Community Reinvestment Act Makes Bankers Stupid, According to AEI Research

One might have hoped that one collateral benefit of the end of the election season would be the end of the attempt to pin the financial crisis on the Community Reinvestment Act, a 1970s law designed to prohibit redlining (the widespread practice of not lending money to people in poor neighborhoods). Unfortunately, Peter Wallison at the American Enterprise Institute (thanks to one of our commenters for pointing this out) has proven that some people will never give up in their fight to prove that the real source of society’s ills is government attempts to help poor people. Regular readers hopefully realize that we almost never raise political topics here, but sometimes I just get too frustrated.

Many people who are more expert than I in the housing market have already debunked the CRA myth. Here are just a few: Janet Yellen, Menzie Chinn, Randall Kroszner, Barry Ritholtz, David Goldstein and Kevin Hall, and Elizabeth Laderman and Carolina Reid. Mark Thoma does a good job keeping track of the debate.

One of the main arguments against the CRA-caused-the-crisis thesis is that the large majority of subprime loans, and delinquent subprime loans, and the housing bubble in general, had nothing to do with the CRA; it was done by lenders who are not governed bythe CRA, and was done in places like the exurbs of Las Vegas or the beachfront condos in Florida, not poor neighborhoods (which generally saw less price appreciation than average). So Wallison comes up with a new argument: relaxed lending standards, encouraged by the CRA, caused lending standards to be relaxed in the rest of the housing market. Really, I’m not making this up.

I’m going to give you a long quote so I can’t be accused of selective quotation:

The key question, however, is the effect of relaxed lending standards on lending standards in non-CRA markets. In principle, it would seem impossible–if down payment or other requirements were being relaxed for loans in minority-populated or other underserved areas–to limit the benefits only to those borrowers. Inevitably, the relaxed standards banks were enjoined to adopt under CRA would be spread to the wider market–including to prime mortgage markets and to speculative borrowers. Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers. This is exactly what occurred. Writing in December 2007 for the Milken Institute, four scholars observed: “Over the past decade, most, if not all, the products offered to subprime borrowers have also been offered to prime borrowers. In fact, during the period from January 1999 through July 2007, prime borrowers obtained thirty-one of the thirty-two types of mortgage products–fixed-rate, adjust-able rate and hybrid mortgages, including those with balloon payments–obtained by subprime borrowers.”

After some more evidence that rich people were offered (and accepted) new mortgage types, he concludes with this:

Although it is difficult to prove cause and effect, it seems highly likely that the lower lending standards banks were required to adopt under the CRA influenced what they and other lenders were willing to offer to borrowers in prime markets.

At its core, the argument is that the government forced lenders to make bad loans in one market, so they went and decided to make bad loans in other  markets. Even conceding some of the premises for the sake of argument, this is illogical. Wallison says “it would seem impossible–if down payment or other requirements were being relaxed for loans in minority-populated or other underserved areas–to limit the benefits only to those borrowers.” It doesn’t seem impossible to me: if you’re running a business, you should be able to understand that you have different target markets, and you have different products for those markets. In fact, if you (the bank) truly thought that you were being forced to make bad loans in one market, you would damned well keep those loans out of your other markets. If lenders are as stupid as Wallison’s argument implies they are, then the entire premise of the American Enterprise Institute – that government should leave businesses alone – starts to look shaky.

You can also tell an argument is shaky when an author says “it is difficult to prove cause and effect.” In areas like business, finance, and economics, where there actually are a lot of data, that generally means that it can’t be proven, or it would have been. Wallison’s evidence is that flexible mortgage products became available to the prime market. (Disclosure: I got an ARM when my wife and I bought our house, and we refinanced it into another ARM.) The most obvious explanation of that phenomenon is not that the CRA induced banks to make those products available to some customers, and that put them on a slippery slope to making them available to all customers, but that bank executives decided to make those products available to all customers. Still hoping to pin this on regulators, Wallison says, “Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers.” I don’t know where to start here: someone who is against regulation is trying to argue that the CRA tied the hands of regulators who otherwise would have clamped down on flexible mortgages to rich people? I’m in favor of tighter regulation of abusive mortgage products, but I don’t think the CRA is to blame for lack of regulation.

There’s no need to grant the premises, either. The root of the problem, according to Wallison, was that the CRA forced lenders to lower standards in one market. The vast majority of subprime loans were made by institutions that were not even governed by the CRA in the first place. If institutions governed by the CRA chose to follow the behavior of those not governed by the CRA, that was their choice, pure and simple. So not only does the argument suffer a mid-air accident, it never gets off the ground.

And there’s another reason for that: the large majority of low-income loans made under CRA were traditional fixed-rate loans, not subprime, and they weren’t even bad loans. Wallison says:

There is very little data available on the performance of loans made under the CRA. The subject has become so politicized in light of the housing meltdown and its effect on the general economy that most reports–favorable or unfavorable–should probably be discounted.

This is a very clear rhetorical tactic: when you can’t find data that you need to support your argument, say the data don’t exist, or that they are so politicized that they should be discounted. (This is the “two sides to every story” argument used so effectively by, among others, people who say that global warming is not happening.) Wallison does, however, cite one study:

One of the few studies of CRA lending in comparison to normal lending was done by the Federal Reserve Bank of Cleveland, which reported in 2000 that “respondents who did report differences [between regular and CRA housing loans] most often said they had lower prices or higher costs or credit losses for CRA-related home purchase and refinance loans than for others.”

This is the sentence immediately before the one Wallison cites, plus the one he does cite:

A large proportion of respondents in all bank-size categories reported that CRA-related and other home purchase and refinance loans have very similar origination and servicing costs, credit losses, and pricing on a per-institution basis. However, the respondents who did report differences most often said they had lower prices or higher costs or credit losses for CRA-related home purchase and refinance loans than for others.

Read that first sentence again: a large majority of banks say CRA loans do just fine. This is Wallison’s source I’m quoting. This is the best evidence Wallison can find, and presumably (since this is his specialty, not mine) he went looking for it. Not only does the plane not get off the ground, but the airline canceled the flight before boarding.

OK, I’ve already spent more of my morning on this than I wanted to, and I haven’t even gotten to the section on Fannie and Freddie.

33 responses to “Community Reinvestment Act Makes Bankers Stupid, According to AEI Research

  1. The worst part of this type of “demonstration effect” analysis is they don’t even make a stab at the null hypothesis: that exotic loans were made because they were much more profitable than traditional loans. I would take literally a few hours of looking at a couple of 10k’s, Wall Street Research report, or even just interviewing a Wall Street analyst, to confirm that hypothesis.

    A second short coming that I see is that the authors don’t even try to TALK to the very people whose views were colored by CRA lending: credit officers and management of credit departments. Again, if the core of the blame-it-on-CRA argument is that these credit officers were “infected” by low-income standards, then a few interviews could quickly prove or disprove this.

    The AEI has really sunk to new lows. It will have to transform itself if the GOP is to, again, become “the party of ideas”.

  2. What’s really funny is that the really scary, toxic mortgages were NOT created for the poor people, and then marketed to everyone. They were created for rich people, with very specialized requirements, and then marketed to everyone including poor people.

    Stated Income loans were for business owners who may not be able to easily document steady income, but were good credit risks.

    Option ARMs were for salesmen with highly variable incomes due to commissions, but who, overall, were expected to be able to pay down the mortgage.

    And just because prime borrowers were taking ARMs doesn’t imply any kind of conspiracy. Greenspan was famously encouraging ARMS. They made perfect sense for some borrowers, and always have, depending on the relative interest rates. There’s nothing wrong with a 5/1 or 7/1 ARM, especially if you’re not sure you’ll be keeping the house (or the mortgage) for over 7 years.

    Just more absurd nonsense about the CRA.

  3. 100% correct but hatred is not rational. (I’m Jewish and know about irrational hatred.) Irvine, CA, Bradenton, FL, places like that are the epi-centers of the crisis. Not places for poor people, nor for African-Americans.

  4. Pingback: Blame « Durable Investor

  5. After watching the workings of a Real estate Office and mortgage brokers in a affluent NYC suburb for 06 and 07 CRA clients were not to be seen but more NINJA loans were made everyday for any cold body.CRA is simply the AEI following ideological bias and throwing out facts,which has been their custom for many years. The last 8 years being the prime example of their dearth of intellectual honesty

  6. 1. The crisis was caused by the failure of mortgage-backed securities, not the mortgages themselves. The MBS’s were created by the government-sponsored enterprises, and the GSE’s owned a substantial portion of this market. In other words, the GSE’s made the mortgage bubble possible. Ding on government.
    2. Learn the term “crowding out.”
    3. Learn the concept of the margins being determinative.
    4. Learn the difference between root causes (Federal Reserve monetary policy) and contributing causes (CRA, FHA, etc.). Just because the CRA is not totally responsible for the damage does not mean it is not partially responsible.
    5. Unless you have opened your own business and have personally experienced a bubble in your industry, you should refrain from making comments about bankers being stupid. Even the wise, cautious ones had to relax their standards somewhat to remain competitive. That is a fact. You have to go where the money is to stay in business.
    6. The CRA is evil, regardless of its consequences. Private entities should not be forced to make certain loans to stay in business.
    6. Why are all of your “experts” leftists?

  7. 1. Actually no, MBS were created by investment banks. GSE’s did buy some of them. And the decline in price of MBS is due to the increase in default rates of the underlying mortgages. You can argue that the decline in price of MBS is out of proportion to expected default rates, but they are still connected.
    2. How is an implied insult (“learn the term ‘crowding out'”) an argument? I do know what crowding out is. Wallison’s CRA argument has to do with lending standards by banks, not with crowding out.
    3. Anyone who knows anything about economics knows about the importance of the marginal X. Again, Wallison is making an argument that one set of lending standards became common across all markets. What does that have to do with marginal anything? The only way I construe your cryptic point to be an argument is that you are saying that if the marginal lender offers a new loan product, then everyone else has to. But that’s not true. If the marginal lender offers a new loan product that will lose money, then the rational thing to do is to not follow the marginal lender into that hole.
    4. My argument wasn’t that the CRA is not responsible because someone else is responsible; it was that Wallison’s argument doesn’t make sense. What’s your argument for why the CRA is partially responsible?
    5. Actually, I have opened my own business, but that’s beside the point here. I’m not saying bankers are stupid. I’m saying that Wallison’s argument depends on an assumption that bankers are stupid. Bankers are not generally stupid, so by the principles of logic Wallison must be wrong, but I didn’t spell that out because I thought it was obvious.
    6. What’s your argument? That sounds like a statement of ideology.
    7. What’s your definition of leftist? Anyone to your left?

  8. Dems and their supporters are fervently trying to distance themselves from our calamitous financial collapse.

    But facts are facts.

    Fannie Mae and Freddie Mac created MBSs and generated a substantial portion of them. When Countrywide, IndyMac, and Wall Street saw how much the GSEs were making, they jumped on the gravy train and paid off Congress to grease the tracks.

    http://www.nytimes.com/2008/07/01/opinion/01brooks.html

    http://online.wsj.com/article/SB122290574391296381.html

    http://www.mtgprofessor.com/A%20-%20Secondary%20Markets/what_do_fannie_and_freddie_do.htm

  9. WRONG WRONG WRONG

    I have a first hand, ground zero knowledge of the loans that went bad at multiple banks, in multiple regions of the country. In addition, I know multiple high level bankers in the Cleveland, Ohio marketplace and have helped retructure several developers and builders who sold homes into multiple market places across the country including Detroit, Denver, Chicago, etc.

    CRA is not the sole cause of the mortage crisis, but is WAS the intital spark. Like all do-gooder government programs, it created the wrong type of non-economic incentives. CRA created the perverse situation whereby banks KNOWINGLY MADE BAD LOANS TO SATISFY THE CRA REQUIREMENTS. It was a business decision, in order to preserve the “good” mortgage business and avoid the regualtory hassles from such groups as ACORN. ACORN held banks hostage to CRA and using the regualtion and publicity stunts employing protesters that they BUSSED IN FROM OUTSIDE OF THE STATE to create BLACKMAIL situations whereby banks had to make MORE BAD LOANS. This increased the market for loans made to people who could not afford to pay them, ie the “sub-prime” market. ACORN is responsible for this crisi just as much or more than the bank they balckmailed into making the loans.

    The TRUE epicienter of the mortgage loan crisis is not on the coasts, it is in the heartland in places like Cleveland, Ohio, and Detroit, MI. In the midwest CRA encouraged banks to start to ignore credit policies and allow “no money down” subrpime credits in order to meet the CRA guidleines. You see,in most of the CRA target neighborhoods, houses sold for $5-10,000 CASH, no mortgage. People did not take out morgages, and had a very cheap place to live. The banks had to compete fiercly to get the one or two mortgages per month that were done in the CRA “target” neighborhoods. As ACORN got more involved,banks made more loans and searche high and low for new CRA credits lest they not meet ACORN’s increasing demands under the CRA / BLACKMAIL scam they were running.

    Banks also bought these loans so that they could meet the CRA guidlines, creating the first market for these loans. As this “market” for increasingly lax credit policies grew it and fueled mortgage brokers driven by origination fees to approach the poor and uneducated with loans they could not afford, and would eventually default on. The banks, in turn, decided to offload the risk by selling and securitizing these loans. Wall Street created CDO’s and other derivatives to “convert” them from “high risk” to low risk via insurance policies. Once investors got addicited teh “crack of high yields and “low” risks, the market fueled itself and THAT is waht got us where are today.

    As the addiction grew, the hunger for more “product” induced more and more banks and mortage brokers to set up shop. Foreign investors, pension funds, insurance companies poured money into CMO’s and CDOS seeking the huge returns.

    BUT, IN THE BEGINNIG IT ALL STARTED WITH CRA, IN PLACES LIKE CLEVELAND, OH AND DETROIT MI. The aftermath has devasted inner city neighborhoods, leaving hundreds and even thousands of foreclosed, abandoned, vandalized hulks that are havens for drug dealers and users, pediphiles, and arsonists.

    These used to be neighbor hoods were poor folks could afford homes and had a place to live, now they are trapped in a physically ruined place and have a mortgage on the property for more than thier home is owrth even if they could sell it, which they can’t.

    Thank you CRA and ACORN.

  10. Mark A. Sadowski

    Thanks Mr. Kwak for an insightful criticism. Fortunately, nobody I know with a real background in economics (including myself) takes the AEI seriously. As for Wendy, it would be hard to even place her on a political spectrum. It’s more like a religion with her. When she isn’t busy making ridiculous comments she is probably burning incense and chanting verses from Atlas Shrugged before the alter of Ludwig von Mises.

    Since you opened a political topic, allow me to throw my two cents in on the CRA in general.

    The main goal of the CRA was that people in low income and minority areas should be offered the same opportunities to borrow money as anyone else. The central principle was NOT that they be offered any special treatment but only that they be offered the SAME treatment as anyone else. CRA not only increased the opportunity for housing loans it also increased the opportunity for small business loans that would generate jobs in low-income areas.

    The CRA has been criticized as being responsible for our current woes for one salient fact. By its very nature, it MUST have caused an increase in the proportion of subprime mortgages that are primarily responsible for our current financial woes.

    But as Mr. Kwak points out, the facts contradict these extremist claims. Although mortgages originated under CRA guidelines account for about a quarter of all mortgages originated in recent years, they account for only about 20% of all subprime mortgages originated.

    There is also research evidence (contrary to what Wallison implies, there is plenty of research, but since it contradicts his ideology, he probably dismisses it) that, probably because mortgages originated under CRA guidelines were subject to comprehensive federal review, they are much less likely to be “high price mortgages,” or mortgages that were priced at 3 points above equivalent Treasury bill rates (proportionately one third as many). Thus, as a result, they are also much less likely to end in foreclosure. In fact data concerning the largest 15 metropolitan areas shows that in areas with a high density of institutions subject to CRA guidelines the foreclosure rate of mortgages is about half as great as in areas where there is a low density such institutions.

    Thus not only has the CRA succeeded in making sure that loans are available to people regardless of the income level and racial composition of their community, it has also subjected these loans to such high standards of approval that they are less likely to fail than loans not issued under CRA guidelines.

    In fact I am tempted to say that bankers were being stupid before the unequal nature of redlining was made illegal. Based on the statistics they were clearly missing out on some profitable opportunities owing to their prejudices against poor and minority communities.

  11. Michael A. Cuttler

    Get Real! The Community Reinvestment Act which morphed into no documentation loans for anybody is the cause of the mortgage meltdown. It’s a classic case of “unintended consequences”. When the banks found a way to get the crummy loans off their books and make money doing it it exploded. It started with government intervention in the marketplace, which distorted the market. A way was found to make big money with low risk and no one expected the long-term results. I repeat myself, a perfect example of the law of unintended consequences.

  12. Mark A. Sadowski

    “When the banks found a way to get the crummy loans off their books and make money doing it it exploded.”

    I don’t remember the exact figures but actually loans originated under CRA guidelines are much more likely to be retained by the originating institution than loans not originated under CRA guidelines. The incentive for this is simple. The approval standards are higher so their foreclosure rate is lower. Thus they are better performing than other loans.

  13. Well if credit card companies issue cards with 25% interest reates in that poor part of town, of course they will have to offer them to the wealthy now won’t they?

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  15. To Kwak and Sadowski: I have noticed you leftists are liars. Nothing personal there, just a cold observation. You believe that the ends justify the means, that misstating things, misinterpreting facts, and painting false pictures are acceptable in service to YOUR ideology because you believe that your values are the right ones and that anyone who doesn’t agree with you deserves to be steamrolled because they are heartless, evil Republicans. Look at your criticisms. They are all evasions, quibbling, and equivocating, and the very next poster knocked you off your high horse with a simple fact. In several paragraphs, you have managed to say absolutely nothing at all. The reality is that YOU are the religionists while you pretend not to be. (You ironically project that charge on others). You are devotees of collectivism and its economic handmaiden, John Maynard Keynes. Sadowski, don’t deny it, you have already been caught. I have seen your crappy posts on RCP. You are an utter ideologue, and a mediocrity at that. I hope you don’t get paid for this.

    Here is another example of how leftists lie. On another blog, someone linked to videos of Peter Schiff in 2006-2007 predicting economic devastation. One of your ilk smugly dismissed Schiff in one line without addressing a single thing he said, then equated Schiff with Ben Stein, against whom Schiff was seen arguing in the video! Then, another poster linked to other columns in which their fellow leftists “predicted” economic trouble. One of the columns, Roubini I think, was dated August of this year. Calling that a “prediction” is an example of the dishonest methods of the leftists. Another was a Krugman column of August 2005, where he says the housing bubble was coming to an end–nothing that wasn’t self-evident at the time–which he described merely as a hiss! Calling it a hiss implies that the correction is smooth and non-severe, yet this poster painted a false picture out of that column, which is that your ilk saw total global economic meltdown coming. You did not. The reason you did not is that your theory is bad. It is utterly worthless.

    Amity Schlaes has utterly destroyed Krugman’s evasive, quibbling, and equivocating Keynesian cheerleading, and Krugman flew off the handle. He was totally unseated. You guys are utterly wrong, and you need to start taking responsibility for the failures of your philosophy and admit all the myriad ways in which government interference and meddling caused this and other crises. I have noticed that you have the same relationship with personal responsibility and the truth as children do. It is time for you to grow up and start being more forthcoming and honest and humble with the failures of your ideology/collectivist religion. Government had its hand all in this mess.

    Austrian economics has predicted every major event since its inception–and not because they are permabears. That would be you leftists like Roubini whenever a Republican is in office. Keynesianism has predicted nothing.

    Keynes and Keynesians didn’t predict anything whatsoever, not even the Great Depression, which the Austrian school did. You are sorely lacking in intellectual integrity. You need to come to terms with why you are so envious of real capitalists and why you feel the need to control the private sector. Counseling would help you deal with your insecurities.

  16. Also, Sadowski likes to imply that economists reject laissez-faire, which he won’t come out of the closet and directly say, because he knows it’s not true. Economists overwhelmingly accept it. But then, Sadowski is a blow-hard self-promoting mediocrity who is obsessed with letting people know on just about every web site he visits that he is an economic professional.

  17. Kwak, why don’t you explain to us why forcing people to make loans with their own money against their will is not evil. Do you think you get a free pass on evading moral questions if you simply label something as “ideology?” You don’t.

    Not that it is possible to reason with anyone who claims not to understand why the CRA is partially responsible for the economic crisis. Or to trust them and their so-called “data,” which they won’t admit to altering or interpreting through a leftist lens. Been in science. Know how it works.

    You guys are really unbelievable.

  18. I worked for over 20 years in the mortgage banking industry. Starting from loan underwriter to VP in secondary markets. I can attest that the CRA had nothing to do with the with the mortgage problems. Lets face it, loan originators only care about the commissions going in their pockets. The originators had a straight line to the wall street banks with the most idiotic loan terms I have ever seen. The problem is that wall street didn’t know what they were doing and the credit agencies didn’t know what wall street was doing either. A simple case of incompetence and failure to manage risk is all.

  19. Mark A. Sadowski

    Wendy,
    Unfortunately for you I do this for pleasure. Actually it was I as you well know that posted the links to articles by Shiller, Krugman and Roubini on the Boston Globe article on the state of the field of economics. The Krugman article concluded by suggesting very serious consequences as the bubble deflates (as of course has come to pass). The article (entitled “Dr. Doom”) on Roubini started by discussing a speech he made before the IMP in 2006 that left the audience incredulous with his pessimistic forecasts. Further it states that he started becoming concerned about the future of the economy as early as 2003. I could have posted links to dozens more real economists, all Behavioralists or New Keynesians that made similar predictions. Also, not only did I dismiss Schiff for being a member of the Austrian School of economics, I also pointed out how his predictions have turned out to be absolutely wrong. Schiff predicted that we would be suffering high inflation by now and we most certainly are not. (I might also point out that he predicted gold would soar past $1000 an ounce and it has been sliding downward since March, so I wouldn’t take his investment advice either). Today John Tamny, evidently another member of your cult, wrote an long albeit well worded piece that bent over backwards trying to explain that the deflation that we are currently observing is not really happening. (I guess we’re all just hallucinating.) This is the problem with cultists. When the facts don’t match their ideology they simply explain away the facts. And the truth is that only the New Keynesians have correctly predicted deflation. And if you think economist are doctrinaire believers in laissez-faire that is only because you only listen to fake economists. You are right that I advertise my economic credentials, if only to draw attention to the utter lack of formal training in economics by virtually all of the Austrian propagandists including Schiff (finance and accounting), Tamny (government and business) and Amity Shlaes (English). (And in my opinion the quarrel between a Nobel Prize winning economist and a complete economic amateur like Shlaes could hardly have been fair.) This might be due to the fact that with the exception of George Mason University almost no school in the country even has one graduate course on Austrian economics because it is generally considered absolute drivel. It takes a lot of gall to call yourself an economist when you haven’t even studied the subject.

  20. Mark A. Sadowski

    Also it turns out that Peter Schiff was not only wrong about deflation this year he was wrong about almost everything else the last five years:

    http://seekingalpha.com/article/106824-being-wrong-for-five-years-makes-peter-schiff-right-now

    So why does Peter Schiff have such a poor track record? The reason is simple. Peter Schiff is Austrian School cultist with no formal background in economics who knows very little about what he talking about.

  21. Mark A. Sadowski

    To reiterate in the inflation versus deflation debate PETER SCHIFF WAS WRONG!! Consumer prices have fallen at an 8.4% annual rate the past four months. Here is what he said a year ago:

    http://www.financialsense.com/fsu/editorials/schiff/2007/1221.html

    Here is a good rebuttal from about a year ago (with an exchange):

    http://www.freedom4um.com/cgi-bin/readart.cgi?ArtNum=69366

    The “Peter Schiff Was Right” video is even funnier when you realize that all of the so called “economists” on Fox Noise got it wrong including Peter Schiff.

    On the other hand many New Keynesians were forecasting deflation a year ago. Here is a January entry from Nouriel Roubini’s blog (you’ll need premium access to read the whole thing, but you’ll get the gist of it from the beginning):

    http://www.rgemonitor.com/blog/roubini/238726/

    One reason why so many of the “economists” on Fox Noise got it wrong was that almost none of them were economists. Art Laffer has a PhD in economics and Ben Stein has a Bachelor’s in economics but that’s about it. Beware of people who claim to be economists. Ask to see their credentials.

    “No but I stayed at a Holiday Inn last night.”

  22. There really ought to be a tort for intentional misuse of information. Yes, there are speech issues that need to be worked out. But, when people like this guy intentionally misleads and obfuscates with an objective that is hateful, there should be some redress beyond the waste of energy/time/focus of others refutations.

  23. Mr Kwak and Mr Sadowski,
    Thanks for the insights. One additional comment on the topic if I may, it’s my understanding that the CRA had no capacity to levy fines, all it could do was give a poor conformance rating. This would have an effect if the poorly rated institution merged or was sold.

  24. You might want to check out this independent study of the CRA by a well-respected New York law firm (http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf)

    It concludes that just 22.8% of ALL loans originated in 2006- the height of the subprime boom- were made by CRA-regulated banks. The other 77.2% came from non-CRA regulated entities (thrifts, bank affiliates, brokerages, etc). There is a lot of information in the report.

    The CRA didn’t cause this, greed did.

  25. In addition to Al Oso’s comment regarding the lack of fines (or other punishment), no bank was ever forced to make a CRA loan. The word “reinvestment” is used for a reason. A bank merely had to apply the same lending standards to all areas where it accepted deposits. If an area were too risky and the bank wished to comply with the CRA, it could remain 100% compliant by closing its branches in that area.

    I’m not sure why Wallison would pursue this line of reasoning. If the conclusion is true (the CRA relaxed lending standards) his argument points in the direction of outright fraud by the banks. “We knew many of these loans would go bad due to government meddling, but we made them anyway, sold them to investors and pocketed the loot.”

  26. Mortgage defaults are mostly caused by curtailment of income (job loss as in outsourced to Asia)

    Causes of Foreclosure (July 2007)

    58.3% Curtailment of income
    13.2% Illness/Medical
    8.4% Divorce
    6.1% Investment property/Unable to sell
    5.5% Low regard for property ownership
    3.6% Death
    1.4% Payment adjustment
    3. Other

    When one also considers that on average 80% of all mortgages are refis not new mortgages the picture becomes a little clearer.
    Homeowner has good industrial job and qualifies for normal mortgage. Mortgage operates well until homeowner’s job is outsourced and he is unemployed/McJobbed and can no longer qualify for a normal mortgage at renewal time. Homeowner gets ‘trick’ mortgage and believes right agenda lies/hype saying ‘Its free trade and it’ll grow the economy and displaced/unemployed workers will get better jobs in the new economy! Homeowner believes that before his ‘trick’ mortgage morphs into serious trouble he/she will have a better job – as promised by neocon ideologues that dominate the media – and he/she will get a new normal mortgage that he/she can now qualify for because “the new economy” has generated an even better job for him/her.
    Of course this never happened because for former manufacturing workers the ‘new economy’ is unemployment or McJobs.
    There has never been, in the history of industrialization, a country that has exported its manufacturing jobs and not destroyed its economy; an inconvenient fact no neocon is willing to recognize.
    “Free trade is good” is a syllogism (Two premises and a conclusion: free is good, trade is good, therefore free trade is good. If you accept this syllogism critical thought ends, and you are suckered!). Syllogisms are the most manipulative form of logic. Syllogisms are regular fare for neocons as they prefer that citizens do not think about what is being foisted on them, and acceptance of syllogisms by design ends critical thought.
    Neocon benefactors (the idle wealthy) never had it so good relative to average people as in the 1930’s. A few of them lost money but most had already cashed out their stocks to the little suckers in ’27 and ’28. When the economy fell apart stocks were virtually worthless and real assets became worth 10 cents on the dollar and the economic financial elites wealth was relatively 10 times as much as it was pre-crash. Rich people do very well during economic depressions and recessions for that matter as asset price deflation always favours money, and the wealthy – they have the money! Assets, labour and consumer products lose value while money increases in value in an economic depression. In the ‘30’s Rolls Royce autos went for $100 as few could afford to own such a vehicle, benefit to the monied classes.
    Neocon ideology dictates, that every decision be made exclusively on the basis of dollars. This is amoral – English has three positions for morality; moral which means that you know what it is and you do it, immoral which means you know what it is and you don’t do it, and amoral which means you never take morals into account in the first place.
    Seeing as there is not one human or social moral value which can be expressed in terms of dollars; there can be no better description of amorality than someone whose deciding factor in every decision is dollars. Neocons are amoral and they only recognize morality that does not interfere with dollar denominated greed. John Kenneth Galbraith’s seminal study on the Great Depression, points to the concentration of wealth in very few hands as the cause of the economic depression that followed the ’29 crash.
    The neocon agenda which has dominated for the last 25 years has achieved an unprecedented accumulation of wealth in very few hands putting even the excesses of the ‘30’s to shame! Until this imbalance is corrected by strengthening the value of labour economic recovery will be impossible.
    Free trade and other neocon ideological policies have currently created an even more pronounced relative concentration of wealth in very few hands in large part by unemploying the North American middle class – (after all the rich can only know they have Hoovered up as much wealth as possible when there are only two economic classes, rich and poor) and by making the wealthy miniscule or non-existent taxpayers.
    The wealthy and corporations can only be made to be socially responsible by national governments and so they hate national governments and use the media they own to get lower economic classes to hate national government too. State and local governments can all be easily manipulated to do whatever the wealthy and corporations want, by threat of job transfer to more compliant jurisdictions. The neocons have spent decades convincing us that the national governments, and naescent world governments for that matter, are evil and corrupt in order to diminish the public support for and power of national government to restrain rich elites and moderate their rapacious greed. This contention from the group that gave us Enron, WorldCom, Madoff and dozens of other similar fraudulent systematic looting schemes fed by corporate malfeasance, irresponsibility, and senior management greed. Veritably it is a case of the kettle calling the pot black!
    The second best way to disguise wolves is to put them in sheep’s clothing, but then they have to act like sheep; the best way to disguise them is to put wolves clothing on the sheep – this way the wolves can continue on being wolves unabated. The neocons and their media cronies are never idle in daily slandering and vilifying government and regulators who act in the public interest and protect the public the way sheepdogs protect the sheep, – making wolves out of sheepdogs allows the real Wall Street wolves to go on filling their pockets and defrauding the public while the public is distracted into microscopic and constant examination of regulators and government policy, regulation, and oversight, thereby diminishing the ability of governments to protect the public interest and increasing the wealthy elites ability to pilfer at will.
    The wolves have the sheep revolting against the sheepdogs, leaving the sheep very easy to slaughter! Doesn’t the American Constitution begin “We the people…”? The government is not some foreign oppressor, it is us. The oppressors are not the government, the oppressors are political neocons and their wealthy benefactor patrons.

  27. I can’t help noting how no one has responded to Mr. Smythe. Crickets, anyone?

    Howard Husock at City Journal made this excellent prediction that CRA and friends were creating bad loans. Eight years ago.

    Note to Schiff-haters: (a) saying Nouriel Roubini predicted deflation is a bit different from saying the New Keynesians predicted the crash. They didn’t, and the Austrians (including Schiff, who is hardly an academic Austrian) did. Big picture beats details.

    Also, since you’re so proud of those fancy pieces of paper you have, you might want to go back to your copy of Keynes and read the way he talks about “orthodox” economists. By “orthodox,” basically, Lord Keynes means Austrian and other hard-money economists.

    Ie, honest economists. Frankly, it takes a lot of nerve for a bunch of Gesellian quacks and inflation enthusiasts, who just happened to hijack the field of economics about 75 years ago by calling their opponents orthodox fuddy-duddies, who have demonstrated no predictive skill or success in economic planning whatsoever, and whose gigantic paper house-of-cards is in the process of collapsing, to pull out the “crank” label.

  28. As for the story of the CRA, Stan Liebowitz in Anatomy of a Train Wreck has the best overview.

    Liebowitz’s perspective basically confirms Robert Smythe’s post. The “mortgage innovation” movement was not just one law. It was an across-the-board thrust from Washington as a whole, from ACORN’s racist mau-mauing to George W. Bush’s crusade for “minority homeownership.” It is certainly hard to say that Republicans are any less responsible than Democrats, for example. No – it’s the whole lying system that is guilty.

  29. So, the same Wall Street that just rolled congress for $700B would not have used its influence to repeal the CRA it knew would be its destruction? That is simply not believable.

  30. Mencius, perhaps no one responded to Smythe because his (and your)misconceptions about CRA and ACORN have already been addressed. If your ideology does not allow acceptance of fact, perhaps the problem lies within yourself.

  31. It’s also worth mentioning that no law forced any bank to leverage these bad mortgage related assets at 40 to 1. Without such extreme leverage, there would be few problems. If the banks were aware of the risks, how did they justify this leverage?

  32. Mark A. Sadowski

    “Note to Schiff-haters: (a) saying Nouriel Roubini predicted deflation is a bit different from saying the New Keynesians predicted the crash. They didn’t, and the Austrians (including Schiff, who is hardly an academic Austrian) did. Big picture beats details.”

    The big picture is the general economy, not the movement of Lehman Brothers (or others) stock.If you cannot correctly predict general price movements there must be something fundamentally wrong with your economic model.Go back to the drawing board.

  33. Mark A. Sadowski

    Mencius,
    The fact that you would accuse us of being Gensellian is revealing. Only an anarchist like yourself would be so keen on such a subtle division. Unfortunately for me I am familiar with all of your various idiotic schools of thought.