The Main Culprit Of Our Housing Crisis….The CRA

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Even after most acknowledge (most meaning those with some common sense) that the CRA was one major component of our financial meltdown we still get examples of our government cracking down on those banks who didn’t buy into the CRA baloney and actually STILL make a profit because of that stance:

…here comes this fantastic story, courtesy of the Boston Business Journal, about East Bridgewater Savings in Boston:

Bad or delinquent loans? Zero. Foreclosures? None. Money set aside in 2008 for anticipated loan losses? Nothing. … The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts. “We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

Yet the FDIC has turned up the heat on Petrucelli’s bank, giving it an apparently rare “needs to improve rating,” for not making more risky loans under the Community Reinvestment Act. Here is how the FDIC puts it: “There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area. The FDIC examiners also faulted East Bridgewater “for not advertising and marketing its loan products enough. The bank, which does not have a Web site, offers fixed-rate mortgages.”

“Paranoid about credit quality.”

If more of financial institutions had felt the same way, or were not so heavily penalized because they did run their business the same way, we would not be in hole we are in. Sure, we may still have been in a hole because there were plenty of other factors involved, or as Mataharley termed it….“The Perfect Storm”….but that hole is deeper then it ever should of been because of the CRA.

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The CRA was bound for failure from the get-go; not entirely due to it’s potential for fraud (which obviously was very large,) but primarily because it was the wrong “solution” for the problem at hand.

Back in the mid to late 1970’s, when inflation was running high, government advisors and economic experts were trying to deal with large low-income communities, mostly in urban areas. In addition to poverty, there was a lot of inner-city crime, gangs, drug dealing, and overall sense of hopelessness in these communities. After much deliberation, Congress decided that the problems were due to an absence of civic pride, brought on by a lack ofhome ownership (especially in housing projects.) The thought back then was that if people owned their own homes, they’d be full of pride and magically empowered to get good jobs and pull themselves up by their bootstraps. The CRA (Community Reinvestment Act) was designed to force neighborhood banks to make loans to people in their communities who might not otherwise be considered credit-worthy under the rules banks had been using to qualify potential home-buyers. To reduce the risk to banks of a portion of these new lenders defaulting, the government created agencies (like HUD, Fannie Maeetc.) to buy the riskiest loans from the banks, insuring them with tax funds for a small fee.

The CRA initially was very successful (i.e. profitable for lenders and new entities designed solely for the purposes of issuing mortgages), so banks and other lending institutions lobbied Congress to expand its coverage. At the time, default rates were very low, because people were afraid of losing their homes if they acted irresponsibly.

Congress obliged, setting the stage with rather loose rules regarding the definition of risky loans, such that many loans got almost immediately resold to the government; now Fannie Mae owns roughly half of all home mortgages in the U.S., vastly reducing the risk to banks.

(I think) we all know what followed, so I won’t describe any more of the grisly details.

So once again, in its extreme short-sightedness, the government invited the Law of Unintended Consequences to wreak its havoc. It just goes to show you what happens when decision makers are shielded from feeling the pain of their poor decisions. Government should never have crammed these bad loans down the throats of unwilling bankers; there were many other ways to encourage home ownership.

Ultimately, however, the government’s first mistake was that they got the premise wrong! Run-down neighborhoods suffering from high unemployment, high crime rates, poverty, and other woes are not symptoms of low civic pride, but rather are contributors to a very complex problem. Economic stagnation is a result of missed opportunities, social stigma, and not least of all, oppression by a government that would rather keep its citizens reliant on its help so as to ensure their continued loyalty in place of true empowerment of individuals by encouraging and rewarding self-effort and the virtues of hard work.

I would rather die a free man, standing on my own two feet, working a plowshare beneath an oppressive midday sun than live all the days of my life on my knees, begging for every crumb of subsistence at the hand of an oppressive government.

Jeff V

“The CRA (Community Reinvestment Act) was designed to force neighborhood banks to make loans to people in their communities who might not otherwise be considered credit-worthy under the rules banks had been using to qualify potential home-buyers.”

You wingnuts just don’t let go of the talking points do you? Name me one community bank that made a NINJA loan, no money down loan, ARMs, etc. These were mortgage lenders, not community banks. Mortgage lenders, the very same that issued subprime loans, DO NOT….repeat, DO NOT fall under the jurisdiction of the CRA. And neither can community banks “package and sell” these loans—they lose their CRA credits otherwise. Not to mention, CRA loans that ARE issued by community banks have some of the lowest default rates, because of the more stringent criteria placed on said loans.

It was the mortgage broker industry—you know the UNREGULATED one, the one subject to and “unfettered” market, the invisible hand job of free market capitalism—which helped cause this debacle. But, who am I to let the facts get in the way of an ignorant right-wing narrative. Im sure it plays well to your base, you know, the former Confederate States of America.

Try again wingnuts…

Samuel,

Sorry, but this time you take the wingnut prize. For the record, I’m an independent, and have no fondness for either Republican or Democratic Parties. I *may* be an independent with a view of politics that is too critical for thin-skinned radicals on both the left and right, but I’m no right-wing (or left-wing) wing-nut.

Before you go SHOUTING and FOAMING AT THE MOUTH in RABID convulsions, show me where I stated that community banks made NINJA loans, no money down loans, ARMs, or other mortgage variants that accelerated the economic breakdown. Get off your high horse and read what I actually wrote, not what your narrow-mind tries to read in between the lines. I never mentioned banks packaging and repackaging loans either, whether independent community banks or large mega-banks (the latter of which absolutely DID engage in deceptive lending practices after Clinton signed the Gramm-Leach-Bliley Act in 1999. This repealed Glass-Steagall, giving banks the ability to set up divisions designed solely to benefit from all of the mortgage derivatives that were becoming very lucrative in the late 1990s.) I would understand your outrage if I was just regurgitating talking points, but I’m not. These are the facts; call ’em what you want to, but they’re not talking points to me. By the way, my mother was a loan officer for a local community bank at the time. I *do* know what I’m talking about.

So mellow out, take a chill pill, or do whatever you need to do to contain your misdirected rage. Then re-read what I wrote, and if you still find something that you disagree with, I’d be happy to discuss it civilly. Until then – Peace.

Jeff V

Jeff,

This thread starts with a Curt’s post, the headline of which reads: The Main Culprit Of Our Housing Crisis….The CRA

You then, after discussing the CRA as a misguided policy and engaging in some armchair sociology, peak with this comment:

“(I think) we all know what followed, so I won’t describe any more of the grisly details.”

Given the above and the fact that you choose to make this cryptic comment, it’s not unreasonable for Samuel (or myself ) to assume that, like Curt, you believe the CRA is the main culprit in the housing crisis. Samuel , you can speak for yourself. And you can as well, Jeff.

The pertinent text of the CRA reads as follows:

Sec. 2903. Financial institutions; evaluation
In general In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall – (1) assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.

Please note the last phrase. As Samuel correctly notes, that key passage neither induces nor coerces financial institutions to make risky loans.

Samuel, any bank who sought to grow, merge must conform to CRA regulations as of the late 90s. Otherwise they were denied.

And yes… the banks that increased their loans to meet the CRA requirements had to use exotic loans and reduced standards and criteria in order to do so. You cannot lower lending criteria for one segment of Americans only.

It was creating these loans for a few that enabled the many to also take advantage of similar packages. It’s called free market competition in a highly competitive industry. To only allow some lending institutions to offer lowered criteria is against fair lending laws.

Or, as I’ve tried to tell many, you can’t allow just Keeblers to make arsenic cookies, and no one else.

This was only one piece in the economic puzzle. But it was an intregal piece since it fostered a huge influx of buyers for existing supply, and drove housing prices out of control. That’s the only reason the assets are toxic… because they aren’t worth the value of the promissory notes.

Mata,

“And yes… the banks that increased their loans to meet the CRA requirements had to use exotic loans and reduced standards and criteria in order to do so. You cannot lower lending criteria for one segment of Americans only.”

Please support that assertion. Paritcularly since you are asserting that the program in practice violated the stated parameters of the federal statute.

Dave,

Samuel began his reply with a quotation of a part of my post, and then went on to criticize assertions not found in my post or in Curt’s main article. He was no doubt considering Curt and me part of a larger group of “wingnuts” who also consider unintended consequences of the CRA to have contributed to the financial meltdown. Samuel is free to state his objections, but he should at least be considerate enough not to put words in our mouths.

For example, where did Curt or I state that banks operating under CRA rules “made a NINJA loan, no money down loan, ARMs, etc.?” By the way, I disagree with Curt’s headline; CRA was but one of the many straws that “broke the back” of the financial system. I think that CRA was basically well intended, but as often happens, it was the *unintended* consequences that proved to be problematic.

As for your “armchair sociology” witty comment, how much sociology did you study in school? I took enough sociology, psychology, and related courses to minor in (organizational) psychology before I declared my major Bachelor’s and Master’s degree areas of study, but that’s beside the point. The social issues that government was trying to address are very relevant towards understanding the rationale behind CRA’s creation (unless you believe that the government just decided to enact CRA with no prompting.)

And I disagree with your “cryptic” claim. Do we *not* know what followed? Do we not agree that a small number of individuals took advantage (sometimes illegally) of loopholes in the laws, and of people’s consumerist nature, to “use” and abuse the financial system to satisfy their own lust for money? I was trying to avoid having to list the myriad ways in which the unscrupulous ruined the financial health of millions of people. If you really need me to spell out for you the various schemes used by lenders, traders, bond quality underwriters, and others, I will do so in another post.

Finally, of course the CRA wording, as you say, “neither induces nor coerces financial institutions to make risky loans.” That’s not the point here, or perhaps it is very germane to the point, which is that all too often when government regulations try to fix problems, they set the stage for – or play significant roles in – bigger problems by way of unintended consequences. That’s not to say that regulation is not needed; much of it certainly is.

There always will be those people who will abuse the legal framework for nefarious purposes. If we want to understand and fix the problems behind such abuses, we need to consider the entire system that enabled the abuses; we can’t fix the problems if we don’t acknowledge them. Once again, I’ll state that I disagree with Curt on CRA being the main culprit; but it certainly is a significant piece of the puzzle, and we’d be remiss in not acknowledging its role.

Jeff V

Dave Noble: Please support that assertion. Paritcularly since you are asserting that the program in practice violated the stated parameters of the federal statute.

No, Dave. I did not “assert” that the program violated the stated parameters of the fair housing laws. If they had only permitted CRA banks to offer those programs, and only allowed the lowered GSE standards for loans only made thru those banks, THAT would have been in violation of fair housing. That’s why the mortgage bankers and mortgage brokers were allowed to compete with these easy money loan packages.

Yet those of you – who think the CRA change regulations in 1995 had nothing to do with where we are today because not all the loans were made thru CRA banks – seem to suggest that it was okay for just a certain segment of banks to make these risky loans (or arsenic cookies), but other financial institutions cannot. That is blatant discrimination in housing… offering easy qualification and easy terms to the unqualified while having another standard for the rest.

Tell me, when is it good for anyone to sell arsenic cookies? Even a limited amount of them?

And, as I stressed in my Perfect Storm post last September, it was but one of the dominos in the design… however it was the first domino to fall.

That said, I’m not doing your homework for you since there are ample posts in our archives, including mine, that discuss the chain of events leading to over inflated housing prices – the main factor which crashed the system. But I suggest you start researching just when the GSE’s started lowering their lender standards for Fannie/Freddie conventional loans (to get these exotic loans thru for those that didn’t come up to snuff for previous criteria). Then research when the government started demanding that the GSE’s increase the amount of loans (including these lower standard packages) on their books.

Hint… try late 90s.

ruaqtpi2: where did Curt or I state that banks operating under CRA rules “made a NINJA loan, no money down loan, ARMs, etc.?”

Ya know, I sure wish everyone would get a grip on some perspective. FHA loans have been around since after WWII. In fact, Obama’s granddaddy used one since they would not allow VA loans for blacks.

FHA loans are just shy of 3% required downpayment. And the seller can pay that – and closing costs – as part of the deal… meaning the buyer can purchase the home with virtually no cash out of pocket.

This is a loan program that has been operating successfully for decades. Now it’s tough because the housing prices are over inflated… as I keep repeating is the real time bomb that blew the avalance. They got overinflated by the huge influx of new buyers with easy money loans charging the existing inventory… driving the prices up.

This does not mean, however, that the majority of FHA loan holders are not making their payments…. even if they are upside down in their mortgage. They cannot, however, refinance easily. They can, however, generally streamline their FHA loan into another package with different rates.

ARMs also have a bad rap. They are a financial tool that was misused by borrowers. It was good for certain situations… ala one who would be selling the home only for a few years before relocating, or one who had some credit issues that they could clear up in a year or two and refinance into a fixed.

ARMs ranged from 3-9 years before resetting. And again, most in ARMs have refinanced out because they cleared up their problems. The segment of those who let them ARM go until resetting is still small compared to those that have already used this financial tool wisely. So shall we stop making hammers because a bunch of dodos keep hitting their thumbs?

And before you lay this on all loan originators. The majority (there’s also some scum in the pond) do explain that their payments will reset, based on prime rates, 3-9 years down the road. But how can they predict what that payment will be without knowing what the prime rate will be years ahead? They are not soothsayers.

So let’s define a “ninja” loan…. these would include no-doc, low doc, interest only, stated income that were created in order to pass the high risk/poor credit borrowers thru the automated DU/LPI underwriting systems for Fannie/Freddie.

Scott posted the Shepard Smith segment that bears repeating here, as it’s relevant.