Skip to comments.How Little Law From '70s Brought The Financial System To Its Knees
Posted on 11/20/2009 5:10:42 PM PST by Kaslin
This is the second installment of a Monday series excerpting the chapter on political implications from Thomas Sowell's latest book, "The Housing Boom and Bust."
One of the first federal government efforts to change the process of mortgage lending by private financial institutions was the Community Reinvestment Act of 1977. Like many government policies or programs, it began small and grew in scope and severity over the years.
The Community Reinvestment Act directed "each appropriate federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."
These almost innocuous words nevertheless contain the implicit assumption that government officials are qualified to tell lenders to whom they should lend money entrusted to them by depositors or investors.
Although the Community Reinvestment Act had no major immediate impact, over the years its underlying assumptions and provisions provided the basis for ever more insistent pressure on lenders from a variety of government officials and agencies to lend to those whom politicians and bureaucrats wanted them to lend to, rather than to those whom lenders would have chosen to lend to on the basis of the lenders' own experience and expertise.
(Excerpt) Read more at investors.com ...
CRA + Political Correctness x ACORN x SEIU = bust
BOOKMARKED!!! (even before finished reading!!!)
Part II of five part series on "Housing Bust"
I use Sowell’s book for my Econ classes.
Thanks for the ping jaz. I would like to provide again that extremely informative link to the Dec. 27, 1993 National Review article “Assault On The Mortgage Industry” that I’ve posted seemingly a gazillion times since 2006 when I first saw it.
To me the date of the article is every bit as important as the text within when one considers the overall picture of the matter. It would be 1997 before the Clinton action was on the radar screen.
It was Senator Phil Gramm who came up with his 262-page amendment called the Commodity Futures Modernization Act, in December of 2000. This amendment, stuck in a government re-authorization bill, gave birth to the $62 trillion market for credit default swaps (CDSs). It was one of the last bills that President Clinton was to sign. Gramms amendment freed financial institutions like Fanny Mae and Freddie Mac from the risks and oversight of their CDS transactions which before they were solely responsible. This opened up the hedge fund and derivatives trade market which became the Achilles heel to our economic system.
We should have known from history that it caused a similar world economic collapse in the Panic of 1907. In the late nineteenth and early twentieth century, the little guy who wanted to trade stocks usually did it in a bucket shop rather than through a stockbroker. Bucket shops were set up in all sorts of premises, such as drug stores, hotels, cafés, etc. A bucket shop is a brokerage firm that books retail customer orders without actually having them executed on an exchange. Basically they were places where people could place bets on the performance of Wall Street. Joseph Kennedy made his fortune in Bucket Shops. It was the same type of mechanism that if found today in the credit default swaps market. What this tells us is that back in 1909, 100 years ago, people understood the risks and potential instability that comes from gambling on securities prices.
People who forget history repeat it. Wall Street firms like Bear Stearns, Lehman Brothers, Merrill Lynch, etc. started selling what they called derivatives, which were bets on how the market would do. Would it go up or down? One type of derivative was created which would bet on whether mortgage owners would pay or default. So, when the mortgage crises hit, the credit markets went upside down because there were a huge number of derivatives that bet on mortgage payments. The people who bet on mortgages would not get paid. These were people who were supposed to be paid off when a default occurred. Many of these people were banks who had huge amounts of money betting on these derivatives. But the folks who invented these derivatives had not set aside enough money to do that, and so it all came crumbling down like a house of cards.
For a good look into Gramms destabilization of the US economy, here is this post by Peter Cohan, President of Peter S. Cohan & Associates:
So as our economy is in grave danger, there has been no talk about fixing the real structural fault in our economic system. It is like the I-35W Bridge in Minneapolis with poorly designed gusset plates. The Obama Administration has ignored the cause of the economic failure and has used it to justify a spending spree that will cause further economic turmoil due to inflation and increased taxation. When the Democrats blame the economic collapse on the Bush Administration, tax cuts for the rich and greedy Capitalists they are purposely ignoring the true cause. All we hear is the continuous mantra that it was President Bushs fault. However, we should understand that there is a deeper fault with our economy that needs to be addressed.
bump for later
My hat is off for that cartoonist and it isn’t funny.
“CRA + Political Correctness x ACORN x SEIU = bust”
Your equation kept out the most important factor: the Fed.
Bump for later. I Love Dr. Sowell.
sowell ping and bump for hh’s ‘CRA page’...
BACKSTORY Remember when Candidate Obama expounded on 'Price Signals' to 'Change Behavior'? In an interview on Iowa Public TV in 2007, Obama advocated sending price signals to middle class consumers in order to change their behavior. Price signals being an Orwellian-Marxist code word for "punitive taxes and fees."
BACKSTORY Sap-happy Barack Obama, Esq, represents ACORN. He sued banks into loaning to marginal people. Illegals were never asked for proofs of employment or citizenship---pay stubs, SS numbers, etc. As long as they had a pulse and could write the name of one of their phony identities, they got a loan. Most illegals were scam artists----flipping the home back and forth among immigrant families at higher and higher profits, duping banks at every turn. When they were done looting, the last "homeowner" defaulted and absconded to Mexico with $tens of thousands in cash.........leaving banks (and taxpayers) holding the bag.
We found out that the toxic mortgages poisoning the global economy (that brought the US economy to its knees) were held by leeches with larceny on their minds, who had mo moral integrity, just parsites who never intended to pay back banks.
BACKSTORY Candidate Obama was fronted by SEIU and ACORNs muscle for money protection racket. The strategy involves SEIU extorting donations from targeted government and corporate officials, offering them Mafia-like protection from protests by SEIUs paid thugs, many of them convicted felons.
ACORN has blocked bank mergers until the targeted financial institutions agreed to change their lending policies to ACORNs satisfaction.
It began to play out----in the context that candidate Obama's "hope and change" anarchy intended to nationalize entire industries----- banks, auto, healthcare, energy----on a march to socialism, and then communism.
STIMULUS SCAM---A DEM SLUSH FUND Americans are awakening to the fact that govt insiders are mishandling trillions in stimulus------that federal monies are being illegally directed to Democrat campaign coffers, or wire-transferred offshore into personal accounts......or being laundered in the states. ABC News reported the WH invented 700 phantom Congressional districts that received stimulus grants (read money laundering).
Keep in mind, some 85% of Obama's stimulus is still in Washington. Ohaha's saving it for imperiled Dems' 2010-12 elections.
BACKSTORY On June 9, 2009, Pres Ohaha called a press conference to announce, "Several financial institutions are set to pay back $68 Billion to taxpayers." Resonable people (taxpayers) assumed that any money or profit would be returned to the general funds from whence it had come .......in order to pay down the debt. The truth, however, is that the money returned by the banks is finding new life as part of what amounts to a Treasury Dept-controlled slush fund.
“BACKSTORY Sap-happy Barack Obama, Esq, represents ACORN. He sued banks into loaning to marginal people. Illegals were never asked for proofs of employment or citizenship-—pay stubs, SS numbers, etc. As long as they had a pulse and could write the name of one of their phony identities, they got a loan.”
Obaba is making many mistakes.
“STIMULUS SCAM-—A DEM SLUSH FUND Americans are awakening to the fact that govt insiders are mishandling trillions in stimulus———that federal monies are being illegally directed to Democrat campaign coffers, or wire-transferred offshore into personal accounts......or being laundered in the states. ABC News reported the WH invented 700 phantom Congressional districts that received stimulus grants (read money laundering).”
This may be enough to bring him down if it is handles properly. Are you listening, Mr. Issa?
Uh, handled that is ;-)
It was the same type of mechanism that if found today in the credit default swaps market.
However, the only way I can make sense out of this fragment is if I change "if" to "is". Is that what it was supposed to have read?
This is extremely potent information. I’d like to quote it. Could you give me a link (or links) to the sources?
Risky screwy mortgages (these risky loans you refer to) were bundled into mortgage backed securities which were sold off and traded
This activity was manic and highly destructive in and of itself
Credit default swap (CDS) insurance (bets) were then taken out on these securities (MBS)
This made the situation 10x worse
One great example is Goldman Sachs sold a lot of MBS to clients and told them they were very good and highly rated
But behind their backs took out CDS insurance on these very same securities -- bet against them
Like betting that your neighbor's house would burn down right after you sold him 10 gallons of gasoline in what you claimed was a leak proof container
They took this CDS insurance out from AIG
When AIG failed GS was left high and dry and on the brink of failure but Geithner, Paulson and other GS agents bailed them out and made them whole on their AIG CDS bets
Actually 99% of your post was correct except for the above
The American dream house - Fannie Mae gives minorities a chance
The Washington Times - Friday, December 10, 1999
Author: Franklin D. Raines
A decade after the Berlin Wall collapsed, a wall of injustice still divides minority families from the American dream of owning a home. We must tear down this wall, and the free market is the greatest bulldozer.
For instance, Fannie Mae brings private capital, management and efficiency to the task of expanding affordable homeownership in America. At the center of the housing finance system, Fannie Mae is a major force in the expansion of minority homeownership.
Since Fannie Mae doesn’t make home loans ourselves, we back mortgage lenders by buying or securing loans they make in the primary market; the company does not serve minority borrowers directly. Nevertheless, Fannie Mae outperforms the overall market when it comes to financing minority lending, according to data provided to the U.S. Department of Housing and Urban Development (HUD), and Federal Reserve data gathered under the Home Mortgage Disclosure Act. Last year, Fannie Mae financed $46 billion in home loans for more than 450,000 minority families, 77 percent more than the previous year.
By far, Fannie Mae is the largest single source of funds for minority homebuyers in the nation. Notably, Fannie Mae finances more minority homeowners than the federal government does through the FHA.
In his column, “Minority housing gap: Fannie Mae, Freddie Mac fall short,” which ran Nov. 17, Martin Luther King III called for more progress in mortgage lending to minorities. We couldn’t agree more. Yet Mr. King suggests that Fannie Mae does less than the primary market when it comes to lending to minorities. Not so. Evidence to support this assertion, sourced to an Urban Institute study, was based on interviews with a handful of lenders, not solid loan data analysis. Another source, a U.S. General Accounting Office study, relied on outdated HUD data.
In fact, when HUD Secretary Andrew Cuomo recently proposed to increase the percentage of the business Fannie Mae and Freddie Mac does with underserved families, as tough as the new targets are, Fannie Mae immediately signed up. This means we will devote 50 percent of our business to low- and moderate-income homebuyers.
However, Fannie Mae’s commitment to underserved families goes well beyond the HUD mandate. Five years ago, Fannie Mae launched our Trillion Dollar Commitment, a pledge to invest $1 trillion to help 10 million underserved families become homeowners or obtain decent rental housing by 2001. We targeted lower-income families, residents of central cities and rural areas and others for whom mortgage finance has always been difficult to obtain. No company in the world has ever made such a commitment, but next year we will meet our goal ahead of schedule. Furthermore, over the 1990s Fannie Mae has carefully studied, surveyed and identified the specific barriers to minority homeownership, including income, credit, misinformation and even discrimination. Then we’ve systematically developed breakthrough strategies to dismantle the barriers. They include 3 percent down payment mortgages, technology that reduces closing costs and nearly $10 billion in experimental mortgages to challenge outdated assumptions about credit. Thirty-three percent of borrowers using our special community lending products were minority families.
To reach families where they live, Fannie Mae has opened 44 local Partnership Offices across the nation and launched over $300 billion in local investment plans with lenders, city housing agencies, non-profit organizations and others. Fannie Mae also helps banks meet their Community Reinvestment Act requirements. Over past two years, we purchased over $3 billion in CRA loans; by 2002, we’ll buy $10 billion more. The Wall Street Journal “Business and Race” column described our impact on the housing finance industry this way: “Fannie Mae’s moves have rewritten the business plans of major lenders. To fight the information barrier, the Fannie Mae Foundation has pioneered consumer outreach to help families understand what it takes to buy a home and feel comfortable and confident with the process. An astounding 7.3 million consumers have responded, and 40 percent are minorities. Indeed, the Foundation’s new homebuyer education campaign, `Your Credit Matters,’ brought 24,000 responses fromminority families in the first 60 days.”
These strategies have helped minority homeownership grow at a faster rate than that of white families, and minority homebuyers report they feel less discrimination. The racial divide still exists. Bridging it must be the first priority of the housing finance system. On this 50th anniversary of the National Housing Act, Fannie Mae is proud to lead the market to make the American dream of homeownership as diverse as the nation itself. Yet we will not be satisfied until the wall is down and the minority housing gap is closed.
Franklin D. Raines is chairman and CEO of Fannie Mae.
No direct link - related link:
70.5 million families, or 67%, now own homes
Tulsa World - November 13, 1999
Author: DANA SIMON, World Staff Writer
In July, Cuomo announced a policy to require the nations two largest housing finance companies to buy $2.4 trillion in mortgages over the next 10 years to provide affordable housing for about 28.1 million low- and moderate-income families. The historic action by HUD raised the required percentage of mortgage loans for low- and moderate-income families that finance companies Fannie Mae and Freddie Mac must buy from the current 42 percent of their total purchases to a new high of 50 percent in 2001. The percentage will first increase to 48 percent in 2000.
In addition, the Federal Housing Administration (FHA), which is part of HUD, insured nearly 1.3 million home mortgages in the 1999 fiscal year many of them going to minorities and central city residents. FHA has insured more than 6.8 million home mortgages since 1993. Without FHA insurance, many families would be unable to get mortgages to become homeowners. On Jan. 1, FHA began insuring home mortgages loans of up to $115,200 in communities where housing costs are relatively low and up to $208,800 in communities where housing costs are high. This was the second increase in the loan limits since October 1998 and will open up homeownership to more families in the years ahead.
The National Partners in Homeownership a coalition of 66 national groups representing the housing industry, lenders, nonprofit groups and all levels of government has also helped boost homeowner- ship. The Partners group was created in 1995. It has implemented initia- tives to make buying a home more affordable, faster and easier. Activi- ties to increase homeownership also are being carried out by 157 local homeownership partnerships established to support the national strategy. Amongthe activities developed by the Partners are homeownership counseling sessions, homebuying fairs, and help with locating homes.
On top of these initiatives, the Community Reinvestment Act a federal law that requires lenders to make loans to all segments of the communities they serve has resulted in more loans to people in low- and moderate-income neighborhoods since it was enacted in 1977. A significant portion of these funds has been used for mortgage lending that has boosted homeownership. Community groups estimate that lenders have pledged more than $1 trillion in CRA loans since 1977.
GAPS SEEN IN LOANS TO BLACKS AND HISPANICS
Boston Globe - September 16, 1999
Author: Bruce Butterfield, Globe Staff
But ACORN officials said their study should raise concerns about the long-term commitment of big banks everywhere. Other housing advocates in Boston agree, though they note that minority lending by major banks has shown signs of improving recently.
The ACORN study agreed. Minority home lending in Greater Boston improved between l997 and l998, particularily for Hispanic borrowers, it found.
The number of Hispanic loans rose dramatically, by 37 percent in Greater Boston, outdistancing for the first time the increase in loans to whites, which was 12 percent.
Loans to African-Americans reversed their downward trend in the final year of the four-year study, posting gains as well. But the gain was just 5 percent.
In Washington, Housing Secretary Andrew Cuomo , citing the ACORN study and another by the Urban Institute that disclosed wide discrimination in minority lending, said he would use the findings to help fight Congress over proposed cuts in spending for housing discrimination laws.
The ACORN study was based on a survey of mortgage data from major lenders in 41 cities.
MORTGAGE-LOAN DISCRIMINATION IS STILL COMMON, STUDIES FIND
Miami Herald, The (FL) - September 16, 1999
Author: TONY PUGH, Herald Washington Bureau
At a time of record home ownership, two new reports suggest mortgage lenders still routinely discriminate against minorities.
Last year, blacks were twice as likely to be rejected for conventional loans as whites in each of 41 cities examined by the grassroots housing activist organization ACORN , the Association of Community Organizations for Reform Now. The same study found Hispanics were at least 11/2 times more likely than whites to be denied a mortgage loan.
A study commissioned by the Department of Housing and Urban Development found that the discrimination typically begins early in the process of buying a house, sometimes in pre-application inquiries in which minority buyers receive less time and information from loan officers and are quoted higher interest rates.
In Miami, ACORN said, blacks make up 20.6 percent of the population but got only 6 percent of conventional mortgage loans in 1998. But Hispanics, who make up about 49 percent of the population, got 57.1 percent of the loans in 1998.
The studies, released Wednesday, contain information obtained through the Home Mortgage Disclosure Act and also relied on white and minority ``testers, who posed as home buyers with similar credit and income but received vastly different treatment.
``Nothing else can explain it, HUD Secretary Andrew Cuomo said. ``All the numbers are same. All the facts are the same. The only difference is the color of the skin.
$7.5 MILLION STUDY WILL TARGET HOUSING BIAS
Contra Costa Times (Walnut Creek, CA) - November 17, 1998
Author: Tony Pugh
Warning the housing industry to think twice before you discriminate, HUD Secretary Andrew Cuomo announced Monday a $7.5 million study to document the extent of housing bias against blacks, Hispanics, Asians and American Indians.
The yearlong study by the Department of Housing and Urban Development will include more than 3,000 individual tests of mortgage lenders, rental agents and real estate agents to see if customers are treated differently because of their race or ethnic origin.
Cuomo said the effort would be the most comprehensive and sophisticated analysis of housing discrimination ever conducted.
Testers will look for evidence that lenders and others steered minorities to certain neighborhoods and lending institutions, provided less favorable credit assistance, quoted higher security deposits and fees to minority renters and withheld information about the availability of homes or rental units.
If proven to be racially motivated, such activity would violate federal fair housing laws.
We will not hesitate to enforce the law, Cuomo said. And if youre a large organization, dont think youre immune from the law. Were serious.
Local housing advocates with the Oakland-based nonprofit group Acorn have for years called for HUD and other agencies to monitor the rate of lending to minorities in the East Bay.
Indeed, as well as at least one other I'll leave unnamed for now.
That said, because Lady Liz said she had a plan I left it at that concerning this malarkey.
However I *do* have an acquaintance who's an extremely powerful & influential force in the world of investigations focusing on precisely this kind of corruption.
Did not ask this man, and by extension his organization, to do a thing; except, follow Liz's work.
I'll tell you my friends, the nappy headed SOB thought he too powerful and that's the A#1 reason he's become so sloppy and that, in turn, makes him so easy to track. We shall see. :^)
Thanks again, Liz.
I said on another thread what's needed right now is for at least another dozen solidly conservative women to step forward to dilute the attacks against Sarah Palin.
Overwhelm the buggers same way they've overwhelmed us, rendering ol' Saul's mo of "isolating the target" useless?
You are exactly the kind of woman I had in mind when I said that.
Excellent summary, Dennis.
These risky loan were my shorthand way of referring to bundled mortgage backed securities. You said good.
Fantastic post-—also bookmarked for later in depth reading
Like that poor unlearned woman in Detroit called it 'Obama's stash', when asked where the money was coming from when the application drive for a measly $3,600 was being offered.