The "Liberal" Subprime Crisis -- Myth and Reality

News Type: Event — Sun Sep 28, 2008 8:20 AM EDT

You mean deregulation doesn't solve everything? Who knew?

If you're like me, you've noticed a plethora of comments and articles, lately, attempting to lay the responsibility for the current financial crisis at the feet of liberals (in general) and Democrats (specifically). Nearly all of them reference the 1977 Community Reinvestment Act as the "cause" of this mess, and claim that government "forced" banks to lend money to individuals with little or no income. It's not a recent allegation, but it has gotten new life as a result of the current bailout. The question is whether or not it's true.

Last September, Thomas DiLorenzo originated the current round of "blame the CRA," and it puttered around for amongst far right blogs for several months. The claims run along these lines--

The mortgage crisis is a direct result of an intentional loosening of underwriting standards done at the behest of "progressive" political forces in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults. At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment. These changes to underwriting standards were forced on regulators by liberals.

In 1995, a "strengthening" of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It allowed "community activists" access to yearly bank reviews, where they shook banks down for large amounts of money. Banks that got poor reviews were punished with interference in their merger plans, or direct legal challenges by the Justice Department.

These CRA loans were riskier than traditional loans, and had higher default rates than loans with traditional standards, allowing individuals to acquire loans with 100 percent financing, no credit scores, and undocumented income.

How true are these allegations? Not particularly.

The intent and structure of the CRA was to ensure that qualified individuals in poorer markets were able to gain access to credit. The CRA itself had nothing to do with over-inflated appraisals, home flipping, the direction of otherwise qualified individuals into subprime adjustable rate mortgages, the invention of derivatives, or the game of hot potato that financial institutions played with securitized packages of bad loans. Much of the blame for those practices lies, in fact, at the feet of the Republican push for constant deregulation.

As noted by renowned economist Robert J. Gordon in The American Prospect,

It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did.

The CRA was enacted in 1977. The subprime lending that has driven this financial crisis didn't occur until 25 years later. During the 1990s, new CRA regulations and mergers led to an increase in CRA activity, but according to the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In 2004, the Bush administration worked hard to weaken CRA regulations, exempting small and mid-sized banks from the laws toughest standards, and subprime lending continued unabated.

Additionally, perhaps less than a quarter of subprime loans were issued under the CRA. Fully half of the subprime loans came from mortgage companies unaddressed by the CRA, with an additional 25% to 30% coming from bank subsidiaries and affiliates not fully covered by the CRA (for instance, banks can choose whether or not to count loans by affiliates).

Gordon further notes

Janet Yellen, president of the San Francisco Federal Reserve... rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending." CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."

The CRA did not deregulate the markets. The CRA did not require bad loans to be made to unqualified people. The CRA did not allow for the securitization of bad loans, nor encourage the game of musical chairs in which companies serially tried to profit from them, hoping to pass them off before the housing bubble burst. The CRA did not create derivatives, nor did it encourage the "mark to model" inflation of valuation (what Warren Buffett has called "mark to myth"), nor did it encourage the fraudulent or near fraudulent trading in derivatives.

Given these facts, the claim that the Community Reinvestment Act and by extension the liberals who supported it are to blame for the current subprime mess is an untruth so big that only partisan shills and CEOs begging for hundreds of billions of dollars in "bailout" money have the chutzpah to utter it. But let's call it for what it is-- bullsh*t.

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{"commentId":3182311,"authorDomain":"iarnuocon"}

iarnuocon

There's also some decent links to the legislation over here.

{"commentId":3182311,"threadId":"371282","contentId":"1922980","authorDomain":"iarnuocon"}

6 votes

#1 - Sun Sep 28, 2008 8:23 AM EDT

{"commentId":3187946,"authorDomain":"ulicnyp001"}

George-369262

This is more of the constant evasion of responsibility in government, which, more than anything, is one of the underlying causes of this, and other, systemic problems which threaten our prosperity and the continued fiscal viability of the Federal Government. As with Richard Nixon, the culprits just don't have the stones to step up and say "Yep, we did it, we're responsible. We made a mistake, and now let's fix it".

{"commentId":3187946,"threadId":"371282","contentId":"1922980","authorDomain":"ulicnyp001"}

3 votes

#1.1 - Sun Sep 28, 2008 3:43 PM EDT

{"commentId":3197571,"authorDomain":"Griff69"}

Griff69

As with Richard Nixon, the culprits just don't have the stones to step up and say "Yep, we did it, we're responsible. We made a mistake, and now let's fix it".

On that part, I'm right with you.

This is more of the constant evasion of responsibility in government

This is the part that confuses me. What responsibility are they evading? I've been through the Constitution with a fine-toothed comb, and I can't find anything in there about managing mortgages or buying companies.

{"commentId":3197571,"threadId":"371282","contentId":"1922980","authorDomain":"Griff69"}

3 votes

#1.2 - Mon Sep 29, 2008 9:14 AM EDT

{"commentId":3731097,"authorDomain":"kelly-tim"}

tkelly33

When the government imposes regulations that cause such problems, namely the CRA, then they assume responsibility for the mess they cause. Responsibility lies particularly with the economically incompetent in government - Nancy Pelosi, Harry Reid, Chris Dodd, Byron Dorgan, Barney Frank, Geoffrey Meeks, Maxine Waters, Bernard Sanders, Chuckie Schumer, Rahm Emmanuel, Barack THE CROCK OF Obama, etc.

Frank, Waters, and Meeks had the nerve to sit on their committee and lambast a Bush Admin official for pointing out the coming storm at Fannie & Freddie. They were like Kevin Bacon in 'Animal House' shouting 'Remain calm, All is Well, All is Well'. Now they have the nerve to shirk any responsibility and try to lay all the blame on Bush? LOL

{"commentId":3731097,"threadId":"371282","contentId":"1922980","authorDomain":"kelly-tim"}

#1.3 - Tue Oct 28, 2008 12:31 AM EDT

{"commentId":3183532,"authorDomain":"macbrowns"}

Level

Memo to Republicans: CRA Has Nothing To Do With the Current Problems

{"commentId":3183532,"threadId":"371282","contentId":"1922980","authorDomain":"macbrowns"}

5 votes

#2 - Sun Sep 28, 2008 10:17 AM EDT

{"commentId":3183819,"authorDomain":"wharrison55"}

Bill Harrison

All elaborate hair-splitting nonsense akin to counting how many angels can dance on a head of a pin. For those in the industry there is absolutley no question whatsoever that both Fannie and Freddie, the setters of the gold standard when it comes to underwriting standards in the secondary CMO markets lowered their standards in this regard in a move to spur both home ownership and the profitability of their own portfolios. Countrywide and Golden West are both prime examples. And the last time I checked Business Week wasn't a known propaganda organ for the GOP. I mean this isn't really an arguable point(PDF):

We further show that there was a deterioration of lending standards and a decrease in the subprime-prime mortgage rate spread during the 2001-2006 period. Together these results provide evidence that the rise and fall of the subprime mortgage market follows a classic lending boom-bust scenario, in which unsustainable growth leads to the collapse of the market. Third, we show that continual deterioration of loan quality could have been detected long before the crisis by means of a simple statistical exercise.

I am fully willing to attribute some of this blame to Wall Street CMO dealers but anyone who claims that the system wan't being primed on the front end by the mortgage loan originators with the full knowledge of Fannie and Freddie and their Democratic allies in the Congress isn't being honest.

{"commentId":3183819,"threadId":"371282","contentId":"1922980","authorDomain":"wharrison55"}

4 votes

#3 - Sun Sep 28, 2008 10:40 AM EDT

{"commentId":3185402,"authorDomain":"iarnuocon"}

iarnuocon

Anyone who claims this was purely a Democratic pushed strategy, and ignores the clear complicity of the Republican party in the deregulation that allowed this mess to bloom isn't being honest, Bill. Blaming the subprime crisis on the CRA is disingenuous and stupid, not that there aren't plenty of people willing to believe it, or to sell the story for political gain. None of the links you've provided here attribute the crisis to the CRA, and for good reason-- the CRA is not what originated the crisis.

Nor is it particularly wise to simply level the finger of blame at Democrats, considering that this crisis grew at a time when Congress and the White House were under the complete control of Republicans. Had every Democrat in Congress been interested in controlling this mess, it probably would still have occurred, because the underlying problem is one of deregulation, seen as a panacea by the Republican party.

For instance, in the past you've brought up S190 as an indication of the Republican desire for fixing this mess far in advance of the current crisis. Unfortunately, that bill died in a committee controlled by Republicans. At a time when Republicans held the political power to force such a bill through Congress, supported by a President who nominally desired to see some sort of mitigation of future effects, they failed to even bring it to a vote.

Do the Democrats bear some complicity? Obviously. Are they to blame? They weren't the purveyors of deregulation as the solution to all financial ills.

It's time that this myth "Democrats are to blame for the crisis, because of the CRA" is put to rest.

{"commentId":3185402,"threadId":"371282","contentId":"1922980","authorDomain":"iarnuocon"}

16 votes

#3.1 - Sun Sep 28, 2008 12:44 PM EDT

{"commentId":3185454,"authorDomain":"JessWondering"}

Jess Wondering

Well....am I dishonest to say that the crisis was caused by loan origination regardless of any standards. The private sector bundler's encouraged originators to keep the mortgage flow coming regardless of quality of the mortgages. The ever more reckless mortgage lending was a result of private sector desire to exploit the pool of available investment funds that were available to bundled securities.

We've argued this point out extensively elsewhere, so I'll spare the readers here the replay of the economic arguments--they can go to your articles to read through those comments if they want, for this vine I'll just say that to try and make this a partisan thing is sad. To blame the problem on the policy of helping the lower end of the economic working class is sad too.

This is a nation that used to count the presence of any African-American homeowner within so many blocks of a prospective new mortgage as evidence that the mortgage borrower was less fit to perform as a matter of national policy and as recently as the 1970s. That practice wasn't grabbed on as the cause the sky to falling.

Yet today, we have partisan who think backward from preferred result to develop arguments to get there complaining that trying to help the lower middle class resulted in the entire boat being overturned. Even as they beg for HUGE MONEY to bailout private actors (not Fannie and Freddie anymore) they want to lay the blame at the feet of one of the two parties for an economic policy that happened not to be aimed at the supposed trickle down top; even though the other party has controlled the executive for twenty of the last twenty eight years and the legislative for twelve of the last fourteen years.

There seems to be at work an ideological dichotomy of evaluation of policy based on whom is being helped: if it helps the monied it is responsible capitalism; if it helps the working classes then it is irresponsible.

I ain't buying it: not on the facts behind the creation of the current crisis or in general.

I'm no particular champion for Democratic congress members. I think their pictures should be put in the dictionary as the very definition of the word gormless. I've lost any faith that one can discover some principle that Democrats in Congress embrace other than short term political expedience, but this crisis is nonetheless still a bipartisan mess and not solely or even mostly attributable to Fannie and Freddie.

{"commentId":3185454,"threadId":"371282","contentId":"1922980","authorDomain":"JessWondering"}

5 votes

#3.2 - Sun Sep 28, 2008 12:48 PM EDT

{"commentId":3189521,"authorDomain":"vas"}

vas

Bill Harrison, being the champion of the free market that you think you are, please explain why there are many lenders subject to the exact same CRA regulations as WaMu, but still doing quite well even in the current economic climate. This point was made by a conservative radio show host last night. As pointed out by iarnuocon, the blame lies with the greed and irresponsibility of the lenders and their cohorts, and the lack of regulation to protect against such inevitable greed and irresponsibility. The banks monitor our credit worthiness. Who has been monitoring that of the banks? Apparently no one.

Also, this article makes the case pretty well: It Wasn't the Community Reinvestment Act

{"commentId":3189521,"threadId":"371282","contentId":"1922980","authorDomain":"vas"}

10 votes

#3.3 - Sun Sep 28, 2008 5:44 PM EDT

{"commentId":3201550,"authorDomain":"vas"}

vas

Here's another for your belated education, Bill: Minorities a convenient scapegoat for U.S. financial woes.

{"commentId":3201550,"threadId":"371282","contentId":"1922980","authorDomain":"vas"}

6 votes

#3.4 - Mon Sep 29, 2008 12:10 PM EDT

{"commentId":3184017,"authorDomain":"MCLiepshutz"}

MCLiepshutz

Scum Hannity has been spouting this garbage all week.. I listen to him on the way home, so I drive more aggressively. I don´t remember the cra..(whose activity has actually almost ceased for years) mandating piggy-back and adjustable rate mortgages, targeted solely to pile on corporate profit.. or did I miss something?

{"commentId":3184017,"threadId":"371282","contentId":"1922980","authorDomain":"MCLiepshutz"}

6 votes

#4 - Sun Sep 28, 2008 10:56 AM EDT

{"commentId":3184405,"authorDomain":"LonoKemp"}

LonoKemp

Law didn't make them lend. The profit motive did.

-It seems to me that capitalism isn't inherently the problem, but the prat who blindly takes the fundamentalist view.

{"commentId":3184405,"threadId":"371282","contentId":"1922980","authorDomain":"LonoKemp"}

2 votes

#5 - Sun Sep 28, 2008 11:28 AM EDT

{"commentId":3185369,"authorDomain":"stacym"}

StacyM

Thanks for writing this, iarnuocon. The complete lack of accountabilty for the failure and attempt to shift the blame yet again onto one of the Republican's favorite targets has been annoying the hell out of me as well.

{"commentId":3185369,"threadId":"371282","contentId":"1922980","authorDomain":"stacym"}

7 votes

#6 - Sun Sep 28, 2008 12:41 PM EDT

{"commentId":3185577,"authorDomain":"smuckitelli"}

JoJo-440468

When the CRA was first enacted in the 1970s, there were screams from banks and other lenders that the mortgage default rate would zoom upward. After several years of low default levels, CRA was quietly accepted by lenders as opening new markets for loans. One of the major results of CRA was curtailing redlining, denying mortgages or setting extremely high interest rates for houses in certain neighborhoods.

Many subprime mortgages were arranged by mortgage brokers, not banks. Banks care about their reputational risk. Brokers don't care about that. They're in, they're out. They get their fee and they never see their loan again. It's not like anyone comes back to them and says "You have to make good on this loan." Mortgage brokers are state regulated, not federally regulated. It depends on which state they're in, but for the most part they got away with robbery. They are not regulated by CRA. Had they been regulated by CRA, there would have been public evaluations of these broker firms.

Some years ago Bank of America and others were caught doing subprime lending, and people started talking about it. They immediately got out of the business, because they did not want the reputational risk and they did not want to have to explain to their examiners why they were doing these kinds of loans.

What also happened was lack of enforcement. During the Clinton administration, bank examiners would fail 12% of institutions on their mortgage lending exams. The Justice Department also filed dozens of cases for violations of fair lending laws and the Fair Housing Act. Since Bush came into office exam failures has dropped to less than 2%. Also under Bush there have also been very few referrals to the Justice Department or any action on the part of the Justice Department.

{"commentId":3185577,"threadId":"371282","contentId":"1922980","authorDomain":"smuckitelli"}

10 votes

#7 - Sun Sep 28, 2008 12:55 PM EDT

{"commentId":3186709,"authorDomain":"kathleengnaa"}

Kayleen-580604

Nobody was able to put those bad loans together without explicit permission by the Federal government....Fannie Mae and Freddie Mac were at the center and pushed the bad standards out into loan shark pool.

Blarney Clark is well known for his Far Left opines.

Brokers were being told to help more people get homes and that the federal government had alot of money to put out. You got a monetary bonus for getting a subprime loan approved. I know, I was a trainee, but got out because I did not want to get somebody into a loan they could not afford.

Sorry, but the Democrats are just as much to blame and their approval in Congress is lower than Bush's. I also think it is terrible these CEO's are walking away with so much money...now I am reading about the rape of WAMU, who was, I thought the biggest player in flimsy loans.

The ordinary people have little representation in government today be it executive, congress or judiciary, or the media.

{"commentId":3186709,"threadId":"371282","contentId":"1922980","authorDomain":"kathleengnaa"}

3 votes

#8 - Sun Sep 28, 2008 2:13 PM EDT

{"commentId":3186838,"authorDomain":"JessWondering"}

Jess Wondering

Nobody was able to put those bad loans together without explicit permission by the Federal government

I'd agree if you changed "explicit permission" to "implicit consent in the form of knowing inaction to prevent"

Sorry, but the Democrats are just as much to blame

Sure, but that's not the argument being made. The argument being made is that the Democrats are specifically to blame. Today's crisis (literally today's since it's unwinding day-by-day) has been grabbed on as a partisan sword to smote political opponents with, even though culpability is general and well earned by all in power.

{"commentId":3186838,"threadId":"371282","contentId":"1922980","authorDomain":"JessWondering"}

2 votes

#8.1 - Sun Sep 28, 2008 2:21 PM EDT

{"commentId":3187566,"authorDomain":"paulpeg1"}

Paul-534930

There are plenty of people at fault on both sides, and even the people that went and got loans they could not afford just because they "gotta have it".

{"commentId":3187566,"threadId":"371282","contentId":"1922980","authorDomain":"paulpeg1"}

2 votes

#9 - Sun Sep 28, 2008 3:15 PM EDT

{"commentId":3192926,"authorDomain":"kathleengnaa"}

Kayleen-580604

Yes, so true. With the pick a payment, you could choose each month to pay a 30 year, a 15 year, interest only or negative amortization ---if I remember it, taking away from the equity.

People who did interest only or negative amortization should not have bought the house in the first place.

Or a broker from Countrywide, bragging how she bought a house with practically no money, paid zero interest, flipped it and said she made $60,000. When she got dead silence, she said, 'Well, if anything happens, there will be alot of us who did this'.

It was people getting in to have it all or flipping.

{"commentId":3192926,"threadId":"371282","contentId":"1922980","authorDomain":"kathleengnaa"}

2 votes

#9.1 - Sun Sep 28, 2008 10:45 PM EDT

{"commentId":3858176,"authorDomain":"brkfstclblvr"}

brkfstclblvr

Yes, Kayleen.

Flipping houses is a horrible way to inflate house prices and those around them. I seriously dislike the flipping business.

{"commentId":3858176,"threadId":"371282","contentId":"1922980","authorDomain":"brkfstclblvr"}

#9.2 - Mon Nov 3, 2008 6:08 PM EST

{"commentId":3459245,"authorDomain":"RachelMO440"}

Rachel-474838

Search the HUD website archives online for "Blueprint for the American Dream" and you will see how the Bush Administration made the largest push in U.S. history for subprime loans.

{"commentId":3459245,"threadId":"371282","contentId":"1922980","authorDomain":"RachelMO440"}

1 vote

#10 - Mon Oct 13, 2008 11:26 AM EDT

{"commentId":3611057,"authorDomain":"monicad"}

Monica D.

Clipped, thanks Iarnuocon.

{"commentId":3611057,"threadId":"371282","contentId":"1922980","authorDomain":"monicad"}

#11 - Tue Oct 21, 2008 2:44 PM EDT

{"commentId":3844463,"authorDomain":"andrewspagnoli"}

Andrew Spagnoli

I just sent a link this way from a really active thread, hope it gets reads... some folks are trying to pin it in the CRA as usual...naughty naughty

{"commentId":3844463,"threadId":"371282","contentId":"1922980","authorDomain":"andrewspagnoli"}

2 votes

#12 - Mon Nov 3, 2008 8:23 AM EST

{"canLink":false,"threadId":"371282","isPrivate":false}

IARNUOCON

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