Skip to comments.The Subprime Mortgage Mess and the Carter-Era Community Reinvestment Act of 1977
Posted on 03/29/2008 8:33:45 AM PDT by Aristotelian
As a source of the current subprime mortage mess, economist Larry Kudlow and Wall Street Journal editorial board member Steve Moore point to the Carter-era Community Reinvestment Act (CRA) of 1977, which purported to prevent "redlining" -- that is, the denial of mortgages to minority borrowers -- by pressuring banks to make home loans in "low- and moderate-income neighborhoods."
The two economists, speaking today on Larry Judlow's weekly radio show, noted how the CRA was the creation of the same liberal political establishment that is now blaming banks and Wall Street for the subprime mortgage crisis.
The connection between bad loans and the CRA was noted in an earlier FreeRepublic thread: How government makes things worse Boston Globe ^ | March 9, 2008 | Jeff Jacoby http://www.freerepublic.com/focus/f-news/1982895/posts
The article stated:
The subprime mortgage collapse is another tale of unintended consequences.
The crisis has its roots in the Community Reinvestment Act of 1977, a Carter-era law that purported to prevent "redlining" - denying mortgages to black borrowers - by pressuring banks to make home loans in "low- and moderate-income neighborhoods." Under the act, banks were to be graded on their attentiveness to the "credit needs" of "predominantly minority neighborhoods." The higher a bank's rating, the more likely that regulators would say yes when the bank sought to open a new branch or undertake a merger or acquisition.
According to Kudlow, the CRA was also aimed at helping illegal aliens get mortgages. Holy cow!!! This story just gets better and better.
IMO, a big part of the problem was the govt exempting gains on home sales from income. I know I made money selling homes whenever I had to move for my job (which was too often) and I sure didn’t put it back into a down-payment. I think that contributed to people leveraging their homes more.
I know I never paid more than 20% down on a home even though I could have. I put the money in the bank and borrowed the rest.
We’re not supposed to talk about this. The Watchdog mentioned it. Let’s concentrate on Lights Out Earth Day.
Simply put, if you "buy" with NO money, you don't really OWN it..it's more a rent to buy..
The CRA has nothing to do with the sub-prime mess. There was a real problem and biases in granting qualified borrowers at that time. If the CRA is in any way to blame for the current mess, it would have happened a long time ago.
This current mess was caused by greedy lenders making loans they knew or should have know were not based on an accurate picture of the borrowers’ financial states.
I have to show this to my neighbor who knows someone (her friend's brother) who went to "work" for ACORN. He claimed he made enough money.
Acorn has been suing Garden City, Long Island, NY to have low income housing. I'd like to have a mansion there, too. That's just what I'd not want for my kids, is to be the poor kid in a rich town.
Now listening to Larry's show this practice of variable rate came about because the CRA. Adjustable rate is gambling.
If he had an audience the size of Limbaugh, this country would be in a lot better shape.
If CRA were the main problem wouldn’t huge issues have shown up long before now? As I understand it (but I don’t follow this closely) the big problems arose from (1) unethical (and illegal) practices of inaccurate documents, etc. that misled investors who buy up paper that is re-sold in financial instruments; (2) so many risky loans were not identified as such and as they were transferred and re-sold throughout the financial markets and over to Europe there were all kinds of huge liabilities spread far and wide that were not recognized as such. Of course there must have been plenty of people in “the industry” who knew what crap they were peddling, but as long as they could send it onward to be someone else’s problem they didn’t worry about it.
I heard it was the changes to the CRA back in the 90s that were the root of the problems.
It is funny to me that people don’t see how changes to lending practices caused the bubble, lowering down payments, allowing interst only loans etc. That actaully drove prices up.
It now must find the real market value.
They were not greedy lenders. They were forced by left wing groups like ACORN to make bad loans or be shut down because of this law.
Yes, and my point was that I doubt that the 1977 act would account for more than 10% of the current problems.
In order to meet the requirements to loan to risky borrowers/low income households, banks came up with innovative loans like ARM's, no-doc loan, stated income and so on. When the housing boom of the late nineties and 2 thousands came about many used these loans to buy their houses. They just had to get on the own-a-home bandwagon.
Once on it they could just refinance over and over again as the house increased in value, extracting equity to buy nifty cars, tv's and world cruises. Unfortunately the boom went bust.
Just when I thought the Carter-Church denial of on-the-ground human intelligence gathering from “unsavory characters” (only from church-going choir boys), comes now yet another set of Carter buzzards home to roost.
So you think the problem was we weren’t paying enough taxes?
Not hardly. In our area, house prices are up an inflation-adjusted (and unsustainable) 200% across the board. That was the lenders trying to make big loans, not loans to poor people, and it's biting all of us because all those big loans have no value behind them. With those mortgages being traded at par, they corrupt the value of all dollars.
That, however, does not accout for the idiocy throughout the entire market where $400,000 houses were being sold for $800,000 borowed in the form of mortgages that even a couple with good paying jobs could never afford after the "interest-only" grace period expired.
Why would a lender make such a foolish loan?
Because they were not lending their own money. They turned right around and sold those mortgages to foolish investor and made their money on commission fees.
Wow - Carter was President for only 4 years, and not only us, but the whole world is still paying for it! Iran, Zimbabwe to name a few....
>>They were not greedy lenders.
>>They were forced by left wing groups
>>like ACORN to make bad loans or be
>>shut down because of this law.
Oh Baloney. Who forced Roland Arnall to give up Long Beach Savings’ banking license and turn the institution into Ameriquest, the flagship of the Subprime industry?
Congress may have created the opportunity, but it was greedy power mongering parasites like Arnall and his imitators who exploited it.
To make money.
See Post 24.
The lenders sold those mortgages to gullible investors, maybe even the manager of one the mutual funds in your 401K.
The lenders made money on commissions instead of on the interest of the loan. If the buyer's finances crashed and burned when the interest-only grace period expired, that was the investor's problem and not the original lender's problem. Instead of carefully lending out their own money, lenders were recklessly lending out other people's money in order to pockets the commissions they charged for each mortgage.
The realtors made money on commissions. If the buyer's finances crashed and burned when the interest-only grace period expired, that was the buyer's problem.
The buyers paid $800,000 for $00,000 house on terms they could never repay.
The investors bought $800,000 mortgages backed by nothing but a promise to pay from individuals who could never afford to pay that much.
The U.S. taxpayers are now being urged to foot the bill to bail out the foolish buyers and the foolish investors.
Home Americans just won’t live in?
I never really thought about it that way but you’re right. Carter’s 4 years and we’re still in hock.
I never really thought about it that way but youre right. Carters 4 years and were still in hock.Hmmm... Now that you mention it -- how could the Panama Canal Zone giveaway bite us on the hindquarters?
And it just took 30 years to kick in? Give me a break!
Oh bullshit. That law is 30 years old and no law can force a lender to deal with someone unqualified for the loan. No law forced the creation of negative amortization mortgages or zero principle mortgages or mortgages for 115% of the homes value. The mortgage industry itself did that. And it was greed that is the cause. Greed on the part of the borrowers and a whole lot of greed on the part of the lenders. The simple fact is for 15 years the mortgage brokers made a boatload of money on the refinancing boom after the rates broke in the 1990's. Those of us in middle age remember that between 1978 and 1991 the mortgage rates stayed in double digits. Then broke in the 90's and people refinanced at a lower rate. Then refinanced again and again as rates continued to drop. A whole lot of people made a whole lot of money off that refinancing people who's credit was good and who's houses had appreciated. Then rates stablized about 5 years ago and suddenly all the people with good credit were locked into low interest fixed morgages and weren't clamoring to refinance any more. So that's when the companies went after the dregs. Those who they hadn't dealt with before, the sub-prime folks. That's when all the wacky mortgage schemes were launched, just so the companies could continue to lend to anyone and keep those fees rolling in. They took risks that the rates weren't priced for, with people they had no rational reason for dealing with, and it bit them in the butt. And not they come screaming to the government for a handout, and blame everyone but themselves for their problems.
your last post makes more sense than most on this thread
That statements really border line. I only know of one couple, personally, that were loaded up on an arm mortgage, and they were sold a line of BS by the Realtor and builder about buy today, when the mortgage resets you can sell at a profit and have a bigger down payment next time. My advice to them was to sell and get out of the deal and then find an attorney to collect off of the builder and real estate broker. Make a good test case.
I read something that said many sub-prime were minority borrowers. Sub-prime is a new term, it was not used in 1977, IIRC. There is some truth in this argument. That said, Bush has pushed for increased homeownership too, though not in such a stupid way as the CRA. In the end, the Dems are the bigger causes of giving loans to unworthy borrowers.
He was also speculating that Tony Rezko might have made money off of the CRA legislation.
It wasn't the guy from Politico dot com, it was the other guest.
I frankly wasn’t playing attention then. But wasn’t one of the guests the guy from RealClearPolitics?
Thank you! You are correct. ... But now I'm wondering whether I got that mixed up with "politico" and that it's still the "other guy" who was taking about Obama & the RCA.
He always has the same two guys on every final hour, so I guess I'll just have to wait until next Saturday.
Kudlow seemed interested in the link. I guess if the story has any legs, he'll bring it up again.
Outstanding post, sir...