Posted on 09/27/2008 10:08:08 AM PDT by hiredhand
The Subprime home mortgage collapse...a Primer. It's ALL about the CRA of 1977
Community Reinvestment Act (CRA) of 1977 - This required banks to offer credit throughout their entire market area for “underserved” populations and small businesses. The CRA gave incentives to help low income borrowers become “home owners”. Liberals call this group “low income borrowers”. Conservatives call them a RISK!
The CRA was passed by the Carter administration.
In 1995 the Clinton administration authorized subprime loans under the CRA. Democrats added these provisions for the securitization of subprime loans and then ENFORCED the lending to high risk individuals. By 2000, one trillion dollars had been loaned to subprime borrowers.
Bear Stearns (collapsed in 2008) was the first to buy subprime mortgage securities. In October of 2000, Fannie Mae purchased two billion dollars worth of these subprime securities.
Subprime mortgages started to grow after 2000, and home prices started to rise. As we all know, Fannie Mae is a government sponsored enterprise. Fannie Mae GUARANTEES mortgages. Then Fannie Mae sells them to banks and investors. The more mortgages they sell, the more money they make.
Fannie Mae wanted to increase the number of mortgages sold. How does one increase the number of mortgages sold? This is done by making the loans available to low income borrowers through “affordable mortgages”. These loans were made available by allowing wider variances that borrowers needed to qualify for loans. These variances apply to:
1. loan-to-value ratio. 2. borrower contribution. 3. housing expense-to-income ratio. 4. others
REMEMBER...The banks HAD to issue subprime mortgages or pay stiff penalties mandated under the CRA. So how does one keep the loans affordable?
No money! No money down! Interest only! Low variable rate! No income verification! Bad credit? No credit?
Experts in the U.S. Financial industry began to worry when it was realized that - In 2004, 92% of all home loans issued by Fannie Mae were variable rate. In 2005, 91% of all home loans issued by Fannie Mae were variable rate.
Fannie Mae tells the banks to make the loans, “We'll guarantee them”. “Home ownership” kept rising and so did prices. Between September 2005 and March 2006, one year ARM (Adjustable Rate Mortgage) loans ballooned from roughly 4% to 6%. This wouldn't have been so bad all by itself, but the real catalyst was the gas prices increase. This “squeezed” people, especially low income earners.
At this point, some borrowers stopped paying, and to a degree, some banks stopped lending. During third quarter of 2007, the subprime market collapsed.
Foreclosures started piling up. This left the market with too many sellers and not enough buyers, and thus home prices started falling. More borrowers stopped paying.
Fannie Mae “guarantees” became worthless because they kept overstating their assets, which incidentally puts them in direct violation of the Sarbanes Oxley act of 2002 which deals with accounting reporting of publicly traded companies.
After this, banks began collapsing due to worthless government sponsored securities issued by Fannie Mae. Jobs were lost, and here we are.
The expansion of the CRA is directly to blame.
Before the CRA expansion by the Clinton Administration in 1995, home prices increased with inflation, but after the CRA expansion, home prices became unhinged from inflation. CRA expansion caused home prices to rise too fast! Economic fundamentals did NOT cause this rise, regulation mandated credit DID!
People DID try to stop it!
In 2003, the Bush administration proposed a new agency within the Department of The Treasury to oversee and regulate Fannie Mae and Freddie Mac, the two largest entities in the American mortgage lending industry. But the Democrats STOPPED it. They said that to regulate lenders tightly under those agencies might diminish their ability to finance loans for lower income families.
One Democratic Congressman who was pivotal in blocking the new agency was Rep. Barney Frank (D-MA). He spoke out against the proposal and was quoted at the time as saying, “...the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Another Democratic Congressman who blocked the new agency was Rep. Melvin Watt (D-NC). He spoke out against the proposal and was quoted at the time as saying, “...and in the process, weakening the bargaining power of poorer families and their ability to get affordable housing.”
Affordable housing? After CRA expansion, housing prices increased a LOT. Did this make housing affordable for low income borrowers?
Someone else tried to stop the collapse too.
In 2005 Sen. Charles Hagel (R-NE)sponsored a bill called “The Housing Enterprise Regulatory Act of 2005. Co-sponsors were John McCain, Sen. Elizabeth Dole (R-NC), and Sen. John Sununu (R-NH). This bill was filed in the Senate as Bill S-190. This bill sought to provide regulation and oversight of Fannie Mae and Freddie Mac. But Democrats blocked it. It came back in 2007 and Democrats blocked it in committee again.
“Why did the Democrats block S-190?” you ask? Because Fannie and Freddie have friends in the Senate.
Sen. Chris Dodd (D-CT) is the current Senate Banking Committee Chairman. He received a sweetheart loan. In 2003 he received a cut rate $800,000.00 loan from Countrywide Financial. “Conflict of interest” you say? “Impropriety” you say? Why is Sen. Dodd still serving in the public interest? It seems that he is plainly serving the interest of Chris Dodd.
Sen. Barack Obama (D-IL) also received a sweetheart loan of $1.32 million loan from Northern Trust in Illinois at a very good rate. TOO good for the vast majority of most citizens.
Earlier in his presidential campaign, Barack Obama chose a man named Jim Johnson to head up his VP (Vice Presidential) search committee.
From 1985 until 1990, Jim Johnson was the Managing Director of Lehman Brothers, which is now recently bankrupt because of the subprime mortgage collapse.
From 1991 until 1998 – Jim Johnson was the CEO of Fannie Mae, when the CRA was expanded under the Clinton administration.
Mr. Johnson improperly deferred $200 million in expenses as the CEO of Fannie Mae. Fannie Mae underreported Johnson's compensation, which was originally reported as $6 to $7 million. Documents show that Johnson actually received $21 million. He was a contributor to Barack Obama's campaign and gave the personal maximum allowable donation of $4,600.00.
Currently, Jim Johnson is a wealthy private banker and is on the board of Goldman Sachs, which has donated another $700,000.00 (seven hundred thousand) to Barack Obama's campaign, and raised another $500,000.00 (five hundred thousand) through bundling.
In June of 2008 it was announced that Jim Johnson quit as an Obama advisor because of pressure on account of his involvement in the current financial crisis.
Oh, and by the way, Jim also received a sweetheart loan from Countrywide Mortgage.
Franklin Raines is Barack Obama's housing issues advisor. Mr. Raines currently lives in a house valued at approximately $7.6 million dollars. While there's nothing wrong with living in a big, expensive home, let's look look at Mr. Raines' past.
Raines served as an advisor in the Carter administration from 1977 to 1979 when the CRA was first enacted.
From 1980 to 1991 he was an investment banker with Lazard Ltd. From 1991 to 1996 he was the Vice Chairman of Fannie Mae, when the CRA was expanded to include subprime loans. From 1996 to 1998 he was the OMB (Office of Management and Budget) director for the Clinton administration. From 1999 to 2004 he was the CEO of Fannie Mae. He received a $25 million dollar “golden parachute” upon his departure.
He also received a sweetheart loan from Countrywide Mortgage sometime between 1996 and 2004.
Under Franklin Raines’ leadership as chairman and CEO, Fannie changed its charter to a more high-risk enterprise of buying mortgages and holding onto them. Fannie also overstated earnings by a mind-boggling $10.6 Billion and paid Raines and his management team massive bonuses tied to Earnings Per Share (EPS). Any company can hit its EPS targets if they don’t worry about minor details such as accounting rules, debt levels and risk factors.
Franklin Raines pulled in a total of $90 million between 1999 and 2003, the majority from bonuses. In 2004 the SEC (US Securities and Exchange Commission) and OFHEO (Office of Federal Housing Enterprise Oversight) sued Raines to recover some $50 million of his bonuses based on Enron-like accounting practices. Civil charges were also filed against Raines. As a result, Raines agreed to an “early retirement”, paid hefty fines and gave up lucrative retirement benefits (stock options valued at $15.6 million) for his role in accounting “errors”.
Franklin Raines resigned from Fannie Mae due to “accounting irregularities”.
From 1989 to 2008, Barack Obama received $126,349 in campaign support from Fannie Mae. This is four times more money from Fannie Mae per year than any other senator. It's 49 times more than John McCain.
The lawfirm, “Miner, Barnhill, and Galland” sued banks for not issuing enough subprime loans. They sued Citibank. Obama was a junior lawyer on the team that sued Citibank.
What we're seeing is bad government regulation that made banks become predatory lenders to fulfill a government mandate; to offer souped up, shell game, “Affordable mortgages.”
This was caused by self interest, greed, and stupidity on Wall Street.
The Democrats got their wish though! LOTS of “affordable mortgages” that people couldn't really pay for! While those mentioned above in Fannie and Freddie and around them got richer. It was a social engineering heist of enormous proportion. It created the environment and the WRONG incentives that set up low income families to FAIL. It was a setup mandated by the government, pushed by the banks, sold to Wall Street and now they want you and I to pay for it.
Ping...
Bump for later
The video had TOO much info, in TOO short a time. These notes are a condensed version and should give people a little more time to digest and mull it over.
This is nothing more than creeping socialism.
“”I hope this helps to clarify the massive deceit which is currently taking place in D.C.””
I’m sure I heard Obama say in the debate last night that the Clinton administration tried to rein in some of these lenders....was news to me. No timeline I read says anything of the sort - only the opposite. Wonder why McCain didn’t pick up on it.
Yours is a good post with much accuracy of historical content defining the cause of the debacle. Thank You for the posting.
again....right on the mark.
Democrat math (2 + 2 = the square root of pi)
Placemarker...thanks, hiredhand.
It is essential that people read and understand this timeline. My problem is finding something that looks very objective and neutral so I can send it to my very liberal relatives and they won’t think they are being spun or preached to or even that I am advocating. I have already been sending things, but they get so upset because they are not used to being challenged and they take it very personally. My daughter in law practically came unglued because I casually sent an excerpt where Sarah Palin was saying she had appreciated title IX...in return I got an email full of vitriol and angst with nonsense such as “McCain is a THIEF...he STOLE “change” from Obama”. I had to remind her that Bill Clinton ran on change...and so on. It seems like a formidable task to get through to such people and such people means just about everybody in my life. So, I start to feel like I am a NUT. Any advice as to direction that would be indisputable timeline of facts?
Happy to help you Gramma! :-)
How many American voters do you suppose are aware of those pieces of recent history? I'd estimate probably 1 in 100. And we have the mainstream media to thank for that.
~ joanie
“No money! No money down! Interest only! Low variable rate! No income verification! Bad credit? No credit?”
*****
Thanks for the post. On some other thread someone thought that the Graham Bill allowing regular banks to make riskier investments to make more money was more of a cause. Obviously it is a big factor as well.
However - when a bank is FORCED to NOT make money (as with the CRA) on its normal business (loans at a naturally competitive rate) - it obviously needs to make up the loss somewhere else.
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