The bank had to keep a certain percentage of loans on the books that were minority sub primes or face fines
So the easiest way was to buy blocks of them on the market to have on the ledgers
That’s not to say banks didn’t make bad loans on their own and ive already spoken on derivatives
The CRA over the years prompted the practice of forcing banks to loan to unworthy clients often with a racial component
Neidermayer said CRA had nothing to do with it....a red herring ...I disagree
Populism in conservatism loves to blame greedy bankers and there were some especially in derivatives etc
And some local banks and mortgage banks like Countrywide or American Century who would loan on over appraised homes with zero down
But what opened those doors wasn’t greed but politics and then it took a life of its in
Politics kept Fannie and Freddie from being reeled in
It was cumulative event that it my minds eye crashed downward after the derivatives collapsed after so many delinquent mortgages ruined those instruments which also resulted in a loosening of home inventories driving home prices down making folks in volatile housing markets upside down on low equity to begin with homes
And where did the notion so many folks who can’t afford homes anyhow begin?
Under Carter.
I just don’t cotton to all this big banks are bad rhetoric. I trust bankers far more than I do govt
We did not loan anyone a 700,000 dollar home on 14,000 income
Very few local banks hold their mortgages themselves
They get bundler in high volume with teenies clipped off or fees
Some banks just dealt with the punishment for having not enough CRA mandated loans
Most just bought them as I previously stated
We did not operate in a market conducive to minority lending but that didn’t matter
You could have a bank in the Utah desert 100 miles from any low income minorities and under the right auditors be fined
Hence that created the secondary markets and on it went and they were not by default high interest comparatively
That would be more common with a mortgage lender like I mentioned above who existed almost exclusively for sub primes
“So the easiest way was to buy blocks of them on the market to have on the ledgers”
That’s what I suspected. Buying loans made by independent brokers got banks into big trouble. The conforming loan standard of Fannie and Freddie is what everyone was used to. That was the industry standard for many decades. A seasoned down, proof of income, a low loan to income ratio.
What banks were buying from F&F’s private sector competition was something entirely different. Your in house loan officers would never have made the loans that you were purchasing, not because they were subprime but because the loans didn’t conform to traditional lending standards, often wildly diverging from them. Subprime doesn’t mean non-conforming but that’s what people were buying on the market because the yield was much better. And the rating agencies were vastly misrepresenting the quality of those loans.
CRA may well have pushed banks towards the easy route of buying those outside loans but it didn’t make them do that. It didn’t force anyone to make risky loans- had they stuck to conforming subprime paper they would have weathered the storm much better. Moreover a CRA loan doesn’t have to be a mortgage, it could be a business loan as well.
I’m not defending the CRA, I just don’t want to see us falling for a convenient but false explanation of the financial crisis. The CRA was headed in the same direction and contributed to the crisis but it didn’t cause it. The driving force really came from quants in Wall Street who were hunting for yield in Greenspan’s ultra low interest rate environment, for reasons having nothing to do with CRA.
There had always been a cottage industry of high interest consumer loans, funded by groups of doctors and dentists. And small loans offered by the likes of Household Finance Corporation. Wall Street would have loved to get those high rates but consumer loans were much too small for their purposes. Those loans were in the hundreds of dollars. Wall Street was looking to lend hundreds of thousands.
In the late 90s one firm hit on the bright idea of lending to those who couldn’t qualify to buy a house. A potentially large undeveloped market of high interest rate borrowers. Oddly enough this firm dropped the practice early on but not before the concept spread all through Wall Street. The world of non-conforming subprime lending was born in a big way and it started eating Fannie and Freddies lunch. Wall Street’s shadow banks were investor financed, they didn’t take deposits, so they were immune from the CRA. They developed that market because the profits were huge, until the game blew up.