Did the CRA cause the mortgage crisis?

Discussion in 'Politics, Religion, Social Issues' started by mactastic, May 9, 2009.

  1. mactastic macrumors 68040

    mactastic

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    #1
    It is taken as an article of faith by many in this forum and in the broader political sphere that the Community Reinvestment Act (CRA) forced lenders to issue sub-prime loans; and that the failure of people to be able to repay these loans is what caused the market to collapse. However, the conservative CATO Institute published a paper (beware PDF) in 2000 -- as a critique of the CRA as redundant and unnecessary -- that claimed that the CRA had little to do with the growth in the issuance of sub-prime mortgages, and that indeed most of the sub-prime mortgages being issued were by lending institutions outside of the CRA purview -- IOW, lending institutions NOT "forced" by the CRA to lend to the people they did.

    Relevant portions here:
    Straight from the conservative horse's mouth. The CRA certainly wasn't forcing the growth in sub-prime lending among institutions not subject to the CRA, and that's where the bulk of the growth in sub-prime lending occurred -- among people who were the "best and brightest", and who were alleged to be so good at risk-management. They willingly got on board the sub-prime bus, and rode it as far as the profits would take them. They certainly weren't forced to make the loans, as they were outside the requirements of the CRA.

    But, the CRA makes a convenient scapegoat.
     
  2. kavika411 macrumors 6502a

    kavika411

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  3. dsnort macrumors 68000

    dsnort

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    #3
    There are many villains in the mortgage crisis, CRA is but one. Which one you feel is at the root of the problem seems to depend on which side of the political spectrum you reside on.

    CRA, Wall Street Greed, Fannie Mae, Freddie Mac, political opposition to regulating Freddie and Fannie, USAG's promising enthusiastic prosecution of banks that failed to lend in low income neighborhoods, and private investors seeking a quick buck in a market they thought had no down side.

    Funny, back in 2003, I was working in the housing market. Everyone I knew in the biz new it was a bubble, that the pricing could not be supported, and that people were being qualified for mortgages they could not hope to pay.
     
  4. Ugg macrumors 68000

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    #4
    The push for high homeownership rates in the US has been going on since the end of WWI. I would say that homeownership has been seen as a panacea for virtually every social ill and republicans and democrats are equally guilty of pushing it onto Americans. Whether they need it or not.

    Whether it's bushco's "ownership society" or the Carter era CRA is irrelevant. ACORN is just as guilty as the bankers frothing at the mouth for less regulation.

    One ironic side effect of all this is that the current debacle will do what all the programs of the last 90 years have failed; create more stable communities. Mainly because too many people are stuck in houses they can't sell. Even if they could, they might only break even. California is already seeing the lowest intra state migration rate since before WWII.

    I think both sides are ignoring the long and troubled history that the US government has had in terms of encouraging homeownership.
     
  5. Desertrat macrumors newbie

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    #5
    I've said all along that the CRA was the seed for this present mess. But the seed isn't responsible for weeds.

    I agree with Ugg; homeownership has been government policy since the beginning of the income tax. With this in place, people bought houses in place of renting even when renting would have been more sensible due to such factors as short-term employment. A datum from the 1960s is that people in those years commonly sold and moved to a different locale within some three years.

    The CRA forced lenders to figure out ways to lay off bad paper. Once that mechanism had been established, non-CRA subprime loans expanded in numbers as risk was reduced. Legislation lobbied for by ACORN during the Clinton years enabled much of this risk reduction. E.g., AIG's insuring of a portion of the loan paper laid off onto Fannie Mae. As for who did what, note that the execs of Fannie and Freddie spent over $150 million in lobbying over a ten-year period from the early 1990s into the early Bush years.

    Then you have the low interest rates of the Fed. That enabled low-cost loans. And some investment money came from using giant loans of Yen at near-zero percent to invest in US housing developments.

    Never forget bubble psychology. Delusional behavior: "House prices always go up!" Folks didn't ever get told about tulipmania in Holland, or remember the dot-com bubble of a mere yesterday. "Buy it and flip it!" "Refi, and pay all the bills, buy an SUV and a second home!"

    When the price of an existing home doubles, triples, quadruples, hey, it's bubble-time. Foolish buyers willing to pay inflated prices due to psychology, not wise fiscal behavior.

    Repeat after me: "Bubbles pop."

    So, no, the CRA was not "THE" cause. It's an identifiable starting point of what grew into becoming the largest bubble-crop of weeds in world history.

    Gotta hit the highway. Y'all have fun.

    'Rat
     
  6. mactastic thread starter macrumors 68040

    mactastic

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    #6
    Care to provide any insight into why you think that is so?

    Regarding other causes: Yes, there are many factors that play into this. However; based on this, and other information I've seen, it seems implausible to say that the CRA was the driving factor in the financial market collapse. Was it a minor factor? Perhaps. But to attempt to blame the financial collapse primarily on the CRA seems like rank politicking.
     
  7. Zombie Acorn macrumors 65816

    Zombie Acorn

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    #7
    I blame the people who took mortgages they couldn't afford without reading the terms. Crazy I know. :eek: For some reason you can't afford a 400k house working at mcdonalds.
     
  8. Ugg macrumors 68000

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    #8
    One thing that absolutely amazes me is the vindictiveness of the extreme right. Everyone was encouraged to hop onto the property ladder. Even our supreme leader at the time was trumpeting the importance of an ownership society. Our mailboxes were filled with fliers from government organizations encouraging us to take part in the largesse of this great country, ad nauseum, ad infinitum...

    It was all based on the Ponzi scheme of course, but outside of a handful of people like Paul Krugman and the Oracle of Omaha, nobody was speaking out against it. "Unfettered capitalism is the salvation of modern times", the bankers said as their take of the national pie grew ever larger and larger, "Remove those outdated laws so we can all prosper" they said as the few laws that remained were flouted or outright ignored.

    They made a point of telling everyone that even if you can't afford it, you can't afford to not buy it. Flip it in two years they said, you'll be a millionaire by the time you're forty, they said...

    Americans were encouraged to gamble everything they had, nay, they were told it was their civic duty...



    ZA, your youth is all too evident in your naive statements.
     
  9. iJohnHenry macrumors P6

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    #9
    It is exceeding difficult to lift a pyramid, to put a new level of blocks on the bottom.
     
  10. Zombie Acorn macrumors 65816

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    #10
    Funny for being so naive I knew that this housing market was going to fall long before it did. I don't excuse the stupidity of people because the government led them off the cliff. The willingness to blame external parties for personal decisions astounds me, I live my life following logic, not what the government says is right.
     
  11. mactastic thread starter macrumors 68040

    mactastic

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    #11
    So you think the primary reason the financial markets collapsed was because of homeowners who couldn't repay their loans?
     
  12. hulugu macrumors 68000

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    #12
    Good for you, but I have to ask, what information did you use to make this assessment? I know I was advising people to be careful in my local market because the average sale had exceeded the average wages, meaning that unless we continued to import large numbers of new Tucsonans (most notable from California) the housing bubble was going to pop.

    Since many loans were also attached to balloon payments, I surmised that once the housing market decelerated and these loans changed terms, there would be a lot of people who would bail on their mortgages. Since these loans were often 125% LTV, the banks would destined to lose money and this would have larger effects.

    At the time, I did not understand the complexities of the derivative markets, nor the relationship between mortgages, insurance companies, and hedge funds. Of course, it appears that I wasn't the only one.

    I think both 'Rat and Ugg are correct. Furthermore, lots of ink has been spilled discussing all those people who borrowed money they couldn't afford, but there was a whole host of people who passed these loans up through the system like a financial game of hot potato.

    There was a systemic structural failure and blaming the single-family who bought a bigger house than they could afford, while simultaneously ignoring the thousands of professionals who telling them they could is a mistake.
     
  13. Zombie Acorn macrumors 65816

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    #13
    I believe its because they didn't have the foresight to realize that the economy doesn't stay on an upward swing indefinitely. Corps were doing the same thing, spreading themselves so thin that a marginal hickup could have thrown them off the wagon. I am not saying that the lenders weren't giving some ridiculous deals (some of them sounded better than others with the ARMS involved), but at the end of the day you have to sign on the dotted line after reading the terms.
     
  14. Zombie Acorn macrumors 65816

    Zombie Acorn

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    #14
    Housing supply has been way up for a while now, but house appreciation continued to surpass inflation by a long shot, sooner or later the economy will push the price back to equilibrium. Around here it wasn't as bad, but in other cities there were entire lots being built without people to move in at double the price the same house would have cost 3 years before.
     
  15. mactastic thread starter macrumors 68040

    mactastic

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    #15
    Here's the problem with that theory -- for $1 trillion dollars you could buy up all the outstanding sub-prime mortgages in the nation. Of course, nowhere near all the sub-prime mortgages in the nation are in default, and that also assumes that all the properties subject to sub-prime lending are currently worth zero.

    So if that truly was the reason behind this collapse, why wouldn't the government simply have stepped in and purchased the properties facing foreclosure for less than was spent on the bank bailouts?
     
  16. hulugu macrumors 68000

    hulugu

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    #16
    I agree. The housing bubble itself wasn't large enough to collapse the banking structure, rather it was the complex arrangements of Credit Default Swaps which caused the larger problem; no one knew just how much bad paper they or others held, so they panicked.

    The mortgages didn't cause this because they all went into foreclosure, rather it happened because everyone *thought* they would.
     
  17. mactastic thread starter macrumors 68040

    mactastic

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    #17
    I don't think anyone thought all sub-prime mortgages would go into default, it was more what you identified in the first paragraph -- the uncertainty factor. These mortgages had been sliced and diced into tranches that were then resold, and since the bond rating agencies were calling them investment-grade, they were able to be sold without anyone knowing the underlying value -- and really it didn't matter as long as the price was going up, since the investment banks were able to mark the value at whatever they wanted without any underlying basis for that valuation. They were able to sell junk-grade stuff as investment-grade because they had gotten other people to insure the junk -- but rather than putting up any money, the insurers were able to post assets being used in other ventures as backing for the junk, which meant there was not much actual cash backing these insurance policies.

    Then when the bubble started to burst, and the calls came in for the people who had provided the insurance, they didn't have the cash and the whole house of cards crumbled.

    That's why I find people wanting to blame the CRA, or lying mortgage recipients, or poor minorities to be completely without credibility. They think that less than a half-trillion worth of bad mortgage debt brought down the economy, yet they ignore the impact of the derivative market that fed off these loans -- a market that totaled in the many tens of trillions of dollars.

    The idea that you could have many tens of trillions of dollars of funny money based on bets on less than one trillion dollars of actual money is simply astonishing, and goes right to the heart of these so-called "best and brightest" people who worked hard to create and legitimize these kinds of investment vehicles, and then worked to ensure that they could operate them outside of government oversight.
     
  18. blackfox macrumors 65816

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    #18
    I have always assumed that greed and institutionalized irresponsibility more than anything else is at the base of the mortgage crisis.

    I thought that as the supply of "safe" clients for home purchases dried up (they are a finite group), that the lenders took risks on less-safe clients to continue the astronomical profits they were used to.

    To hedge their bets (as they had done in the bast with better debtors), they bundled and packaged these loans in extremely complicated ways, which worked fine in practice until there was a critical % of defaults therein, in which their was subsequently a cascade effect of uncertaintiy, as the true risk and value of these bundled packages became impossible to accurately ascertain.

    I am certainly no expert on such matters, however, and several previous posts have probably better explained parts of what I am getting at.

    I still believe it is dishonest to place too much blame with either something like the CRA or even individual debtors - as the banking/housing industry should be in a position to know what risks to generally expect with certain courses-of-action. That they abrogated their responsibility in this area in pursuit of creative profit-seeking paper alchemy, puts the onus directly and chiefly on them.

    Or so I would posit.
     
  19. hulugu macrumors 68000

    hulugu

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    #19
    I should have said "might" as you said it was the uncertainty that led to so much trouble.

    Exactly. This is also a good post.
     
  20. mactastic thread starter macrumors 68040

    mactastic

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    #20
    Here's a good article that uses understandable language to explain what was going on in these markets.

    As usual, I'm sure the people who really *should* read this, won't; but it's an excellent starting place for people who really don't understand these complex investment vehicles, and how they were employed.
    Read on to see what happens next with these bonds...
     
  21. leekohler macrumors G5

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    #21
    Thanks Mac. Didn't get to read the whole thing, but you can see where it's going- bad places. I'll try to finish it later.
     
  22. Zombie Acorn macrumors 65816

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    #22
    The assets had been entangled in the financial sector, when the market value dropped due to the housing bubble deflating they would have had question marks on their packaged securities even if the government bought up all of the properties.

    If the only mortgages that were approved were people who had 20% down and an acceptable level of income for their particular house we wouldn't have experienced a housing bubble and we wouldn't have ever realized this issue.

    Sub-prime lending didn't happen in a snow globe, it had effects on the rest of the market that would be immeasurable. If I have 4 houses and only one person who can rightly afford the mortgage they will be able to get their pick of house at an acceptable cost. If I now lower requirements for mortgages I have 20 people and 4 houses, so the price of house goes way up and more houses are built. Then the banks package the assets into securities and you have a ticking time bomb if the economy takes a downturn. Thats before we even get into CDSs which further complicate the issue.
     
  23. rhett7660 macrumors G4

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    #23
    I don't think it was one single thing that caused the mortgage crisis. Lets look at the big picture and take into account all the different area's that contributed to the crisis. To blame it on one single thing is ludicrous.
     
  24. mactastic thread starter macrumors 68040

    mactastic

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    #24
    Exactly. Which is why it's completely insane to say that it was homebuyers making poor decisions about home purchases that brought the whole system crashing down. The government couldn't step in and simply buy the houses because of the shock waves that the declining housing prices had already created in the derivative market. These shock waves were a result of the massive amounts of money at stake in bets on the housing market -- a sum that dwarfed the actual amount of outstanding sub-prime mortgages. And then an even larger amount of bets *on those bets* on the housing market. All totaled, the amount at risk in the derivatives markets of US-based companies alone totaled several times US GDP.

    Again, all the outstanding sub-prime mortgages totaled under a trillion. Estimates of the sums at risk in these bets and bets on bets put them at somewhere north of $100 trillion.

    That's why the government can't simply step in and stop this with a trillion or so. If it was just the mortgages that were the problem, a trillion dollars could simply be handed to the banks and the problem would disappear. The government would own some 6 million homes, but the markets would be stabilized. But because of the house of cards investment bankers and hedge funds managed to build -- completely outside the regulatory purview of the SEC or any other agency -- buying up the mortgages won't cut it.

    True. But I still fail to see how greedy homebuyers or the CRA forced lending institutions to lower standards to the 'Alt A' level, or interest only etc. Sure, there's blame to be given to those who couldn't afford the loans they took out; but there's also plenty of blame given to lending institutions that deliberately relaxed their standards in the pursuit of profits.

    Not without the CDOs and CDSs though, because if you package up a bunch of sub-prime mortgages into an MBS, you can't sell off the package of loans, which means you can't acquire the funds that would allow you to make new loans. In effect, you become responsible for the risk, which is as it should be. Without the ability to get these loans off your balance sheets ASAP, you are not incentivized to make risky sub-prime loans.
     
  25. Tomorrow macrumors 604

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    #25
    That's part of it, I think, but it's more about why they couldn't repay their loans. For that, I can offer this true story:

    About three years ago my wife and I were shopping for a house. We used a mortgage broker - an agency that didn't actually write loans, but took our credit application and shopped it around to lenders.

    We were told we could get an FHA loan (federally insured, lower interest rate) for X dollars - right in line with what we knew we could comfortably afford. We were then told we could get a conventional loan (completely private, 1 point higher interest rate) for - I'm not kidding - 1.8 times X dollars.

    I was dumbfounded and asked the broker: "I've just spent two months giving these people bank statements, paycheck stubs, credit card statements, the works - they know every penny I earn and every penny I spend. They ought to know better than anyone that I can't afford that much of a loan, so why would they loan it to me?"

    The answer is below.

    This, I think, is one of the truest and wisest statements I may ever read.

    In my opinion, banks were loaning money to good credit risks for homes, boats, cars, small businesses, you name it. Then someone got the bright idea that the only real way they could make more money was to loan more money. And the only way to loan more money was to loan money to people who, for years, they would not loan money to; or to loan more money to people than they normally would.

    I suspect it might have less to do with subprime loans and more to do with banks lending too much and borrowers borrowing too much. I think the greed and irresponsibility rests both with the lenders and the borrowers.

    When we got our loan for the house, we didn't want to be so strapped for cash that we couldn't have extra pocket money, or save for an emergency, etc. I didn't buy the lenders' assertion that I could afford the larger loan; I knew better than that. I think there were some lenders that were going farther out on the limb by offering more than people could reasonably pay back; and some borrowers who were borrowing more than they could comfortably pay back.

    Just my thoughts based on my experience.
     

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