Great article. Just one point of fact: his criticism of rapid rescore for credit scoring is off the mark.
You can’t rescore a bad risk into a good risk; and, credit score is a only a measure of risk in terms of the lenders record of managing credit, having nothing to do with the other legs of the lending decision such as income, affordability, stability...
A janitor can have the same as or higher credit score than Bill Gates; it has nothing to do with income or ability to pay.
Great article. Just one point of fact: his criticism of rapid rescore for credit scoring is off the mark.
You can’t rescore a bad risk into a good risk; and, credit score is a only a measure of risk in terms of the *borrowers* record of managing credit, having nothing to do with the other legs of the lending decision such as income, affordability, stability...
A janitor can have the same as or higher credit score than Bill Gates; it has nothing to do with income or ability to pay.
“Pelham, be a sport and explain it to us one more time, would you?”
There’s a number of problems with trying to lay the economic crisis at the feet of the CRA.
The CRA only applied to deposit-taking institutions. That means S&Ls and the sorts of banks where we, the public, have our savings and checking accounts. The CRA did not apply to Wall Street investment banks, hedge funds, and pure mortgage lenders, all of which raised their money through investors.
These non-deposit, non-CRA firms were major players in the development of the subprime mortgage market and the resulting bubble, generating trillions of dollars of mortgages and related derivatives. Trillions of dollars of bad paper is sufficient to generate a global economic crisis. The total amount of CRA loans ever issued simply wasn’t in that league.
The CRA wasn’t specifically about mortgages. It was a requirement that deposit-taking firms make a portion of their loans to the communities from which they raised their deposits. These loans could have been business loans, personal loans, or mortgages.
The law arose from the practice of banks to take deposits from low income neighborhoods and to use those funds to make loans only in high income neighborhoods. The low income customers couldn’t get loans for their businesses or houses despite being long time customers of these banks.
Whether the law is a good idea or not is open to debate. But the law didn’t mandate subprime mortgages. That idea is a post-bubble claim being made by some people looking for a political hook for the crisis, but that claim has to ignore a host of facts that don’t fit.
A comment on some of Darth’s points:
“2. Home buyers lying on apps with the full cooperation of loan officers and bank upper management.”
Probably much more common among independent mortgage brokerages than with banks. It seems to be a side effect of the recent practice of divorcing loan origination from loan funding.
“3. Bankers packaging what they knew to be non-performing sub-prime loans into bonds”
Primarily a practice of investment banks rather than retail banks. IBs were becoming major rivals to Fannie and Freddie, issuing trillions of dollars of CDOs, CMOs, CDOs Squared, and other variations on collateralized mortgage paper.
“4. Rating agencies that sold the junk bonds as AAA to idiot pension fund managers, et al, worldwide”
The rating agencies didn’t sell anything, they simply put their (worthless) ratings on the paper generated by the IBs and hedge funds. Part of the problem is that the rating agencies got paid by the firms that they were rating. But another large factor is that the entire financial industry had deluded itself with a fancy piece of mathematics called Li’s Gaussian Copula Function that led them all to seriously underestimate the risk of what they were doing.
“Throughout this entire fiasco the regulators were asleep.”
That is absolutely true. A belief that “the market can regulate itself” permeated both political parties and many of the agencies entrusted to regulate the financial markets. And the few regulators who did try to do their job were hounded into submission.