Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs
"It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did."
-Robert Gordon, American Prospect>
>
I have been meaning to get back to this issue, but events in the market have kept me a tad busy.
Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.
These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.
I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.
Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:
• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?
• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?
• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?
• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?
• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?
• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?
• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)
• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?
• Did the GSEs require banks to not check credit scores? Assets? Income?
• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood
• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?
• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?
The answer to all of the above questions is no, none, and nothing at all.
The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron's, there is plenty of things to be angry at D.C. about -- but this ain't one of them.
If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed's part in supervising bank lending, allowing banks to give money to people who couldn't possibly pay it back.
The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with -- which they promptly did.
There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.
Shame on them for their foolishness or cowardice.
Whenever I see a CRA proponent blathering, I have a "Star Trek moment." That's when Captain Kirk proves to some random alien computer that its basic programming is logically inconsistent. It's the AI (artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .
"You can fool some of the people some of the time and some of the people all of the time. That's usually enough."
-MILTON BERLE
~~~
Note in the Sources section, we have a few subtopics: "Sources" is what I use to show where data, quotes and charts are from. "Previously" discusses commentary on this subject we have written in the past. "Related" is a good jumping off point for further reading; lastly, Consistently Wrong is where we point out the willfully misleading tripe written by people who should know better, but publish nonsense anyway. In the case where it appears some are trying to mislead the public, the least we can do is call them out.
>
Previously:
A Memo Found in the Street
Uncle Sam the enabler
BARRY L. RITHOLTZ
MONDAY, SEPTEMBER 29, 2008
http://online.barrons.com/article/SB122246742997580395.html
Download A Memo Found.pdf
(PDF)
The Ongoing Impact of the Housing Sector
Barry Ritholtz
Investor Insight, Aug 27 2007, 11:50 AM
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/08/27/the-ongoing-impact-of-the-housing-sector.aspx
Real Estate and the Post-Crash Economy
Barry Ritholtz
Thoughts from the Frontline,December 29, 2006
http://www.2000wave.com/article.asp?id=mwo122906
>
Related:
Community Reinvestment Act had nothing to do with subprime crisis
Aaron Pressman
BusinessWeek, September 29
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
It's Still Not CRA
Ellen Seidman
New America Foundation, September 22, 2008 - 9:36pm
http://www.newamerica.net/blog/asset-building/2008/its-still-not-cra-7222
“The Community Reinvestment Act: Thirty Years of Accomplishments, But Challenges Remain”
Prepared Testimony of Michael S. Barr
Professor of Law, University of Michigan Law School
Before the Committee on Financial Services
U.S. House of Representatives, February 13, 2008
http://tinyurl.com/CRA-Michael-S-Barr-testimony
The GOP Blames the Victim
Capitalism sure is fragile if subprime borrowers can ruin it.
THOMAS FRANK
WSJ, OCTOBER 1, 2008
http://online.wsj.com/article/SB122282690823092989.html
Did Liberals Cause the Sub-Prime Crisis?
Robert Gordon
The American Prospect, April 7, 2008
http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
After the Deal, the Focus Will Shift to Regulation
FLOYD NORRIS
NYT September 28, 2008
http://www.nytimes.com/2008/09/29/business/29norris.html
>
Consistently Wrong:
Don't Blame the Markets
JERRY BOWYER
NY Sun, April 18, 2008
http://www.nysun.com/opinion/dont-blame-the-markets/74903/
How A Clinton-Era Rule Rewrite Made Subprime Crisis Inevitable
TERRY JONES
INVESTOR'S BUSINESS DAILY, September 24, 2008 4:30 PM
http://www.ibdeditorials.com/IBDArticles.aspx?id=307149667289804
Wingnuttery on CNBC
TBP, Wednesday, September 17, 2008
Michelle Caruso Caberra
http://bigpicture.typepad.com/comments/2008/09/wingnuttery-on.html
IT’S NOT JUST THE LENDERS
There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem.
TYLER COWEN
NYT, January 13, 2008
http://www.nytimes.com/2008/01/13/business/13view.html
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Comments
Dick Armey on CNBC spouting the same line of bullcrap --
Best quote: "Herbert Hoover was a must better president than he gets credit for."
He also cites the BS Amity Shlaes book.
Posted by: Dick Armey | Oct 2, 2008 7:10:18 AM
who you calling a wingnut ;)
Posted by: txchick57 | Oct 2, 2008 7:26:17 AM
thanks for staying on this point.
Posted by: MikeBC | Oct 2, 2008 7:28:11 AM
Excellent case against the CRA being a key factor in the crisis. I'm still waiting for some deeper analysis on FF lending and how much responsibility they have for priming the subprime bubble. But it seems that they are probably just one of many players who lowered standards.
What's very clear is whomever is responsible for lowering lending standards, nobody forced investment banks, hedge funds and PE to build a huge edifice on top of a risky market. Deciding to build their skyscrapers on that particular piece of quicksand was clearly Wall Street's fault.
I do think saying that the fault is deregulation and profit-motive is a tad vague. I subscribe to the idea that we live in a unique historical moment where computer models stoked an irrational belief in our ability to predict the future. Investors delegated to fund managers who delegated to their boffins who delegated to their computers.
Too much faith in markets and models, chaos and complexity, too little clear thinking about what was actually happening in the world.
Posted by: Ben | Oct 2, 2008 7:38:06 AM
I wish I could print this all on a business card, or perhaps make a sign with it. I wouldn't even have to waste breath on these nutjobs; just hand 'em their sign. . .
Posted by: xon | Oct 2, 2008 7:41:15 AM
Barry:
Trying to straighten out wingnuts is a fool's errand.
That said, has anyone ever seen a comprehensive discussion that would back up Barry's statement:
"The root legislative cause of the current was excessive deregulation."
I am not arguing with the point. However, I've never seen anything that really shows, all in one place, exactly which "deregulation," excessive or otherwise, that can be said to have allowed (or not prevented) the loan originators, appraisers, bond packagers and credit rating agencies to have failed so thoroughly.
Bits and pieces of this I've seen. A comprehensive discussion, not so much.
I am looking for something that includes all the legislation that was repealed, as well as all the legislation that was proposed, but then beaten back.
Anyone?
Posted by: rm | Oct 2, 2008 7:55:01 AM
The CRA struck again!
http://tinyurl.com/5m3uo8
Posted by: wunsacon | Oct 2, 2008 7:56:04 AM
those questions are Classic. the product of a Sound Mind, unencumbered by the cacophony of the unthinking..
as I said before, BR, you can handle my Voir Dire, anytime ;)
Posted by: Mark E Hoffer | Oct 2, 2008 7:59:34 AM
The CRA is a red herring, however the ACORN lobby deserves a long look. They are not the same thing, they are related. The group, and others in the same vein, its supporters in congress are in this mess up to their necks. What sets them apart is that they approach the "crisis" with their hands out. To them this is a golden opportunity.
Posted by: dave | Oct 2, 2008 8:00:12 AM
Larry, you hit the nail right on the head
Posted by: FredW | Oct 2, 2008 8:12:57 AM
Barry, you are tilting at windmills. The nutzoids in this country will blame anyone and everything fot their foolishness. Americans all wanted to live like "the millionaire Next Door" whether they could really afford it or not. Take out equity, HELOC loans, liar loans, anything to get their McMansion, Boob jobs, vacations in Caba San Lucas and the big bad ass SUV. It's always easier to blame the other guy rather than look in the mirror.
As Walt Kelly's Pogo said "We have met the enemy and he is us".
Posted by: grumpyoldvet | Oct 2, 2008 8:16:46 AM
I posted this on the open thread, but I think it is something we just don't think about...
"Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to tell which was which."
Last sentence of Animal Farm. George Orwell
Gale Norton, former Interior Secretary, general counsel for Shell Oil.
Tom Ridge, former secretary of Homeland Security, now on board of directors of Savi Technology, supplier to Dept. of Defense.
Jon Corzine.
Hank Paulson.
Dick Cheney.
and so on....
Maybe it was a cautionary tale about communism, but today, you still can't tell the faces of the pigs from the humans...
and some wonder why the bailout bill was going to pass, and everyone knew it...only the creatures "outside" seemed not to know...
Posted by: Bruce in Tennessee | Oct 2, 2008 8:21:52 AM
The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?
I agree with all your statements except wording of the above. I live in the Phoenix valley and to say that this illegal immigrant capital of the Southwest is an affluent, non-minority region is stretching it a little. There may be affluent spots like Scottsdale, Tempe, etc., but we are about to the point of this area reverting back to Mexico.
Posted by: Deano, Peoria, AZ | Oct 2, 2008 8:22:16 AM
Could it not be both? I do agree that deregulation was done in areas which hurt our economy, however:
Did the GSEs not remove some of the systemic risk in the mortgage markets? Did they not buy up mortgages that shouldn't have been made in the first place, creating government-induced demand?
Were the GSEs not advocates of the deregulation themselves?
I'm not saying Fannie and Freddie were *the* cause of this current mess, but they are certainly not victims.
~~~
BR: As I noted in the Barron's piece, "THERE'S ACTUALLY A LOT MORE we could add to these items. We could mention impotent supervision of Fannie and Freddie by the Office of Federal Housing Enterprise Oversight; the negligent oversight on ratings agencies; the Boskin Commission's monkeying around with how inflation gets measured; the "Greenspan Put," etc."
Fannie and Freddie were cogs in the machine, but are far, far from the root cause of this. And the CRA is essentially an irrelevant factor.
Unless you are a partisan grasping at straws. Then you ignore reality, and go to whatever you can pin on the other guy . . .
Posted by: Steve Place | Oct 2, 2008 8:27:15 AM
Fair and accurate piece..great work ...It was more like 10 vultures eating a live victim...which was responsible for the eventual death..
Posted by: brasil | Oct 2, 2008 8:33:46 AM
497k new claims, which will be revised next week to over 500k. You will be told in the strongest language that when the bailout bill passes, it will be safe to get back in the equity waters again....
Wanna bet?
Posted by: Bruce in Tennessee | Oct 2, 2008 8:35:46 AM
Right on. Beware any subculture that never accepts responsibility for failures and always assigns blame to others...
Posted by: cuvo | Oct 2, 2008 8:37:29 AM
Steve Place,
Barry covered all the bases. For you to ask a question like, "could it be both?" is like asking if humans are equally full of both blood and urine because we take a piss every now and then.
Posted by: AGG | Oct 2, 2008 8:41:00 AM
US. government pulled the biggest accounting scam ever by spending $trillion subsidizing housing in off-balance sheet financing with Fannie/Freddie, just like Enron! Instead of helping the working class, our government destroyed their lives. Home foreclosed, no savings left, just more debt for our kids. Thanks Uncle Sam.
Government is the problem, not the solution!!!
What do I know? In the big picture, I am just another wingnut.
Posted by: Hulu | Oct 2, 2008 8:43:00 AM
Barry,
With all due respect, you are describing the symptoms of the disease, not the cause of the disease. We need to treat the cause, not the symptoms.
The evidence is clear (unless your rational neocortex thinking is inhibited by emotional amygdaloidal political bias) that the cause of the disease is CRA rewrite of 1995; more specific, Clinton ordering Robert Rubin Treasury Department to rewrite the rules in 1995 (banks were given strict new numerical quotas and measures for the level of "diversity" in their loan portfolios) that according to the Harvard study resulted in, from 1995 to 2005, minorities making up 49% of the 12.5 million new homeowners. Because of this Clinton policy, the banks were forced to cheat (symptoms that you describe like JPM Memo) to get a good CRA rating.
If you really want to eradicate the disease, you need to understand the root causes of this disease, and not simply provide a salve for its most troublesome manifestations.
P.S. Why the democrats cannot understand that their social engineering programs like Affirmative Action and CRA will not work, because these programs are attempting to reverse millions of years of evolution and natural selection (Survival of the fittest)?
~~~
BR: Herbert, how do you explain then, that there was no problems in either Housing or Credit for another decade?
If you were to ask me for the prime causative factors for the Housing boom, I would say it was Fed Chair Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was the failure of the Fed to supervise lending, allowing banks to give money to people who couldn't possibly pay it back.
As to the credit crunch, look at the 2 key elements: The 2000 Commodities Futures Modernization Act that exempt CDS from regs, and the ratings agencies slapping triple AAA on what turned out to be junk paper.
Posted by: Herbert Spencer | Oct 2, 2008 8:44:26 AM
There isn't any credit crisis...
http://biz.yahoo.com/rb/081001/business_us_financial_bailout_fdic.html?.v=2
FDIC Seeking "Temporary" Unlimited Treasury Loans.
Oops. I am afraid I put the quotation marks in there, and mispelled taxpayer as Treasury...mea culpa..
Now just how long was that temporary ban on short selling....ummmmmmm...
Posted by: Bruce in Tennessee | Oct 2, 2008 8:46:44 AM
..The rating agencies ..unless also politically coerced also by the Clinton and Bush admins...hold the majority of the blame ..they let a family cold turn into a plague..
Posted by: brasil | Oct 2, 2008 8:51:11 AM
Well I knew if one waited long enough that bag of wind bullshit artist Dick Armey would say it. It's all Clinton's fault. The Republicans did everything theuy could to stop him but failed.
Jeez...how in the hell does CNBS give him air time. Oh wait, it's the network of Jack Welch, that other rightwing cuckoo.
Posted by: grumpyoldvet | Oct 2, 2008 8:52:02 AM
Barry, am with you there and thanks for staying on this topic! Unfortunately, what we have in Congress right now don't realize that they represent 'we-the-people' and continue to bulldoze economic plans good for America. Am amazed for $700B there's no hearings whatsoever from economists!! I respect Frank, but Frank is no W Buffet, who gets his deal right.
Posted by: urban trekker | Oct 2, 2008 8:55:26 AM
"I feel compelled to set the record straight about this pseudo-intellectual detritus."
Sorry to disagree with you Barry, but affixing the word "intellectual" (even with the pseudo disqualifier) to what is in reality a blatant. propagandistic lie is an insult to anyone who value thought processes.
The fact is that the far-right wingnuts made up this story because no matter how dangerous the current mess can be, it is out of the question for the wingnuts to accept that their cherished beliefs should bear ANY blame for the mess we're in.
The ONLY reason we have to spend precious time debunking those myths is because too many of these idiots (Jerry Bowser, Amity Schlaes, Cherles Krauthammer etc.) have too much access (when measured by merits of their arguments and quality of their thinking) to an uncritical mainstream media much more preoccupied with false fair-balance than seeking the facts for what they are.
Is it any wonder the best financial news come from Financial Times, The Economist an other foreign publications?
Posted by: Francois | Oct 2, 2008 8:57:27 AM
