Another problem I have with the 11 responses articles is it’s blatant racism. Just say the words “low income” and suddenly you’re talking about a racial group? What a stereotypical broad brush! That’s racism at its ugliest.

The financial industry is one of the most heavily regulated in the world. The number of regulations are astounding, but I DO advocate some of them coming back such as the Glass-Stegall Act (signed by Clinton with 50 Republicans and 40 Democrats backing — but not John McCain).

No matter how it’s spun, the CRA was a mandate by the Federal government to lower lending standards to certain groups. And government meddling in financial markets (the CRA wasn’t regulation, it was social engineering) results in blowups like we have now. No, it wasn’t the sole reason, but like everything else the Government gets hold of, it opened the floodgates.

Then the Clinton Administration rewrote the CRA to REQUIRE loans be made to low credit quality borrowers. And engaged FNMA and FRE to buy these loans. In order to make loans and homes more affordable for lower income borrowers lenders had to come up with unusual loan products. Interest only, Option ARM, 125% LTV, and low teaser rate products were the solutions for helping people who did not otherwise qualify get a home, as REQUIRED by CRA. These low standards for qualification were THEN applied to everyone who wanted a mortgage. Hence, the “floodgates.” All because of Government intervention.

Besides, nobody made loans “under the CRA program.” The CRA is not a loan program. It set numerical targets for lending by location, race, and ethnicity, and often required lending to uncreditworthy persons to get a satisfactory CRA rating. It did indeed cause Freddie and Fannie to take on huge amounts of trash loans. The chief executive of Countrywide Financial, the nation’s largest mortgage lender, is said to have ‘bragged’ that in order to approve minority applications, ‘lenders have had to stretch the rules a bit.’” See http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Criticism and the following references.

The CRA probably started out as a well meaning, well intentioned program to increase flows of credit to borrowers and neighborhoods that banks had traditionally neglected (why would a profit making organization neglect them? Hmm…). The CRA itself simply says that banks are obliged to “serve the credit needs” of all the communities where they are located. It required regulators to examine each bank’s record of doing so and to take this record into account when deciding whether or not to approve applications for new branches or mergers with other banks.

Liberals think that government can solve all problems. Conservatives think that business can solve all problems. I happen to believe that people should solve their own problems and get the government out of the way.

Where do you land in this political quiz? http://www.theadvocates.org/quizp/index.html

I’m Libertarian.

I have been enjoying many of your posts, especially the ones lately where you’ve been linking the big picture crises to individual behavior. That’s a welcome and much needed connection, imho.

There are a host of causes for our current economic drama, not the least of which is government regulation– or lack thereof. Given this, I was really disappointed with this particular post that blames the Wall Street crisis on any of us seeking to end racist and sexist discrimination in lending practices. While there might be some grain of truth in the view that anti-redlining legislation led to this crisis, this view is being discredited (pun intended) far and wide.

You seem to hold your view very strongly, so I wanted to suggest that you check out a post on Alternet.org: 11 Racist Lies Conservatives Tell to Avoid Blaming Wall Street for the Financial Crisis By Sara Robinson.

Here’s a clip of the intro:
“The real blame for the current economic crisis, conservatives would have you believe, lies not with anything they did, but rather with the 1977 Community Reinvestment Act — a successful Carter-era program designed to get banks to stop covert discrimination, and encourage them to invest their money in low-income neighborhoods. …. Conservatives are twisting the facts beyond the breaking point to support their revisionist history. But don’t be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more. Here are the basic myths they’re trying to push about the CRA — and the facts that will enable you to fire back.”

Can you see a way to incorporate these criticisms of the “CRA explanation” into your analysis?

And, have you considered (1) whether the bank you worked for misapplied the principles behind the CRA, or (2) whether implicit racism, etc. in discussions at your bank encouraged awareness of less-qualified blacks getting loans, to the exclusion of noticing the less-qualified whites who were also getting loans? Remember this rough statistic: (Only) 13-14% of Americans are black. Could loans to the unqualified subset of that group really be at the root of this all?

thanks- cvh

I personally think we SHOULD go back to better banking regulation because one (just one) of the triggers was the repeal of the Glass-Stegall Act that prevented banks from dabbling in securities. The problem today is that we couldn’t re-instate it without 100 gazillion pork projects and earmarks being added to it. They need to simply repeal the repeal!

Access to information? We’re on the same page.

The most I would involve the government in the mortgage process is to offer insurance. We already do that with FHA, though. It went haywire when we relaxed the qualifications. Bring back the qualifications!

I’m not advocating handing out mansions to unemployed folks who can’t hold a job (although something needs to be done for them!), but the reality is that to keep a manufacturing economy working, you need low paid workers. Add in high health care costs (that are unpredictable by nature), and you have a recipe for a portion of that work force to have high debt or bad credit.

For the market to “work”, it would require a bunch of people who are crucial to the American economy being in a severe amount of emotional and financial discomfort.

Why should anybody (let alone a politician) see that as a system that is “working”? There’s no higher law that states that free markets are the morally right path to true enlightenment. Obviously in this case the balance tipped too hard the other way, but I would be very cautious about believing that truly deregulated, “free” markets would have solved all the problems either. Remember that truly “free” markets require equal access to information, a problem that has reared it’s ugly head time and time again in the American economy. Should the government come in and fix that?

The CRA Act started in 1977 under Carter in an attempt to “get more people into home ownership.” Why were these people not already in homes? Answer: they had credit histories that were horrible, meaning they were a tremendous risk for non-payment…sub-prime if you will. Would YOU loan money to a known risk? No? Why? Guess what…bankers didn’t want to either. Along comes Congress and “Jimma” to save the day and then Clinton, in 1995, signed legislation that allowed the re-sellers of these mortgages to hold only 2.5% in reserves in case of default. And no matter how you slice it, the majority of these loans were made to Democratic voting blocks.

In 1995, Congress decided that it would tweak the CRA by allowing the securitization of of CRA loans as packages. Remember: the purpose of the CRA was to allow “equal access” to lending to all people located in a lending institution’s geographical area (usually a 3 to 5 mile radius).

THEN, Clinton signed the repeal of the Glass-Stegall Act in 1999. In the Senate, 50 Republicans voted for repeal, 40 Democrats voted for it, 8 Democrats voted against it, and 2 Republicans abstained…one of them was John McCain. Glass-Stegall was the legislation that prevented banks from dabbling in the securities market. The purpose was to insure the viability and security of depositors.

What happened next was the home flipping extravaganza. If a low to moderate income person could qualify for those crazy loan programs, so could anyone else…and they did. The flippers, the inverstors, the home builders, and scores of others jumped at the chance to get into real estate and make their fortune. As long as prices increased, and those borrowers were able to keep up with the payments, everything was fine. Once prices moderated and no one could refi over and over again, once interest rates began to rise, once the economy tightened up, and once those ARM and interest only loans adjusted…it hit the fan. When you only keep 2.5% reserve, it doesn’t take much to go belly up. Also when you consider that many of these CDO’s and MB Securities with 10 tranche layers, were purchased on margins up to 40 to 1, it truly doesn’t take much to go belly up. Even a 20 to 1 margin loses money on a 5.01% default rate.

The cause of the S&L crisis had its roots in the tax reform act of 1986. It removed tax shelters on real estate, decreasing the value of those investments (which were held more for their tax-advantaged status than for profitability). According to L. William Seidman, the former chairman of both the FDIC and the Resolution Trust Corporation (formed to buy and re-sell S&L assets), “The banking problems of the ’80s and ’90s came primarily, but not exclusively, from unsound real estate lending.” (page 57 of http://www.fdic.gov/bank/historical/history/vol2/panel3.pdf).

Finally, please don’t drink the “greed” Kool Aid. Who was more greedy: the politicians for votes, the bankers for trying to generate profits for shareholders, or the homeowners who, making $40,000 applied for an $800,000 mortgage? No one WASN’T greedy.

It is a very complicated problem, but it started out simply as an attempt to buy votes through increased homeownership for voting blocks that historically did not pay their bills on time. And believe me, I had a front row seat right in the middle of it when I worked for a bank/mortgage company in the late 80’s/early 90’s.

And I’m not necessarily calling for less regulation. Just less government meddling and social engineering. Bring back the regulation that most Democrats, Republicans, and then President Clinton repealled. That would be fine with me.

The buyers of these homes would typically be those who would not pass any credit worthiness tests. Still, when the @#$% hit the fan in 1997/98 it was not these guys who caused the trouble, but the bigger corporate chieftains.

I have to say that I support this mandatory lending allowances for the lesser privileged. (But giving them a loan for a McMansion is not what I am supporting.)

Once enough loans were collected to be sold to Fannie Mae, they were sent off and then Fannie sold them to Lehman on a 20 to one leverage deal as a collateralized debt obligation and when those mortgages hit more than a 5% default rate, BAM! Only multiplied by ten thousands upon ten thousands.

What’s funny is that much of this debt is being sold to the government at 22 to 30 cents on the dollar, even though the underlying real estate is still valued at 80+ percent of its original value. But because of the US government’s requirement that firms use mark to market accounting, they have no value on their books for the margined accounts. If the Feds would temporarily lift the mark to market accounting rules, this whole thing could be settled for probably less than $50 billion. But by making it into a larger problem, the politicians get to swoop in to save the day for the mortgage companies … and the auto makers … and who knows who else?