CRA has been around since 1977. There was no bubble in subprime loans during the first 25 years of its existence.
GLB passed in 1999 opening the mortgage market to investment banking. The amount of subprime lending exploded, and much of it was now high-risk and non-conforming. The rise and collapse of the subprime market occurred in less than 10 years.
There has been a raft of studies by the likes of the FDIC, the Office of Thrift Supervision, the Federal Reserve, and private firms. In the world of subprime lending, 50% of subprime loans were made by independent mortgage brokers and were not subject to CRA. 25% of subprime loans were made by bank subsidiaries and affiliates and were only partially subject to CRA. Only 25% of subprime loans were fully CRA regulated. CRA loans were conforming and low yield. The great excesses in subprime lending occurred in the non-regulated sector where you had zero-down loans, no doc loans, payment option ARMs, and a host of similar high-yield innovations. These loans were highly sought after by the investment community because they promised high yields. They also turned out to be time bombs for those unlucky enough to have been involved with them.
Boring, conforming, low yield CRA loans have proven to be as safe as other conforming loans since they use similar criteria to vet the borrowers’ ability to make payments. CRA is probably a bad idea just like all other government mandated social engineering, but it doesn’t involve enough money to have created the credit bubble. That took the firepower of Wall Street looking to create a large new market to invest in. And once Glass-Steagall was out of their way they poured huge amounts of money into mortgages and the related derivatives market.
and affiliates and were only partially subject to CRA. Only 25% of subprime loans were fully CRA regulated.
Yes, but Banks that wanted to compete with the Gov’t, had to issue loans at a MUCH lower interest rate say 3% to get individuals like myself(in 2001) who would otherwise have no choice but to take a Federal Loan, as opposed to pay 20% down for a conventional loan which was the norm in the past.
Fannie and Freddie guaranteed HALF of ALL U.S. mortgages, there’s no WAY that that DOES NOT set the tempo for the REST OF THE MARKET.
Sorry. I’m interested in other views but the math just does not add up to me.
I have no doubt GLB opened the flood gate to another level, but I don’t see how Fannie and Freddie did not set that MARKET by causing conventional loans to have to compete.