just below the threshold) have performed slightly better and alt A loans in these areas slightly worse than those that are not (table 6). ...

Another way to measure the likely effects of the CRA on the subprime crisis is by examining foreclosure activity across neighborhoods classified by income. Data made available by RealtyTrac on foreclosure filings from January 2006 through August 2008 indicates that most foreclosure filings (e.g. about 70 percent in 2006) have taken place in middle- or higher-income neighborhoods and that foreclosure filings have increased at a faster pace in middle- or higher-income areas than in lower-income areas that are the focus of the CRA (table 8).

http://www.federalreserve.gov/newsevents/speech/20081203_analysis.pdf

 

[Care4all]

Here is the Fed study mentioned earlier in this thread absolving the CRA of responsibility for the Housing Bubble.

Since 1995, there has been essentially no change in basic CRA rules or the enforcement process that can be reasonably linked to subprime lending activity. ...

Analysis of 2006 Home Mortgage Disclosure Act (HMDA) data indicates that two-thirds of mortgage loans (first-lien home purchase and refinance loans for site-built properties) are entirely unrelated to CRA; these loans were extended to middle- or higher-income borrowers or to borrowers located outside of lower-income neighborhoods (table 1). These data also indicate that only ten percent of all loans are “CRA-related” — that is, lower-income loans made by banks and their affiliates in their CRA assessment areas.

More important for this discussion is CRA’s relationship to subprime mortgage lending. As shown table 2, in 2005 and 2006, the peak years of subprime volume, independent mortgage companies (institutions not covered by the CRA) accounted for about half of all higher-priced loans (our proxy for subprime lending derived from HMDA data).
Also, 57 percent of all higher-priced loans in 2006 were effectively unrelated to CRA because they were made to non-lower-income borrowers or neighborhoods (table 3).

Most importantly, only 6 percent of all higher-priced loans in 2006 were made by CRA-covered institutions or their affiliates to lower-income borrowers or neighborhoods in their assessment areas. As noted, CRA performance evaluations focus on lower-income lending in CRA assessment areas. ...

This analysis indicates that subprime loans in zip codes that are the focus of the CRA (those just below the threshold) have performed slightly better and alt A loans in these areas slightly worse than those that are not (table 6). ...

Another way to measure the likely effects of the CRA on the subprime crisis is by examining foreclosure activity across neighborhoods classified by income. Data made available by RealtyTrac on foreclosure filings from January 2006 through August 2008 indicates that most foreclosure filings (e.g. about 70 percent in 2006) have taken place in middle- or higher-income neighborhoods and that foreclosure filings have increased at a faster pace in middle- or higher-income areas than in lower-income areas that are the focus of the CRA (table 8).

http://www.federalreserve.gov/newsevents/speech/20081203_analysis.pdf

there was a farmer who had a cow
and Bingo was his name-o
B I N G O,
B I N G O,
B I N G O
and Bingo was his name- o.

 

[CrusaderFrank]

The biggest contributor to the Financial Crisis outside of the Fed was Wall Street, who securitized enormous amounts of crappy loans and packaged them to investors as "AAA" investments. As you can see here, Wall Street, i.e. "non-agency securitized" mortgages, dramatically gained market share at the expense of the GSEs, whose market share fell.

The volume of non-agency securitized loans went up by ~10x during the decade.

Economist's View: "Bankers Have Been Sold Short"

If, in fact, Fannie and Freddie were the primary causes of this mess, then their market share would not have fallen as dramatically as it did.

Congratulation, the GSE's (who were responsible for the collapse) now have 100% of the market!

Well done!

 

[Toro]

Deregulation and industry capture certainly contributed to the crisis.

The Fed was hardly alone in not pressing to clean up the mortgage industry. When states like Georgia and North Carolina started to pass tougher laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local subsidiaries of nationally chartered banks.

Virtually every federal bank regulator was loathe to impose speed limits on a booming industry. But the regulators were also fragmented among an alphabet soup of agencies with splintered and confusing jurisdictions. Perhaps the biggest complication was that many mortgage lenders did not fall under any agency’s authority at all. ...

by 2005, federal banking regulators were beginning to worry that mortgage lenders were running amok with exotic and often inscrutable new products. ...

Because each agency receives its funding from fees paid by the banks or thrifts they regulate, critics have long argued that they often treat the institutions they regulate as constituents to be protected. All of them are wary about stifling new financial services.

http://www.nytimes.com/2007/12/18/business/18subprime.html?_r=1

Regulators appointed by President Bush often have been more sympathetic to industry concerns about red tape than their Clinton administration predecessors. When James Gilleran, a former California banker and bank supervisor, took over the OTS in December 2001, he became known for his deregulatory zeal. At one press event in 2003, several bank regulators held gardening shears to represent their commitment to cut red tape for the industry. Mr. Gilleran brought a chain saw.

He also early on announced plans to slash expenses to resolve the agency's deficit; 20% of its work force eventually left. When he left in 2005, Mr. Gilleran declared that the OTS had "exercised increased diligence in its review of abusive consumer practices" while reducing thrifts' regulatory burden. But his successor, Mr. Reich, a former community banker, has reversed many of Mr. Gilleran's cuts. Citing "understaffing," he hired 80 examiners last year and plans to add 40 more this year.

Regulators Scrutinized In Mortgage Meltdown - WSJ.com

Econbrowser: A Thought on the Sub-prime Debacle

 

[Toro]

More

This much is true. In an effort to promote affordable home ownership for minorities and rural whites, the Department of Housing and Urban Development set targets for Fannie and Freddie in 1992 to purchase low-income loans for sale into the secondary market that eventually reached this number: 52 percent of loans given to low-to moderate-income families. ...

But these loans, and those to low- and moderate-income families represent a small portion of overall lending. ...

Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks -- not Fannie and Freddie -- dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

http://www.nytimes.com/2007/12/18/business/18subprime.html

the delinquency rate is highest in the years after Fannie and Freddie are constrained in terms of their subprime holdings.

Econbrowser: CRA and Fannie and Freddie as betes noire

And just to remind everyone

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

Private sector loans, not Fannie or Freddie, triggered crisis | McClatchy

 

[Revere]

Is the "ownership society" to blame?

It only takes a small number of bad suprime loans to fuck up all the home equity in the market.

 

[william the wie]

CRA was not primarily responsible for the meltdown but it certainly gave regulators a figleaf with which to cover their mistakes in both the Clinton and Bush administrations. Without that figleaf a much smaller bust would have resulted. The 2004-6 bubble due to the trailing edge of the Baby Boom would have happened anyhow but with the CRA as an excuse for the regulators to goose the boom it got 2-3 times bigger than it needed to. So CRA was not the drunk but it sure was the main enabler.

 

[Toro]

The impetus for subprime came from the private sector

Acemoglu’s assessment of recent research on lobbying is that parts of the private sector wanted financial rules to be relaxed – and worked hard and spent heavily to get this outcome. The impetus for a big subprime market came from within the private sector: “innovation” by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks. ...

The FCIC Republicans point the finger firmly at Fannie Mae, Freddie Mac, and other government-sponsored enterprises that supported housing loans by providing guarantees of various kinds. They are right that Fannie and Freddie were “too big to fail,” which enabled them to borrow more cheaply and take on more risk – with too little equity funding to back up their exposure.

But, while Fannie and Freddie jumped into dubious mortgages (particularly those known as Alt-A) and did some work with subprime lenders, this was relatively small stuff and late in the cycle (e.g., 2004-2005). The main impetus for the boom came from the entire machinery of “private label” securitization, which was just that: private. In fact, as Acemoglu points out, the powerful private-sector players consistently tried to marginalize Fannie and Freddie and exclude them from rapidly expanding market segments.

Did the Poor Cause the Crisis? by Simon Johnson - Project Syndicate

 

[william the wie]

Yeah Toro but bending over and putting a big "kick me" sign on your butt is really stupid politics and that is exactly what the Ds did with CRA under Clinton and Carter. The Ds have a much bigger problem with their certifiably lunatic left coming up with the most screwball claims than the GOP even have nightmares about with the Tea Partiers denying pacts with Satan on TV. Then Obama gets two of the three stooges of the meltdown to stay on and do the same bang up job for him that they did for W. In the court of public opinion that is as good as a nolo contendre plea on causing the meltdown through the CRA.

 

[Care4all]

blaming the CRA is a copout, and is letting the bad guys get away with it...they want to deflect from themselves and blame cra to cover their own tracks and their own irresponsible subprime loaning to NON CRA customers....

 

[william the wie]

blaming the CRA is a copout, and is letting the bad guys get away with it...they want to deflect from themselves and blame cra to cover their own tracks and their own irresponsible subprime loaning to NON CRA customers....

So what? Clinton's HUD secretaries publicly claimed to set off the 1994-2006 construction and housing boom and therefore the meltdown by means of the CRA enforcement. That they were wrong does not change the fact that they set up policies based on the CRA that they said were intended to increase subprime loans to historic levels. If you google Cuomo or Cisneros and the CRA for when they were HUD secretaries you have to cherry pick to find statements that do not sound like the engineering of a housing bubble set to blow up under the next GOP president. That Bush and Greenspan were far more culpable is irrelevant. The Clinton administration was mired in shaky real estate deals from the get-go (Whitewater) and claimed total credit for the subprime boom before it really started. Please note my bend over and put a "Kick me" sign on your butt. I am not saying that the Ds did it I am saying that the Ds explicitly claimed that the causes of the meltdown were their goal and also claimed that their use of the CRA was the way they set up a housing boom. When you plead guilty before a crime is committed the cops or in this case the voters or going to operate on the that your confession of intent is valid once the crime occurs.

 

[CrusaderFrank]

Soviet style central planning of the US Residential market including CRA and FNMA/Freddie/FHA are to blame.

FHA Fannie and Freddie should sell their entire Single family portfolios, never write another one again

 

[Ravi]

I find it amazing that some still believe a virtual handful of poor people are responsible for the world wide financial crisis.

 

[editec]

Its so easy to refute that BIG LIE that one wonders why the Banksters' apologists even tried to blame this law for the RE meltdown.

That law was in place for nearly 40 years before the RE meltdown.

It had absolutely nothing to do with the NINJA loans that the banksters decided to give to people who ought not have gotten mortgages.

The decision to allow NINJA loans to be given was ENTIRELY the decision of the lenders.

 

[bigrebnc1775]

The San Francisco Fed was all it took for me to call it bullshit.

 

[bigrebnc1775]

blaming the CRA is a copout, and is letting the bad guys get away with it...they want to deflect from themselves and blame cra to cover their own tracks and their own irresponsible subprime loaning to NON CRA customers....

OK let's blame the democrats.

 

[Toro]

Countrywide was committing mortgage fraud, routinely altering documents so that they could loan people money.

41. Former Countrywide employees have admitted that Countrywide originated loans that did not meet its underwriting criteria. Countrywide employees were incentivized to increase the number of loan originations without concern for whether the borrowers were able to repay the loans. Instead of evaluating a borrower's ability to repay the Countrywide's Sales Training Facilitator Guide instructed originators to "look for ways to make the loan rather than turn it down." According to a former Countrywide manager, "f you had a pulse [Countrywide] gave you a loan."

42. Countrywide's loan originators systemically manipulated the income, assets and employment status of borrowers to qualify them for mortgages they could not afford. Countrywide loan officers would "coach" borrowers as to what level of inflated income they should state to qualify for a loan they could otherwise not afford. Countrywide also inflated borrowers' stated incomes, or facilitated income inflation, by encouraging ineligible borrowers to resort to "stated income loans." According to a former account manager, the company was "infested" with employees that ignored company underwriting standards requiring them to determine if borrowers could repay their loans.

43. Former Countrywide employees have revealed that as many as 80% of the loans originated from a Countrywide office in Florida ... did not meet loan underwriting guidelines. According to another former Countrywide employee, approximately 90% of all reduced documentation ["Liar's Loans"] sold out of a Chicago office had inflated incomes, and one of Countrywide's mortgage brokers, One Source Mortgage Inc., routinely doubled the amount of the potential borrower's income on stated income mortgage applications so that borrowers could qualify for loans they could not afford.

44. Moreover, even in the few cases when Countrywide employees actually obtained income documentation (i.e. a Form W-2) demonstrating that the borrower did not qualify for a loan, the documentation was ignored by Countrywide and the loan was re-submitted as a stated income loan with an inflated income figure so as the facilitate approval of the loan.

45. Countrywide's deliberate actions of ignoring its own loan underwriting guidelines and routinely inflating borrowers' incomes resulted in the company being charged with fraud by numerous state Attorneys General. Ultimately, Countrywide settled the charges by paying a huge sum - $8.4 billion.

http://www.tavakolistructuredfinance.com/LBBW.pdf

This is important because without those fraudulently-represented loans by Countrywide, people would not have been able to buy homes they could not have afforded. These loans were represented as being of a higher quality than they really were, which were then bundled into securitized loan and sold to investors, who thought they were buying something else.

A lot of this went on. Fraud by lenders facilitated the Housing Bubble by channeling liquidity to people who couldn't afford the houses they were buying, funded by investors who thought they were lending to those who could afford it.

 

[bigrebnc1775]

The following timeline of events is the TRUTH that caused the economic collapse.

1.Our Government passes the Community Reinvestment Act of 1977 in an effort to assist low-income individuals to buy homes.

2.The CRA of 1977 simply “encourages” banks to make a certain amount of loans to low-income individuals. No enforcement or penalty for not being “encouraged”…yet.

3.In the mid 1990′s the HUD department of the Government begins requiring banks to prove they are making the right number of low-income loans.

4.Banks not making the government imposed and now enforced “quota” are penalized.

5.The Clinton and Bush administrations with Barney Frank and Chris Dodd use the
Community Reinvestment Act of 1977 to force banks to make loans to unqualified people in the name of making homes affordable to everyone. This guarantees votes for the politicians. They ignore the likely economic outcome of giving loans to people who can’t pay them back.

6.If the banks don’t make the loans to unqualified borrowers, our Government prevents banks from opening new branches, new ATM’s or expanding. Every bank knows if they don’t accept the invite to the Government party and start giving out loans to people that can’t pay them back, SOME bank will….which will force other banks out of business as the bank willing to play this game gets to expand and take marketshare from the other banks, who are denied by our Government every application to expand.

7.Unqualified borrowers (low-income, bad credit, no down-payment) are suddenly made “qualified” by banks being blackmailed by our own government.

8.As these “unqualified” borrowers flood the market overnight buying houses, a rapid decrease in housing inventory begins inflating prices beyond normal ranges. Basic supply and demand principle.

9.Builders rush in and begin building homes but panic sets in as buyers continue to flood the market for fear of being “priced out forever.” The National Association of Realtors (NAR) perpetuates this fear in the media to make more money through Realtor sales commissions.........>>>>>>>>>

36.Government (and Barney Frank-the host of the Government Party) blames Wall Street and Banks for the whole thing.
37.Responsible taxpayer is handed the bill.


There's more in the link posted
What Caused Our Economic Collapse in a Nutshell Angrywoodchuck's Blog

 

[del]

The following timeline of events is the TRUTH that caused the economic collapse.

1.Our Government passes the Community Reinvestment Act of 1977 in an effort to assist low-income individuals to buy homes.

2.The CRA of 1977 simply “encourages” banks to make a certain amount of loans to low-income individuals. No enforcement or penalty for not being “encouraged”…yet.

3.In the mid 1990′s the HUD department of the Government begins requiring banks to prove they are making the right number of low-income loans.

4.Banks not making the government imposed and now enforced “quota” are penalized.

5.The Clinton and Bush administrations with Barney Frank and Chris Dodd use the
Community Reinvestment Act of 1977 to force banks to make loans to unqualified people in the name of making homes affordable to everyone. This guarantees votes for the politicians. They ignore the likely economic outcome of giving loans to people who can’t pay them back.

6.If the banks don’t make the loans to unqualified borrowers, our Government prevents banks from opening new branches, new ATM’s or expanding. Every bank knows if they don’t accept the invite to the Government party and start giving out loans to people that can’t pay them back, SOME bank will….which will force other banks out of business as the bank willing to play this game gets to expand and take marketshare from the other banks, who are denied by our Government every application to expand.

7.Unqualified borrowers (low-income, bad credit, no down-payment) are suddenly made “qualified” by banks being blackmailed by our own government.

8.As these “unqualified” borrowers flood the market overnight buying houses, a rapid decrease in housing inventory begins inflating prices beyond normal ranges. Basic supply and demand principle.

9.Builders rush in and begin building homes but panic sets in as buyers continue to flood the market for fear of being “priced out forever.” The National Association of Realtors (NAR) perpetuates this fear in the media to make more money through Realtor sales commissions.........>>>>>>>>>

36.Government (and Barney Frank-the host of the Government Party) blames Wall Street and Banks for the whole thing.
37.Responsible taxpayer is handed the bill.


There's more in the link posted
What Caused Our Economic Collapse in a Nutshell Angrywoodchuck's Blog

if we hadn't won world war II, none of this would have happened.

i blame patton and that commie bastard, zhukov.