Posted on 10/04/2008 11:05:02 AM PDT by jrushing
What few today remember is that one of the government's central goals in undertaking mortgage market reform was to segregate American cities by race. As the insurer of much of the national mortgage industry, the FHA fixated obsessively on fears that racial integration would harm real estate values and leave the government responsible for bailing out legions of failed loans.
(snip) Wall Street Street's apologists have tried to blame the subprime crisis on the Community Reinvestment Act, Congress' tepid attempt in 1977 to atone for the FHA's sins. This argument, of course, is completely ludicrous, since the vast majority of subprime loans were made by institutions that were not covered by CRA. Wall Street and old-fashioned greed drove lenders to offer subprime loans, not the federal government.
(Excerpt) Read more at blog.nola.com ...
The government opened up the floodgates to non-CRA loans (e.g. $300,000 NINJA) to maintain the illusion that the CRA loans were solvent. Otherwise the CRA loans would have crashed around 2005 or so.
BTW, has anyone seen the videos of the voter fraud in Ohio on Michelle Malkin's site? "Thug thizzle" ?? /hijack>
Cheers!
Activist groups were encouraged to agitate by the Carter-era Community Reinvestment Act, which enshrined in law a kind of lending protection racket. Banking regulators were given the power to make trouble for banks that failed to lend enough money to so-called underserved communities. Banks that paid enough -- whatever that means -- got left alone, but banks that didn't, got their legs broken....
After CRA came into effect, Saul Alinsky-inspired "community organizer" groups such as Greenlining, ACORN, and National Council of La Raza got into the shakedown business. They preach the hateful class-warfare rhetoric of their fellow community organizers Jeremiah Wright, Jesse Jackson, Al Sharpton, and Michael Pfleger.
They rage against capitalism and demand crushing taxes and aggressive wealth-redistribution programs. They demand more government spending on social programs, a higher minimum wage, and gun control. Depending which way the economic wind is blowing, they demand more subprime lending, or curbs on subprime lending, which through the magic of dysphemism, is linguistically transformed into "predatory lending."
His statment, "majority of subprime loans were made by institutions that were not covered by CRA" seems to be false.
I thought it was a fact that all mortgage lenders had to follow the CRA rules or be subject to investigation. Isn't this correct?
Questions raised from your comment;
Were most sub-prime mortgages bought and securitized by Fannie and Freddie?
What lending institutions were exempt from CRA and when?
What percentage of CRA exempt lending institutions had their mortgages bought and securitized by Fannie and Freddie?
Who wound up purchasing these sub-prime mortgage securities and did they know the the specific risk of what they were purchasing?...or was the risk hidden by Freddie and Fannie?
Alright frog, you made me look up that one.
dysphemism 1. a deliberate substitution of a disagreeable, offensive, or disparaging word for an otherwise inoffensive term, as pig for policeman.
I was always amazed at the way they turned these "loans for the poor" into "predatory lending".
You gottta have a victim.
It was my impression that both small and large lending institutions are subject to CRA regulations although testing for larger lending institutions is more stringent.
I too would like to see more definitive information on this.
So, Lehman Brothers . Bear Stearns , AIG and the whole US financial system is going under because minorities bought too much house...
No.
The way I understand it is that the FM's bought all of these loans, good & bad. They bundeled the loans together & sold them as securities/investments to the companies that you mentioned & others. Now no one wants to buy these "toxic" securities because no one knows what they're worth. These companies now have to write down these assets as worthless which can push the company into default.
Anyone, feel free to jump in & correct this because my understanding of the problem is very limited.
“Were most sub-prime mortgages bought and securitized by Fannie and Freddie?”
Yes. That does not mean they are held by Freddie and Fannie today. In fact, regulators preferred that Freddie and Fannie NOT hold MBS instruments themselves, but sell them to the commercial banks.
“What lending institutions were exempt from CRA and when?”
I do not know that answer.
“What percentage of CRA exempt lending institutions had their mortgages bought and securitized by Fannie and Freddie?”
I do not know that answer, but can say that a lending institution’s relationship to the CRA was neither a needed qualification or a disqualification for Freddie and Fannie to buy and securitize it’s mortgages.
“Who wound up purchasing these sub-prime mortgage securities and did they know the the specific risk of what they were purchasing?...or was the risk hidden by Freddie and Fannie?”
They were purchased and sold, and re-sold, and re-sold to and among financial institutions around the world. One element of “specific risk” was not “specifically” “hidden” by Freddie or Fannie - or anyone else. That particular risk was the risk implied by the mortgage rate and type of mortgage (prime or otherwise). An MBS carries a sort of “net” “risk” in that area because a single mortgage package, once securitized (bundled and sold in shares of the ‘package’) can contain mortgages at different mortgage rates as well as mortgages of different types. The specificity of risk of single mortgage is not “hidden” in an MBS, it is lumped with the net risk of the entire package.
Another area of “risk”, or lack of “risk” was not only not “hidden” but was accepted as FACT throughout the markets - would the originator of an MBS (Fred/Fan) stand behind it - no matter what. The Fred and Fan issues were considered as good as gold - that, in a crunch, the American taxpayer would bail them (Fred/Fan) out. That was a two-way good-good street for Fred/Fan and the markets they sold their MBS into - they could get a better price than could institutions that did not have the presumed government guarantee that Fred and Fan had, and those that bought them took them to be as safe as U.S. Treasury notes.
LOL! I stopped reading right there. This guy, Mr. John Kimble, gives the federal government wwaayy too much credit at being organized and efficient.
Wall Street and old-fashioned greed drove lenders to offer subprime loans, not the federal government.
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This line kills me! I defy anyone to explain how “old-fashioned greed” leads someone to loan money to someone who lacks the ABILITY to repay it. This might make sense if they were loaning twenty percent of value and could repossess and sell at market and keep the total but that is not the case. I used to get solicitations offering to lend up to one hundred and twenty five percent of appraisal on my property.
The thought process was this: If I can get this loan made and repackage it out before he defaults, then I have made my money. That is the greed part.
If I can get this loan made and repackage it out before he defaults, then I have made my money. That is the greed part.
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That is understanable but without the ability to sell the loan to someone else without recourse greed would not motivate a person to make a bad loan. Greed also does not make a third party buy into a bad loan, something else had to be involved and that was government interference in the process. Free financial markets are fairly self correcting, we could never have had anything like the mess we have now simply because of greed.
I am sure that you yourself understand what is going on here but I run into some people who rant about greed as if the mere fact that someone is greedy allows them to make huge sums of money, even though in reality a lot of people who are quite selfish and greedy end up with very little. Of course greed is a vague term anyway, just how much can someone have without being greedy? It depends on who you ask.
My own idea of real greed tends to run toward the kind of person who would rather not make money than have to share it with someone else. A good example would be a local man who had a business selling plants, especially daylillies. When he decided to retire from it the sensible thing to do would have been to have a half price sale and sell as much as possible and then wholesale the rest and be done. Instead he just quit maintaining his gardens and sold only what he could sell at full retail. I stopped once and inquired if he would wholesale and he flat refused, he let most of his stock wither and die rather than take a penny less than his retail prices for anything. I believe Aesop’s story of the dog in the manger was written to illustrate the attitude this man had.
The greed factor comes from 5 sources.
First,the mortgage lenders were using basically free money (paying very low interest on the money they borrowed) to make these subprime loans. They knew they would see a higher rate of foreclosures on the subprime loans, but they didn’t expect the current rate of foreclosures. They were projecting huge profits on these types of loans due to the large interest rate spread, and they got them for a while. Still, they made the loans for short term profit, knowing they would be able to unload them on the Freddie’s and Fannie’s, which they loved as it was nearly risk free in the short term.
Second, the inherent greed on the part of large investors for ever higher “returns on investment” created the market for the first level of derivatives, the collateralized debt obligations. The bundling up of all these high-risk mortgages into a supposedly safe, high return investment with a triple A rating, which was bought by the trillions of $s by the institutional investors. This securitization of mortgages was supposed to spread risk, but instead has created the current fundamental lack of confidence in the entire financial system.
Third level of greed comes in with the derivatives on top of derivatives scheme, creating this huge and unsupportable ponzi scheme, again and still in search of those high returns on investment. The credit default swaps sold by insurance companies to the lending banks, insuring the first level of securitized derivatives but without collateral, then exposed not only the huge banking industry but now also the huge insurance industry.
When the bubble burst and foreclosures started climbing, the entire house of cards started to collapse because basically you have way too much debt to real assets, and everyone running out of liquidity to meet obligations, leading to this domino effect of bankruptcies.
The fourth level of greed comes from the political class idiots who engineered this debacle, with the intent of pandering to certain voters who, as always, are after more “free stuff and gimme;s”. Political greed means doing anything it takes to get re-elected.
The fifth level of greed is the fact that millions of people bought more house than they could afford and is the underlying cause of the mess, Much of that is greed but a lot of that is also human nature, wanting a better lifestyle. Greedy speculators who were buying houses as investments continued to drive up housing prices, which helped create the bubble and delayed the inevitable crash. Homebuilders who flooded the housing market with millions of new units in the past decade have contributed to depressed market as well, creating a huge oversupply of houses.
A lowering of underwriting standards and ignoring risk management safeguards at all levels (private, business and government) has driven us to the point where we may actually be looking at another depression economy.
Thanks for the explanation but to my simplistic mind it still seems to come down to this, if the government hadn’t changed the rules of the game, greed alone could never have created such a mess.
I think the real greed will be found to reside with our elected representatives as you mention in your fourth level of greed.
The CRA’s purpose was to offset red-lining which may well have occurred in some places, altho from various things I’ve read, not proved. BUt accusation is just as effective as fact, as we all know. Banks did have a tendency to want to make loans that would be repaid, and if that meant that loans were denied to people and areas not considered good risk, that was considered red-lining by some.
CRA was to neutralize this. Any bank that was a depository of funds guaranteed by the FDIC was included.
From the act itself: “The CRA requires that each insured depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically”
We all know what govt means by “helping” and “evaluated.”
Unfortunately, meeting the alleged credit needs of the “entire” community trumped sound lending policies, and the “evaluation” was more a legal weapon used by virtually any group who decided to hold a bank hostage to get what it wanted. No bank wants to be in court for years or called racist. Nor does it want to be the govt’s enemy.
Now, regardless of who was involved in the sub-prime loans, that is not the main issue, which is that CRA began the descent into mortgage hell that snowballed into all kinds of lending messes that Fannie and Freddie gobbled up to keep things rolling to meet “social” and bonus quotas. As soon as it was known that risky loans could be easily sold off at no pain to the originator, all kinds of people other than banks got into the act and made lending a hot-potato game.
Lower standards became the norm, and it all escalated into a race to make loans, take a fee, then get rid of the bad paper to an agency more than willing to buy it, all in the name of social engineering and higher bonuses. Throw in Wall St. investing in these shaky enterprises, and we have today’s debacle.
But leave it to the so-called experts to take one element and use that as the primary explanation. It didn’t start out as greed, but rather need -— the need to toe a line created not by main street but by DC.
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