I feel the need to.... well no not really. It's pretty simple really, what would motivate this subprime crap getting started in the first place? Gov't beatdowns of course. Finally somone with more time on their hands has shown it in a more substantial way. How many times must this be relived in history? Liberal economics=disaster because liberal economics is all about their vision of social justice and not wealth creation.
http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6
Beware folks, the same type of thinking that gave us the CRA garbage is now in power full force. Obama is setting up mortgage crisis x 10 with his leftist/multiculturist/tear-down-mean-white-america agenda.
http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6
Beware folks, the same type of thinking that gave us the CRA garbage is now in power full force. Obama is setting up mortgage crisis x 10 with his leftist/multiculturist/tear-down-mean-white-america agenda.
How could a piece of 1977 legislation be significant to the deterioration of mortgage standards 25 years later?
The CRA was not a static piece of legislation. It evolved over the years from a relatively hands-off law focused on process into one that focused on outcomes. Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways. Banks responded to this new accountability by increasing the CRA loans they made, a move that entailed relaxing their lending standards.
Thatâs still too early. Why would changes in the mid-nineties result in a mortgage boom a decade later?
Throughout the nineties banks, as banks lowered their mortgage standards, mortgage rates remained high. The laxity was spreading but the incentives for borrowers to re-finance even under relaxed standards remained low. New buyers often still didnât know that some of the loosey-goosey mortgages existed. Speculators had an internet bubble, so they werenât yet attracted to real-estate. Treasury rates were not yet so low that investors seeking yield would pour into mortgage backed securities. Securitization levels were low enough that banks werenât yet willing to fully embrace the loose standards. The historical data on default and loss rates from the lax lending were not yet available, so they werenât embraced by banks or the broader market.
But as the years went by, these factors changed. The Fed pushed interest rates down. This made refinancing more attractive, and created an investor demand for yield. Fannie and Freddie popularized low-income securitization. Low defaults and loss rates from lax loans made them seem not as risky as previously expected. A shrinking consumer asset base thanks to the dot com bust created a demand for home-equity loans and high loan-to-value loans, as consumers exchanged high-interest credit card debt for low interest home debt. Speculators seeking higher returns and ordinary home buyers became aware that lax lending standards would allow them to buy bigger homes with little or no money down.
In short, the lax lending standards created in response to the CRA had dug a pit that was waiting to get filled when the circumstances were right.
Ah ha! So it wasnât the CRA that caused the mess. It was everything else!
Of course it wasnât the CRA that caused everything. The CRA was a factor in lowering lending standards. This was a necessary, although not sufficient, cause for the mortgage mess.
Wait a minute! Paul Krugman told me the CRA was relaxed during the Bush administration. What about that bit of evolution, buster?
Itâs true that the CRA requirements were relaxed during the Bush administration. But at this point the lax lending standards were already in place. In any case, the relaxation took a peculiar form that actually made CRA lending more important rather than less. You see, the government let banks drop things like putting in ATMs in rural areas in favor of letting their compliance be judged entirely on CRA loans. This means the CRA had more of an influence on home lending after the requirements were relaxed, not less.
What's more, George W. Bush was a major proponent of the kind of mortgages that banks had started making under the CRA. He urged low-to-no doc mortgages and the elimination of downpayments, just like the CRA regulators had long done. âWe certainly don't want there to be a fine print preventing people from owning their home,â the President said in a 2002 speech. âWe can change the print, and we've got to.â
What about "No Money Down" Mortgages? Were they required by the CRA?
Actually, yes they were. The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination. They told banks that lending standards that exceeded that of regulators would be considered evidence of unfair lending. This effectively meant that no money down mortgages were required. A Treasury Department study published in 2000 found that the CRA had successfully lowered down payments not just for CRA loans, but for all mortgages.
Explain the shift in loan to value away from the traditional lending requirement of 80%.
Again, the regulators told banks that much higher LTVs was an appropriate way to meet the CRA obligations.
What about the elimination of payment history? How about income requirements?
Regulators instructed banks to consider alternatives to traditional credit histories because CRA targeted borrowers often lacked traditional credit histories. The banks were expected to become creative, to consider other indicators of reliability.
Similarly, banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income. The problem, of course, comes when the con-artists and liars come into the game.
Did the CRA require banks to develop automated underwriting systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
This was another lending innovation praised by regulators to the point that it became mandatory for banks. Those who were not employing automated underwriting would be putting their CRA ratings at risk. Automated underwriting was seen as a way of eliminating bias in lending.
Point out to me where in the CRA or any regulation that any of this is required.
I cannot. But this kind of legislative fundamentalism misconstrues the way laws constrain business activity. An unenforced law exercises little constraint, regardless of how onerous it is worded. Think of the way anti-trust enforcement changes from presidential administration to presidential administration.
In the case of the CRA, it was the activity of the regulators that matters. And each of these credit innovations described above was put into place to satisfy the CRA regulators.
Wouldnât lending standards have been lax during the boom even if we didnât have a CRA?
Thatâs an interesting question to which weâll never have a satisfactory answer. Itâs possible. But this kind of counter-factual is just a game. We know that we had the CRA and that it caused relaxed lending standards in the reality we actually live. In another universe, another reality? Well, if you get there send us a post-card and let us know how it turns out.
Couldnât the increase in CRA loans have been accomplished without these lax lending standards?
This is another interesting question about an alternate universe. It is possible that banks may have been able to meet their CRA obligations with tighter, more traditional lending standards. But weâll never know. We know that they thought they needed to employ lax standards, and so did the regulators. A banker who refused to relax standards risked the wrath of regulators, andâmore importantlyâif his unorthodox, novel attempts failed heâd be found to be in non-compliance with the CRA. In the real world, lax lending standards were the only known way of satisfying the CRA regulators.
Isnât it really securitization that is the culprit?
The government pushed for greater mortgage securitization in an effort to increase CRA lending. At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of âaffordableâ mortgages. The government was intentionally decreasing the risks to the original lenders in order to increase loans to low-income borrowers, and minorities in particular. In short, you canât blame securitization without coming back around to the CRA.
Werenât the majority of the subprime loans made by mortgage service companies not subject to the CRA?
This is true. But it is largely beside the point. A huge driver of the demand for subprime loans was the demand for CRA bonds. Banks operating under the CRA could meet their obligations by buying up CRA loans or MBS built from CRA loans. The CRA created a demand that the mortgage servicers were meeting.
What's more, many smaller mortage service companies hoped to be acquired by larger banks. Increasing their CRA lending made them more attractive take-over targets.
A study put out by the Treasury Department in 2000 found that the CRA was encouraging the mortgage servicers to provide loans to low-income borrowers, in part because the CRA loans had been so successful.
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