The CRA Scam and its Defenders
The myth that the CRA would not be harmful to bank-industry profits was hidden for years by the Fed-created housing bubble, which allowed for easy refinancing of all the bad debt. But now that the bubble has burst, all those unqualified borrowers -- whom the government calls "subprime," as though their credit ratings are only a tiny, tiny smidgen below "prime" borrowers with the very best credit ratings -- are defaulting on their mortgages in droves.
Bank profitability has been extremely "undermined," to put it mildly. The bursting of the Fed-generated housing bubble is the reason why the CRA scam was not exposed until now, despite having been in operation for some thirty years. FULL ARTICLE
Comments (18)
Jeff Haymond
Awesome review. Of course I was well aware of the Fed's role in this mess, but I had neglected the role of the CRA. Thanks for pointing this out.
Published: April 30, 2008 9:19 AM
Paul Marks
A very good article.
Published: April 30, 2008 9:27 AM
Deacon
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You'll not get any closer to
the truth about what's afoot
with GLOBALIZATION and
this looming food crisis than
my below thoughts and links
(copy and sent to friends
and colleagues)):
The Third-Way push of socialism/capitalism to equalize
the world's economies has caused this looming food
crisis, NOT CAPITALISM.
Socialist/communist leftists have captured capitalism
and enslaved it to EQUAL/FAIR outcomes.
Of course, you have think more deeply to find the truth.
Read and learn the truth:
What we are facing in 2008 is a Third-Way (socialist/
communist/capitalist) conspiracy to equalize the world's
economies, as preface to installing one-world government;
a plan hatched during the 1940s GATT formulations, which
were socialist/communist, in effect.
Keep in mind that there is no PEAK OIL crisis—only a
decades-long, purposeful cap on searching and drilling and
refining for oil, in order to put the world in crisis-mode.
Using food to produce fuel is part of the conspiracy to
generate food riots, in order to destabilize governments;
and this so-called "war on terror" is also part of the
secret plan, although its primary beneficially is Israel
in the exchange of blood and treasury for oil--as payoff
for protecting Israel from an ever-threatening, encircling
Islamic Arabism.
The secret plan?: to create one-world government under
GLOBAL ECONOMIC SOCIALISM.
This is a conspiracy-driven dismantlement of the West's
financial underpinnings, for a certain purpose: TO EQUALIZE
GLOBAL ECONOMIES, for future installation of one-world
government.
I've provided all the details in my essay, "Planned
Destruction of America" (linked below), which is my report
on Lt. Col. Archibald Roberts' 1968 booklet: "The Anatomy
of a Revolution".
Study my essay, then write as if we're all being led down
a path to hell on Earth by secretive, elite movers and
shakers on the Left and Right (path to hell aka “Third-Way
Global Economic Socialism”). Read and learn and teach:
The EU and the coming North America Union are products of
the 1940s GATT formulations, and very few analysts are
aware of it ((GATT, NAFTA, and CAFTA are socialistic
attempts at equalizing global economies, in order to in-
stall one-world government under THIRD-WAY Global Economic
Socialism)).
My missive to Ron Paul’s staff, regarding my view that
this financial crisis is not by happenstance nor
mismanagement—but BY DESIGN!:
The Honorable Ron Paul is ignorant of an ongoing conspiracy
to topple, financially, the West, in order to equalize
the world’s economies; for building one-world government
under GLOBAL ECONOMIC SOCIALISM. // The conspiracy began
in the 1940s with the GATT formulations. // Ask why
Greenspan had violated his chairmanship duties by advising
prospective home buyers to take out an ARM. // Ask why
Greenspan had sent out fed regulators to warn banks that
they’d be charged with RACISM if they didn’t loosen home
loans for minority, HIGH RISK home buyers. // Ask why
Greenspan recently, TRAITOROUSLY, had advised OPEC oil
producers to de-link from the U.S. dollar. // Greenspan -
the FEDERAL RESERVE - has embarked on a purposeful set of
monetary policies designed to destroy the West’s financial
underpinnings. // Read about the WHO, the HOW, and the WHY
of it in my below article (first one):
Planned Destruction of America
http://planneddestructionofamerica.blogspot.com/
Corporate America: What Went Wrong?
http://corporateamericawhatwentwrong.blogspot.com/
This one helps to confirm efforts to PURPOSELY trash
America’s financial underpinnings:
http://www.321gold.com/editorials/engdahl/engdahl031808.html
P.S.
Oil is payoff for the West's efforts at providing PROXY
COMBATANTS for Israel--for protecting Israel from expanding,
encircling Islamic Arabism; a Jewish nation-state having
supporters throughout the West willing to destroy the entirety
of Western civilization for Israel's sake.
P.P.S.
“Because many nations’ agricultural
production will decline under NAFTA
and GATT, in becoming dependent on
the more productive nations’ capacity
to export cheaper product to them,
they’ll become gravely vulnerable to
any of the exporting nations’ food-
production declines, possibly resulting
from bad weather conditions or bad
economies. ‘Free trade’ in food sets up
a looming catastrophe (read my essay,
GATT: Ubiquitous Treason)…Wouldn’t such
worldwide economic interdependence
necessarily set the stage for a worldwide
economic collapse should any one nation
seriously falter? Such a worldwide collapse
would make America’s Great Depression
appear like good times. Why aren’t the
NAFTA and GATT crafters arguing for more
economic independence for nations - for
rugged individualism among nations – rather
than building this One World interdependency
that their brand of ‘free trade’ necessarily
engenders?”
The NAFTA Debacle (1995)
http://naftadebacle1.blogspot.com/
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Published: April 30, 2008 9:28 AM
Kel
Uh, ok, nice crazed speach above.
Anyway, great article on CRA. Thanks for the great research and the sharing of the details.
Published: April 30, 2008 9:43 AM
toolkien
Is capitalism completely at fault? No. Is it perfectly free from guilt. No.
Inherent in capitalism, the clearing house of individual action, is boom and bust. Capitalism doesn't guarantee that everyone will think critically, and when enough people don't, corrections occur, painful perhaps, but teaching others to act differently.
Major problems come into play when the government endeavors to both "level the playing field" and subsidizing poor allocations. In doing so, it merely increases the amplitude and duration. The good times seem to last longer, and reach higher, but when the inevitable corrections come, they too are much longer, and consequently deeper.
I look at it in terms of one wave (capitalism) itself being carried on a bigger wave. And when the bigger wave hits 0 on the Y-axis and goes negative, the slave wave also hits a down cycle, and as it does, it takes the full blame.
Simply put, capitalism has booms and busts. Booms are great, busts are painful. But left to themselves, they will correct. Government, in its illegitimate efforts to entrench itself into peoples lives can artificially make the good times better, but at a cost. And when that cost comes around, capitalism takes the blame.
It should be the task of libertarians to sell to people the idea that nothing is certain. Risks and rewards abound. There are no guarantees. Attempts to make the government the insurer of last resort just makes things worse in the long run. Trading freedom for security is never good for the individual.
Published: April 30, 2008 10:00 AM
Mathieu Bedard
I can't remember the name of the Heritage Foundation economist that was/is avidly against affirmative action and, more generally, positive-discrimination as a whole.
Has he ever written or spoken out about the CRA? Now would be a time I guess..
Published: April 30, 2008 10:10 AM
Jon Tyree
Thanks for the great article. I was aware of the monetary reasons for the current situation but not the regulatory. It's very enlightening. Its amazing how the MSM never mentions things like this. Its so much easier to blame greed.
Published: April 30, 2008 11:40 AM
kel
toolkien, capitalism has no inherit booms or busts. Like the great depression, these are man made. Credit expansion causes the boom, and the resulting bust is the re-setting of the misallocations of people and capital caused by false signals given by artificially low interest rates during the boom. Read Mises or Rothbard or previous financial ariticles this year on this site and it will all be explained.
Published: April 30, 2008 11:57 AM
Mike D.
I'm not sure that the problems with sub-prime loans are credit problems. In a BofA study of loan profitability of loans originated in the early 90's, contrary to intuition, CRA loan's were identified as a profitable sub-portfolio. The key factors were very low prepayment rates (in a rate lowering environment), low origination fees - nearly all loans were originated in the local branch bank, and the customer's relationship with the local branch account manager. Care was taken to make sure that this was a "win-win" situation. A company motto was "you don't do anyone a favor by putting them into a house that they can't afford.
The real problem as I see it is that the securitization process "passes on the old maid card". At each stage of the process, everybody plays the game according to the rules, collects a fee, and passes the risk down the line. Making decisions primarily based on FICO credit scores, fails to take into account income, employment history or assets.
In the past, lower interest rate trends, and escalation of housing prices covered up many defects in the lending system. However, originating ARM loans at a 3% spread over a (historically low) 1% index, created a massive reset risk. What is surprising is that the Fed was oblivious to this. (The originators can be excused by the intoxication of easy money and the perception that, since the majority of the loans packaged by securitization were someone else's problem, and that loses in the retained "toxic waste" tranches were dwarfed by origination and servicing revenue. Everybody was dancing and having a great time playing musical chairs - everybody was surprised when the music finally stopped that there were not enough chairs. (A better metaphor than the lifeboats on the Titanic?).
I am not a great fan of Government programs. However, I think it is a mistake to blame CRA loans.
(I do remember, from my BofA days in 1997, having Affordable Housing Loans in Atherton, Los Altos Hills and Belair on our books on $1 million + properties, based on the 40% of median income rule - puts a new spin on "Down and Out in Beverly Hills!)
Published: May 1, 2008 1:26 AM
Josh
I agree with Mike. And from that same Bernarke speech you cited:
And furthermore CRA actually deterred risky:
http://www.reuters.com/article/pressRelease/idUS135259+07-Jan-2008+BW20080107
Blaming the fed for easy money I agree with but I think you're way off base on the CRA.
(Not sure about the BBS code on here)
Published: May 1, 2008 1:45 AM
happylee
Whenever I am in a pickle, I just ask myself "what would Abraham Lincoln have done?" Here, the solution to the CRA problem is, well, duh, CRA-2.
Excellent article, and heartfel congratulations on your recent honors.
Published: May 1, 2008 3:14 PM
Bruce Williams
Good article, but I question the thought that the banks were helpless victims.
There was predatory lending going on, no question about it. There was also a large industry of mortgage brokers adding middleman costs. There is nothing wrong with charging more for a risky loan than a safer one, but when you create deceptive products, such as teaser rates, interest only loans and even the regular ARM loans, you create a time bomb of loans the borrower will never be able to repay. This was done by the banks themselves and they are paying the cost for poor business practices.
A more interesting thought is executive compensation which rewards high return/high risk practices that destroys shareholder equity in the long run, but makes poor decision makers rich.
Published: May 4, 2008 11:24 AM
jp
Just a note... the Fannie mortgage product that can be used to fulfill CRA requirements is called MyCommunity. The Freddie product is Home Possible.
MyCommunity mortgages are typically 100% loan to value, ie. no cash down. No prior credit history is necessary. No minimum credit score req'd if filed with Fannie's automated underwriting service. Debt to income ratios (total recurring debt payments divided by income) traditionally stood at 36% in the 1990s. With MyCommunity I've heard of 65% being allowed. Only available to borrowers below median income in their areas.
Fannie bought these sorts of mortgages, slapped a guarantee on them, and sold them off as AAA mortgage backed securities. If Fannie wasn't underwriting subprime than I don't know who was.
Published: June 6, 2008 4:55 PM
Rick
I have to concur with the people who have refuted the concept that all (or most) CRA loans were bad. Those refutations seem damn plausible as the majority of the bad paper is on securitized debt from 2004ish and on. No one appears to refute that the vast majority of "portfolio covering" CRA loans were written prior to 2002. Nor do I see a refutation of statistics showing that CRA portfolio loans are in general less likely to go bad than other loans.
Although CRA has surely driven the writing of more subprime loans, they are not shown to be the majority of loans that are bad. The killer statistic would be : Of the 2% of loans that are currently bad, how many are a) prime, b) sub-prime and c) CRA required. Armed with that information, we might plausibly be able to lay blame.
To me, the real issues are :
1. It was an up market. Banks are more likely to write and profit from subprime mortgages when the housing market is increasing, and they did. They wrote them and they profited handsomely. So much so, that they looked for new ways to increase their There is no suggestion that BoA's 600B in subprime mortgages was necessitated by the CRA. Some portion of it surely satisfied CRA requirements, but it cannot be claimed that BoA, or any bank, only wrote sub-prime mortgages because they were forced by CRA. We don't have enough data at our finger tips to know what percentage were driven by CRA, but it is appearantly not refuted that CRA loans outperform other subprime loans.
2. The Fed should never push anything.. to the extent that they should offer advice, it should be only cautionary.
3. The loans were securitized, sold off and then used as collateral for further loans, and was of a poorer quality than advertised.
Allow me to suggest, in the case of #3, that using a risky investment as collateral is not terribly bright. But it is a risk that was taken with open eyes. No one was forced to buy swaps. Furthermore, if you were sold crap as if it were gold, the phrase caveat emptor comes to mind. If you bought them assuming that they were backed by the full faith and credit of the USA, then you didn't read the contract. My sympathy for people who bought these debts without performing due diligence and then used them to meet collateral requirements is zero. Unfortunately, they will get bailed out by the taxpayers. That is a real scam.
Published: September 22, 2008 3:39 PM
Dilapidus
To be fair.. my comments are based on information available 6 months later. Still there is no real evidence that CRA has caused, or is even significant here, except where it de-regulated the rules for loan qualification.
Rick
Published: September 22, 2008 4:06 PM
Matthew
The CRA did not force Moodys, S&P etc to rate junk paper as Triple AAA!!!
The CRA did not force banks to make "no money down" or "interest only" loans!!!
The CRA did not force investment banks to repackage and sell these troubled loans as "safe" investments!!!
The CRA did not force banks to NOT VERIFY income and credit history!!!
The CRA did not force the SEC to allow investment banks to plunge tens of millions in borrowed money into subprime mortgages!!!!
In fact, 80% of all subprime loans were made by institutions that were not subject to the CRA.
Countrywide for example, was not subject to the CRA.
It failed anyway!!!!
Blaming the CRA is just a convenient scapegoat for the GOP.
Published: October 5, 2008 7:55 AM
Matthew
CRA is not to blame for subprime crisis.
This was in Business Week.
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
The GOP blames the victim
This was in the Wall Street Journal
http://online.wsj.com/article/SB122282690823092989.html?mod=rss_The_Tilting_Yard
Published: October 5, 2008 8:00 AM
TBA
The CRA is being treated apart from Fannie Mae and it should not be. This involvement by the government created a market for non-market loans. FM promised to buy these loans, so private banks made them due in part because CRA allows groups to hassle them if they don't make certain types of loans to non-marketable borrowers. CRA was a part of the bigger government bank mess. You guys are denying gravity.
Published: December 10, 2008 2:15 PM