Goal: Increase Minority Homeowners by 5.5 Million in a Decade
Guess who's goal this was? You might be surprised:
"More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a home ownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a home ownership gap.
I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families . . .
Home ownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; the activity -- the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work."
- George W. Bush, U.S. President, October 15, 2002 1:55 P.M.
(video after the jump)
Why keep bringing these up? Because it derails the false argument brewing amongst those on the right who blame the 1977 CRA or the 1938 Fannie Mae for the current housing and credit problem. I have zero patience for this nonsense, and am unafraid to call people on it.
Nothing in any of these Bush speeches that pushed for more lending to minorities and increased lower income home ownership caused the problem. Neither did any similar Clinton speeches. Nor did related the legislation related to the Bush speeches, nor did the CRA, nor Fannie Mae or Freddie Mac. Indeed, none of these actions required the sort of reckless lending that we saw from 2002-2007.
Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidily, and mortgaes are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.
As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that -- to put people in houses that would not default in 90 days -- was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.
Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.
This is the key to the hosuing boom and bust, anbd ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the "2" of the 2/28) of these mortgages so attractive.
Those who continue to blame the CRA, Fannie Mae, etc. reveal their fundamental misunderstanding of how credit operates in general, what the financing process was like from 2002-07, and how this situation came to pass. Or worse, they understand it, and choose to lie about it anyway for partisan political purposes.
You either understand these simple facts, or you don't. If you cannot comprehend this, well, then, I am at a loss as to what that says about your cognitive functioning. But if you understand this, but spit out the nonsense anyway, then you are merely a partisan with no respect for the truth.
And that seems to be the main people blaming the CRA and Fannie/Freddie for the credit/housing crisis -- those folks who either can't think -- or wont.
President Hosts Conference on Minority Homeownership
October 15, 2002 1:55 P.M. EDT
Putting the Dog Back in Dogma
One of the more interestingly intellectual jihads I came across recently was this strange commentary in the FT this week. It was an incontinent lament against the evils of pragmatism. Never before have so many words been so eloquently spilled saying so very, very little.
Titled The excesses of pragmatism, I cannot tell if the writer actually believe his own empty tripe, or if he is truly ignorant as to how we got into the mess in the first place. Have a glance at this doozy of a paragraph:
"A beloved myth holds that dogmatists (or ideologues) get us into problems like these, and pragmatists get us out. In fact, the difference between dogmatists and pragmatists is hard to draw. We got into this mess in a pragmatic way. We kept following a method that had succeeded before. In the 1990s, securitised mortgages and various derivatives seemed to offer a sophisticated way of managing risk. Whatever works gets overdone. The longer the system went on without collapsing, the more incentive there was to strip protective “give” out of the system. The system became more complicated, diversified, elegant and (as we now know) fragile. There were horrible excesses, but they were excesses of pragmatism, not of ideology."
Um, not even close.
You may disingenuously ignore the changes that occurred over the ensuing decade after the 1990s. You can vacuously skip over the legislative changes, the monetary policy shift, the massive change in the way mortgage underwriters were compensated, and the way loans got written. But that doesn't mean they didn't occur.
Let's review the ideological underpinnings of the current crisis.
• Greenspan believe we could clean up a bubble, rather than prevent one. So he let one form in the 1990s. Went it popped, he tried to clean it up by taking rates way, way down. Consider that the Greenspan Fed maintained a 1.75% Fed fund for 33 months (December 2001 to September 2004), and eventually brought rates down to 1%, keeping them there for over a year.
• We also know that despite repeated warnings by fellow FOMC governors, Greenspan refused to supervise banks lending standards, as is the charge of the Federal Reserve. Hence, my accusation of nonfeasance.
• The exempting of CDOs from all regulatory scrutiny thanks to the passage of the Commodities Futures Modernization Act of 2000 was another triumph of not pragmatism but ideology.
There are many many other elements, but for now, let's stick with just these major ideological factors. To Caldwell, since these somehow worked in the past, that is considered pragmatism (?!?).
Those of us who live in planet earth call it rampant and extreme ideology.
Here's another densely empty passage, one where innocent pixels were needlessly slaughtered:
"Dogmatism is pragmatism that has stood the test of time. Institutions tend to be forged in moments of crisis. Ideas that fail are discarded; ideas that succeed are retained, elaborated and then over-elaborated until they collapse. The problems of 30 years from now will turn out to have been hidden somewhere in the parts of today’s bail-out packages that wind up being most effective. If we are lucky, the most effective parts will be the most morally admirable parts. But that is not inevitable. In politics, correlation often passes for causation. The recovery of the Russian economy after the rouble crisis of 1998 coincides with the arrival of Vladimir Putin in power. If a strong hand coincides with prosperity, the public sometimes assumes a stronger hand will mean more prosperity. Needless to say, leaders always think like that."
Where does one begin with a paragraph so overladen with nonsense? Has Caldwell actually convinced himself that it was Putin that led to the Russian recovery? Gee, you would think a market guy might have noticed over the same time period Oil had gone from $30 to $145! Do you suppose that had a little something to do with the Russian recovery? Or is that Putin simply a genius?
Only ideologues are capable of such sheer intellectual dishonesty.
The author may be right about one thing: Ideas that fail are discarded. That process is going on right now. I suspect we are watching the death rattle of a certain type of ideology. Its a tainted brand called unregulated, market absolutism.
Good riddance to you.
The excesses of pragmatism
FT, October 10 2008 18:31
Federal Reserve Director on the CRA
From the Federal Reserve:
"Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution's individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner." (emphasis added)
What about mergers or acquisitions -- did the CRA get in the way of that?
"Since 1988, there have been more than 13,500 applications for the formation, acquisition, or merger of bank holding companies or state-member banks reviewed by the Federal Reserve Board. Over this time, twenty-five applications have been denied, with eight of those failing to obtain Board approval involving unsatisfactory consumer protection or community reinvestment issues."
Wow, just 8 out of 13,500. That's less than one tenth of 1%.
What about the methods of forcing compliance?
"The CRA is one of several laws enacted to ensure that consumers and communities have access to financial services and products regardless of location or demographics. Congress sought to achieve that goal not by imposing rigid, prescriptive rules but by charging regulators to use flexible standards that could change, as needed, over time."
Gee, this doesn't sound too onerous; What was all the brouhaha about?
"The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. Partly in response to these concerns, the act adopted by Congress included little prescriptive detail."
What are the requirements of the CRA?
The CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:
• to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;
• to assess their records of performance under the CRA during examinations; and
• to take those CRA records into account when evaluating proposals for expansion.
Hey, that sounds pretty flexible. What sort of discretion exists in applying the CRA:
The law gives the agencies considerable discretion and flexibility to fashion programs and procedures to carry out the purposes of the law, to issue implementing regulations that include measures of performance, and to modify those regulations in response to changing markets. This flexibility has contributed to CRA's relevance and adaptability through times of rapid economic and financial change, and widely differing economic circumstances among neighborhoods.
Wow, this stuff makes the wingnuts and gasbags look pretty foolish. What's your source for all this?
All quotes are come from the testimony of Sandra F. Braunstein, Director, Division of Consumer and Community Affairs of the Board of Governors of the Federal Reserve System, before the Committee on Financial Services, or from the Federal Reserve website.
The Community Reinvestment Act
Sandra F. Braunstein, Director, Division of Consumer and Community Affairs
Before the Committee on Financial Services, U.S. House of Representatives
February 13, 2008
The Community Reinvestment Act: Its Evolution and New Challenges
Chairman Ben S. Bernanke
Community Affairs Research Conference, Washington, D.C. March 30, 2007
Community Reinvestment Act
The Performance and Profitability of CRA-Related Lending
Robert B. Avery, Raphael W. Bostic, and Glenn B. Canner
Federal Reserve Bank of Cleveland, November, 2000
Variant Perception in Science
I love finding disconnects in the market (i.e.,the PPI data today);
Unfortunately, the people who fail to understand what the scientific methodology entails are pressing in the political realm -- rather than in the market place. We have seen they dare not try their silly little stunts in the peer reviewed scientific sphere.
If only these people were investors -- we would be emptying their bank accounts!
In politics, perception is reality, and so, for the most part, the penalty for deviating from reality is de minimus.
In the stock market, you cannot create your own reality -- at least not for long. Eventually, the market place comes around to the numerical facts -- i.e economics, revenues, and earnings.
For example: In surveys conducted in 2005, people in the United States and 32 European countries (The same question was posed to Japanese adults in 2001).
Respondants were asked whether to respond “true,” “false” or “not sure” to this statement:
“Human beings, as we know them, developed from earlier species of animals.”
It turns out that the United States had the second-highest percentage of adults who said the statement was false -- and the second-lowest percentage who said the statement was true, researchers reported in the current issue of Science. (Only adults in Turkey expressed more doubts on evolution).
What is the penalty for this belief system? Well, you probably won't get a Science-based job -- but that's about it.
The acceptance of evolution is lower in the United States than in Japan or Europe, largely because of widespread fundamentalism and the politicization of science in the United States.
That -- and the lack of any sort of financial or societal disincentive for the belief system. At least so far . . .
UPDATE August 16, 2006 6:26am
Some questions in the comments require a bit of schooling:
Understand what the Scientific Method is: It is a body of techniques for investigating natural phenomena and acquiring new knowledge, as well as for correcting and integrating previous knowledge.
It posits theories which are used until better theories come along. Example: Gravity is a theory that works so well we assume it to be a fact. And if one day a better theory of gravitation comes along that predicts the motion of bodies and interaction of masses better than the present one, well then we will throw out the old theory and replace it with the better one.
Scientific Method assumes that its theories are subject to revision as additional evidence is acquired. No axioms are invioable, every thesis is subject to rigorous testing and peer review; Every theory is based on observable, empirical, measurable evidence, and subject to laws of reasoning.
All the acquired data are collectively called scientific evidence.
Did Humans Evolve? Not Us, Say Americans
NYT, August 15, 2006
The Evolution Debate: Complete Coverage
Public Acceptance of Evolution
Science, 11 August 2006:
Dark Matter Revisited
Monday's discussion of the BusinessWeek cover story on "Economic Dark Matter and Why the Economy is Stronger than You Think" generated some buzz -- at least going by all the comments.
Funny thing is, that post hardly discussed the specific problem with dark matter, and instead criticized the misleading way BusinessWeek characterized the issue via its headlines.
Today's online WSJ takes a deeper look at the core issue, in "Is 'Dark Matter' in the Deficit?" Its a great debate about the intellectually intiguing question of why, despite all of the structural imbalances, the US economy hasn't fallen apart. (I manage to get in a few amusing quotes).
Of course, economies don't behave like stocks -- miss a quarterly number, and get cut in half. Macro-Economic issues are, well, macro -- they are bigger, more complex, and take much longer for their full cycles to play out
But the concept of Dark Matter makes for a brilliant and handy excuse for all manner of bad government policies -- Federal deficits, negative account balances, excessive spending, vanishing savings rates, etc. Not to worry, Dark Matter will make up the gap.
Here's the Ubiq-cerpt:™
"Physicists for decades have used "dark matter" as Spackle to fill pesky anomalies that seem to defy theories about gravity, the Big Bang and more. Recently, economists have proposed a similar fix for apparent anomalies in U.S. economic data. Unlike dark matter in space, dark matter in economics is a concept that has been mostly derided by other economists. If it's real, though, it might be no joke for investors.
If you want to immerse yourself in the wonk-fest that is dark matter, feel free to read the recent paper, by Harvard economists Ricardo Hausmann and Frederico Sturzenegger, identifying the stuff. In a quantum nutshell, their theory is meant to explain something that has bugged economists and investors for years: A persistent trade deficit has built up a mountain of U.S. debt, taking America's balance sheet from about $400 billion in the black in 1980 to about $2.5 trillion in the red in 2004. When Average Joe is up to his eyeballs in debt, he sacrifices his income to whittle away debt. Uncle Sam, on the other hand, still nets about $30 billion more a year on his foreign investments than he shells out to foreigners in debt service and other payments.
Dismal scientists have long warned that this affront to the natural order can't be sustained, that the U.S. must pay off its debts, suffering all manner of horrors, including a hobbled economy and weaker U.S. stocks, bonds and dollars. But that day of reckoning hasn't come, and Messrs. Hausmann and Sturzenegger think they know why: The U.S. has a vast, imaginary asset -- dark matter -- that not only wipes out its debt but provides a surplus that generates that $30 billion a year in investment income.
Working backward from the $30 billion, Messrs. Hausmann and Sturzenegger tried to put a value on that dark-matter generated surplus. By using what they thought was a reasonable rate of return on an investment -- 5% a year -- they decided that surplus must then be $600 billion. Thus the U.S. since 1980 has accumulated $3.1 trillion that, if accounted for, erases that $2.5 trillion in debt and then some.
And, what is this dark matter? Mostly, the Harvard researchers say, it is simply a deep well of good old American know-how -- the consistent ability to export, say, Kentucky Fried Chicken restaurants to Moscow that are more appealing and profitable than Rasputin's House of Chicken and Waffles. According to this theory, foreigners have been pouring money into the U.S. in hopes of tapping that well again and again."
Its a great discussion; I'll ask Mark if they can move the entire piece to the public site.
UPDATE: February 10, 2006 11:38am
This is now on the free WSJ site.
Is 'Dark Matter' in the Deficit?
Spackle for Economic Anomalies Looks to Explain How U.S. Operates With Massive Debt
WSJ, February 10, 2006
Alaska is Melting . . .
It seems that the melting polar ice is becoming more of a concern to Alaskans than those of us in the lower 48.
click for larger graphic
courtesy of Anchorage Daily News
Thank goodness there's no Global Warming -- imagine how much more of Alaska would be melting if there was!
The truth about global warming > http://seattletimes.nwsource.com/html/nationworld/2002549346_globewarm11.html
A world of evidence says global warming is real > http://seattletimes.nwsource.com/news/nation-world/globalwarming/1.html
Permafrost-thawing concern deepens
PERMAFROST: Computer scenario shows rising temperatures could melt top 11 feet in Alaska by 2100.
Anchorage Daily News, December 25, 2005
Global Weather Volatility is a Strong Buy (Short UnScience)
Global Warming is actually misnamed -- it should be called Global Weather Volatility. Because of gulfstreams, ocean currents, etc., any overall increase in temperatures thermodynamically interacts with these other weather climatological elements and leads not only to a general warming, but to colder winters, stronger storms, etc.
Hey, its not that complicated -- its just physics. Increasing energy in a closed system introduces a range of variable outputs that can potentially be several standard deviations away from historical norms (duh).
I suggest that derivatives for Global Weather Volatility should trade on the CBOE under the ticker symbol "VXG."
Coincidentally, like Oil, and like Natural Gas, if Global Temperature were a stock, its chart would be a technical breakout, and a strong buy:
"Two global-warming skeptics who questioned an influential climate study and prompted a congressional inquiry are now facing critics of their own, as a pair of new research papers take issue with their results.
The new findings are the latest round in a politically charged dispute over the "hockey stick," a widely publicized graphic showing that temperatures during the late 20th century were likely higher than at any time in the past 1,000 years . . ."
Some scientists believe the dispute has more political weight than scientific significance. That's because, they say, other studies of past temperatures also indicate they are higher now, on average, than at any time in past 1,000 years, and perhaps far longer. "A number of studies all come to the same conclusion," Dr. Mann said.
I find the debate over whether there is such as thimg as Global Warming to be another absurd use of UnScience. If I could short UnScience, I would . . .
So with this post, we also add the category of UnScience to our repetoire . . .
Global-Warming Skeptics Under Fire
Two New Papers Question Results Used to Challenge Influential Climate Study
THE WALL STREET JOURNAL, October 26, 2005; Page B3