The Current Podcast :: Uncategorized :: Presidential Debate Live Blog @ 9PM  on October 7th, 2008

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Da5id  on October 8th, 2008

The CRA applies only to depository institutions, such as banks and savings and loan associations. According to Michael Barr’s February testimony to the House Financial Committee, problems in the subprime lending industry were a driving force behind the housing crisis, BUT he estimated that only 20 percent of subprime mortgages were issued by depository institutions under the CRA.

Here’s a quote:

“More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such organizations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.”

http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf

So, explain how if only 20% of the subprime mortgages were CRA related the CRA is somehow the major cause for the economic crisis? I’m not seeing the dots connect here.

Jacob  on October 8th, 2008

For starters, that’s an estimation, so it’s not an exact number; I’d take it with a grain of salt.

Secondly, no one is claiming, including myself, that the CRA was the only reason for the credit crisis. However, it is a very large reason.

It really doesn’t matter how many subprime mortgages were CRA related or not, the problem is the CRA set off a domino effect that sparked massive government intervention in many sectors of the housing market.

It started with the CRA which forced certain banks to lend to unqualified borrowers in the name of fairness. That obviously failed, Countrywide is a great example. They had $600 billion in subprime loans, and now they’re owned by Bank of America.

Then we said that if a CRA bank wanted to merge with another bank, they would have to prove that they were doing a good job lending to unqualified borrowers that the government wanted them to lend to. This sparked petitions from groups like ACORN against bank mergers.

Then in 1994 we loosened those regulations, but we had already created a mess. Once those regulations were loosened ACORN (who is partially funded by taxpayers) and other groups took it upon themselves to intimidate banks into lending to subprime borrowers. This lead to bank sit ins and other means of intimidation.

Then we had Fannie Mae and Freddie Mac back up these subprime loans to diversify their risk. Fannie and Freddie, of course, are GSE (government sponsored enterprises) and the taxpayers basically have their back if anything goes wrong.

So while the CRA certainly isn’t to blame for every single subprime loan, it certainly isn’t in the clear at all. The CRA sent big government thrill up everyone’s leg and we got a little carried away with government intervention.

And that’s the source of the credit crisis, government intervention.

Da5id  on October 8th, 2008

“the CRA set off a domino effect that sparked massive government intervention in many sectors of the housing market.”

That’s simply not true. 80% of the subprime mortgages were completely outside the CRA. Where’s the domino effect?

“It started with the CRA which forced certain banks to lend to unqualified borrowers in the name of fairness. That obviously failed, Countrywide is a great example. They had $600 billion in subprime loans, and now they’re owned by Bank of America.”

You need to do some additional research into the CRA. Countrywide was a lending business, not a bank that required FDIC insurance… therefore had NO OBLIGATION under the CRA and indeed set it’s own standards that were often LESS cautious than the standards in the CRA that you keep saying forced them to make bad loans.

1) The CRA didn’t force any non FDIC insured lending company to do anything. Check out the Home Mortgage Disclosure Act. 84.3% of the “subprime” or “high-cost” loans in 2006 were NON-CRA. The Federal Reserve clearly states that non-CRA lenders were twice as likely as CRA lenders to issue subprime loans to “vulnerable” lenders.

http://www.ffiec.gov/hmda/

2) Non-CRA lender’s standards were often LOWER than those required in the CRA, so if they HAD used those standards, they would’ve be better off today.

So, by this argument if the CRA had covered more institutions (i.e. more gov’t intervention) then the housing market would be better off. Government intervention is not the source of the credit crisis. There’s plenty of blame to go around, from predatory lenders, to deregulation, to greedy trading of credit default swaps… but emphasizing the CRA as a “talking point” for why the housing bubble burst seems like blaming a drop of water for the size of the ocean.

apackof2  on October 8th, 2008

You quote,” 84.3% of the “subprime” or “high-cost” loans in 2006 were NON-CRA.”

That is only one year. The sub-prime crises goes back farther

Lets go back to 1999
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&&scp=1&sq

New York times article ,”Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.”

Why?
“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 to Whom:
“that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.’

And spills over to banks,
“By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.”

Franklin Raines, Obama supporter and who paid the government 25 million settlement in an accounting scandal bragged, ”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. ‘

ALL of this activity is because there was a CRA

Because there was a CRA groups like Obama’s ACORN could abuse it and use intimidation tactics, public charges of racism and threats forcing banks to make hundreds of millions of dollars in “subprime” loans to uncreditworthy customers including home loans to undocumented aliens in California

So while Franklins Raines and ACORN were busy abusing the CRA, eventhe New York Times could see the handwriting on the wall;

“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.”