CRA Bashing, Nth Generation

The Community Reinvestment Act is a law originally passed in 1977 that directed federal regulatory agencies to ensure that the banks they supervised were not discriminating against particular communities in making credit available.The onset of the subprime mortgage crisis triggered a flood of sloppy, lazy attacks on the CRA claiming that since the crisis was created by excess lending to the poor, and the CRA was intended to increase lending to the poor, the CRA must have caused the crisis. These arguments suffered from a mistaken premise (subprime lending had a modest negative correlation with income, but many subprime loans were used by the middle class to buy expensive houses in the suburbs and exurbs of California and Nevada) and a failure to check their facts (“Only six percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.” — Randall Kroszner, former Fed governor appointed by President George W. Bush, in a Federal Reserve study that also found that subprime loan performance was no worse in CRA-covered zip codes than in slightly more affluent zip codes not covered by the CRA.)

Yesterday at a Cato Institute conference, Edward Pinto, chief credit officer at Fannie from 1987 to 1989 and currently a real estate financial services industry consultant (according to recent Congressional testimony), rolled out the new line. The new argument is a curious mirror image of the old argument (which Pinto himself may not have made): now the subprime explosion did not cause the housing bubble, but was caused by the housing bubble and … wait for it … the CRA caused the housing bubble, along with the affordable housing goals of Fannie and Freddie.

Before going further, it’s time for my favorite lesson on correlation and causality.

The idea that the housing bubble caused the explosion in subprime lending is not crazy. The worst excesses in mortgage lending happened in 2003-06, after housing prices had already reached historical highs. The idea is that with prices so high, lenders had to offer exotic mortgages (and stop checking for documentation) in order to make the houses affordable for new borrowers. (Of course, there should have been stronger safeguards against those exotic mortgages — consumer protection enforcement, better credit rating agencies, etc. — but that’s another topic.)

But the weirder part of the argument is that the CRA caused the housing bubble. A policy could push housing prices up by increasing the availability of credit in a way that increases borrowers’ buying power. However, that can only contribute to a bubble if (a) it increases the number of loans that cannot be paid off, making price rises unsustainable and (b) there is some continually-increasing aspect to the policy, without which prices should simply reset at a higher level.

Pinto gets into an argument with the Federal Reserve study (cited above) on the performance of CRA-covered loans, claiming that those loans are doing worse than the Fed claims; I can’t judge that without seeing something in more detail. But even so, there are a few missing elements to the causal chain. One is that the CRA should only have an effect in low-income communities, and unless the people buying houses in the Nevada desert were all people who had been priced out of low-income communities by the CRA, it’s hard to blame the real housing price craziness on the CRA. Another is that the CRA itself has provisions that say that lenders do not have to make loans that are unprofitable. A third is that if the CRA was forcing banks to make unprofitable loans, then you would expect the nonbank lenders to stay out of those market segments; in fact, we saw just the opposite.

Back in 2000, Cato had a different line on the CRA. Jeffrey Gunther wrote an article in a Cato journal arguing that the CRA should stand for “Community Redundancy Act” because competitive forces in the market made it unnecessary — lenders seeking profits would not discriminate against particular communities. Gunther cited subprime lending as an example of the type of profit-seeking innovation that made the CRA unnecessary. He noted exactly what CRA defenders argue today:

“If CRA were the driving force behind the recent increases in home-purchase lending in low-income neighborhoods, we would see evidence of a treatment effect. Lenders subject to the ‘CRA treatment’ [regulated banks] would have refocused their activity toward CRA objectives to a greater extent than lenders in the untreated control group [nonbank lenders]. However, there is little evidence of such a treatment effect. To the contrary, it was lenders in the control group that refocused their efforts in line with the mid-1990s boom in lending in low-income neighborhoods. In fact, lending in low-income neighborhoods grew faster than other types of lending at institutions not covered by CRA, whereas low-income lending grew at the same rate as other types of lending activity for CRA-covered lenders.”

Gunther’s optimism about subprime lending seems naive in hindsight, although it was shared by many prominent economists and policymakers from Alan Greenspan on down.

For the CRA to be the problem, the causal factor would have to be availability of credit in low-income communities. But from what I’ve read, it seems like today’s problem is no longer redlining — plenty of lenders were willing to lend to the poor. It’s predatory lending — they found that for various reasons it was easier to steer poor people into unnecessarily high-cost loans. Now, I’m no fan of policies to encourage homeownership in general. I think we have too many of them. But the CRA is primarily a policy to discourage discrimination, and that is something we unfortunately still need.

By James Kwak

37 responses to “CRA Bashing, Nth Generation

  1. How long before we see Pinto’s argument on Fox?

  2. low interest rates created the housing boom. as the rates went lower, people re-financed. also, real estate said ‘lower rates mean lower payments. so we will just raise prices until the monthly payments are the same as they were when interest rates were higher.’
    who lowered rates? (the FED) who cried whenever rates were even mentioned to go up 25 basis? (wall street)
    thanks for the great work guys.

  3. CATO institute is a joke. Just like 90% of the Republican radio talk shows, they take cheap shots at any Democrat ideas or initiatives and if you dare to strike back and show what hypocrites and political cowards they are they go “Oh, I’m not Republican, I’m Libertarian”. And then you’re just supposed to shut up and not know how to respond.

    Most Libertarians are the IN ACTUALITY lowest form of cowardly Republicans who don’t even have the guts to verbally defend their ideas.

  4. How long before we see Pinto’s argument on Fox?

    wait for it…wait for it….NOW

  5. The pragmatist

    The low interest rates may have contributed to the housing bubbe, but they certainly did not cause it. There were many factors that contributed. Perhaps the biggest factor was the idea tha “this time is different” and that proven business practices could be tossed out the window. And don’t foget the roll that unregulated derivavtives like credit default swaps played. They gave investors a false sense of security, without which very few mortgage backed securities would have been sold and the easy money for mortgages would have dried up.

  6. That’s the classic. How many times did we see Wall Street analysts on CNBC whining to Mommy that the Federal Reserve was “too Hawkish” on inflation?? You wouldn’t have enough fingers and toes to count in the average week of CNBC programming how many Wall Street babies were whining when they raised rates a freaking 1/4 point. Like little babies crying because they couldn’t get more than one cookie from Mommy. Now they want to blame CRA for their problems??? It would be funny if it weren’t so nauseating what two-faced liars they are.

  7. Who needs facts when one has ideology?

  8. One wonders how the Cato crowd explains that it took almost 25 years for the CRA to “cause” the housing bubble.

  9. Must have been some problems near the end of some 30 year mortgages some black people took out. I mean we all know it wasn’t caused by low amounts of bank capital or bogus credit ratings or credit default swaps. No it couldn’t have been those, it must have been those darned blacks again.

  10. How dare you impugn the integrity of FOX news!! They are always very careful to present things in a very uh….uh uh……uh uh……”factual” and uh…uh honest way. See here
    http://latimesblogs.latimes.com/washington/2009/11/fox-news-rolls-wrong-video-of-palin-crowds-will-heads-roll-too.html

  11. This is an extremely common conservative, libertarian, and business source tactic when policies and/or related investments initially billed as “free market” or similar terms fail. I call this the “Mommmy! The Government Made Me Do It!” excuse.

    This has happened with the Great Depression, the Savings and Loan “deregulation” fiasco of the 1980′s, George Gilder’s failed stock picks and the Internet Bubble in the 1990′s, the electricity market “deregulation” fiasco in California, many other lesser fiascoes, and now the housing bubble.

    The basic tactic is to immediately and aggressively blame the government and liberal activists as soon as the bubble bursts. This often involves an astonishing about-face in which claims that “deregulation” has finally gotten the government out of the way and unleashed the “magic of the marketplace” are immediately replaced by claims that the government was heavily regulating the economy and drove it into a ditch.

    The Federal Reserve is frequently a scapegoat. Depending on circumstances, Federal Reserve policy is retroactively denounced as too loose (e.g. the housing bubble) or too tight (the Internet Bubble, Milton Friedman’s analysis of the Great Depression). Since the federal government essentially cannot get out of the business of setting monetary policy (even a gold standard is setting monetary policy indirectly) this is always a good way to blame the government.

    In the Great Depression, the Federal Reserve, the Smoot-Hawley tariff, various tax increases, the New Deal programs to try to combat the depression, and various other government policies have been blamed for the economic crash.

    In the Savings and Loan fiasco of the 1980′s, organizations such as the Cato Institute suddenly discovered the fine print in the Garn-St. Germain deregulation of 1982 and other related laws and regulations greatly increasing government guarantees through FSLIC to the “deregulated” savings and loans.

    In the Internet bubble, Alan Greenspan’s tightening of monetary policy was blamed as well as some obscure sections of the various Telecommunications acts passed during the 1990′s.

    In the electricity market “deregulation” in California, conservative, libertarian, and business sources switched quickly and seamlessly from extolling the virtues of deregulation to blaming environmentalists for allegedly blocking construction of power plants.

    The housing bubble and financial crash have spawned one of the most extensive and aggressive efforts to blame the fiasco on the government. The big three scapegoats are:

    1. Alan Greenspan and the Federal Reserve for too loose monetary policy.

    2. Fannie Mae and Freddie Mac for somehow forcing Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America and the other giant “private” banks to make trillions of dollars in bad loans or acquire securities back by bad loans.

    3. The Community Reinvestment Act (CRA) as described above.

    Many other lesser scapegoats have also been proposed including implicit government endorsement of credit rating agencies, Elliot Spitzer’s attack on AIG and its former CEO Maurice Greenberg, various FHA policies, etc. etc. The list grows, but almost always excludes the implicit too big to fail doctrine and policies.

    It is rather like the boy who cried wolf in the Aesop’s fables and critics of this nonsense should aggressively point out the long history of these claims and about-faces, in several cases by the very same pundits who are now blaming CRA and other government scapegoats for the housing bubble and financial crash.

    Sincerely,

    John

  12. We hate poor people.

  13. Man, I recently had to work on a book that joined the CRA, Fannie, Freddie, and all the Democrats, with the addition of the current media darlings, ACORN, conspired to create the housing and credit bubble by FORCING banks, including nonbank lenders, to make all kinds of crazy loans to low-income and minority folks. Because Wall Street is in thrall to the Democrats, don’t you know.

    Which I suppose is why there was a bubble in the UK, Spain, Ireland, Australia, China, India, etx.

  14. Luckily for us, your comments are so ignorant, you show yourself to be a very obvious and bad liar. Any stories about Martians you’d like to share???

  15. All these results seem to prove is that predators will do what predators do, which is to act in a predatory way dictated by both market forces (outside Government programs) and external forces such as CRA. They will make their money in any way possible, and in this sense, what caused the bubble was two things. First, the profound administration programs and policies regarding home ownership for everyone, but second, and more prevalently, the lax regulation of those structures within the financial community that made the packaging of loans in risky ways the norm.

    All of that is obvious.

  16. You will never convince a conservative, especially a Southern conservative, that the economic crisis was not the fault of the CRA because blaming this act of Congress points the finger at their favorite scapegoats, minorities. When you can blame the government and minorities at the same time, even better. As a Southern moderate, I have taken some time to look over the evidence, which shows only a small percentage of these sub-prime loans originating from institutions covered by the CRA. The majority were issued by financial institutions that did not fall under the terms of the CRA.

    If you bother to really do your homework, you will see that can be traced back to the emergence of the credit industry as major player in the American economy. Back in the middle to late 1980′s, when the financial sector began becoming more important to the American GDP and credit became a huge money making industry, especially as middle class buying power faded as the tax burdon was shifted away from the very rich via the Reagan tax cuts, credit became easier to get. Credit cards flourished as individual savings shrank. As the years went by, both borrowers and lenders realized that the middle class was becoming bogged down in debt and could no longer afford major credit purchases, like houses. The answer was trick mortgages and the housing bubble. Financial institutions came up with ways of getting credit to an already overburdoned consumer by offering new types of mortgages like Variable Rate Mortgatges and Interest Only Mortgages, both of which offered low initial payments that ballooned after a certain amount of time. The theory was that housing prices would continue to rise and the easy credit would allow for the continued upward movement of house buyers as they made money on selling their homes and moved into bigger, more expensive houses. The Fed played a major part in this sad business by keeping interest rates low, thus encouraging rising housing prices.

    The other major culprit is capitalism itself in the form of a whole new industry of “flipping houses.” People quit their jobs and began buying low priced, smaller houses and spending thousands on making improvements, then turning around and selling them for a huge profit, hopefully before their first payment was due. The Feds low interest rates and the credit industry’s easy credit policies aided and abetted the process. The result was a rising price of entry level housing which defeated the efforts of the government to make housing more affordable for those on the lower end of the earnings spectrum.

    In hind sight, the bubble had to burst, as bubble have always done down through history. As always, we are busy trying to find a scapegoat for our greed.

  17. you can assign blame on the poor if you want but, anyone with a decent mind knows that the system is ridiculous and needs serious overhauling; for example how do you let someone buy a house with out verifying income? Better yet,how do you let the people like Country Wide and a whole list of other lenders inflate a person income to qualify a person for a loan, who orignally could not afford the loan in the first place. I would say that is the greedy society we live in and it is all about the mighty dollar. So all you college educated fools take responsibility and look at your self first. There is so many holes in this system that allows for scams to take place.

  18. If the middle end of the housing market is inflated somehow by tax/govt subsidy….that will only raise prices on middde to upper priced homes.

    But if you inflate the bottom end of the market…

    That has inflationary repercussions all through the housing market – b/c of move-up buyers, 1031 exchanges, etc.

  19. A liar? No, I really did work on a book that said all those things. I’m a proofreader by trade; don’t hold me responsible for the content. I forget the title, I’ll have to look through my invoices.

  20. Another funny thing about this book was, that even though the author was trying to prove that it was all the fault of Democrats and their flunkies, he skipped over two important Clinton-era changes, the repeal of Glass-Steagal and the $500,000 tax-free capital gains on houses lived in for two years, encouraging people to treat their houses as short-term investments. But I guess that doesn’t really flow with the whole it was the fault of poor minorities narrative.

  21. This person stated that they “HAD TO WORK ON A BOOK THAT” etc.

    Next you’ll be telling us that all editorial personnel have sovereign control over their tasking.

    Everytime I stop in at this site Ted K is jumping down someone’s throat for no good reason.

    You’re really kind of nasty.

  22. ” he skipped over two important Clinton-era changes, the repeal of Glass-Steagal and the $500,000 tax-free capital gains on houses lived in for two years, encouraging people to treat their houses as short-term investments.”

    Exactly. In other words, “the government” does have much to do with the housing bubble. Apparently thinks the sesspool on the Potomac can do no wrong.

    You know, Ted K, the conservatives you despise *are* the government, too.

  23. John,

    Excellent comment. What I think is particularly true and often overlooked is the fact that conservatives attack immediately and aggressively when things turn sour. While everybody else is trying to figure out what the problem is and how to fix it, many conservatives are busy organizing and executing a plan to cast blame. They are very good at it. Heck, the blame-the-CRA meme is broadly adopted in spite of all of the debunking.

  24. Mr Kwak,
    Your defense of the CRA is much appreciated by those who have been working in the field of low- and moderate-income homeownership and financial services. The CRA is not responsible for the financial or housing crisis.
    I would direct you to a late summer paper written by our researchers entitled, Neighborhood Subprime Lending and the Performance of Community Reinvestment Mortgages. You will most likely find several of our other papers of interest as well.

  25. Are we sure the writer’s name isn’t “quack”?

    The bottom line here is this. Everyone loves to blame those they disagree with. For the GOP, the scapegoats are Barney Frank and his ilk. For the Dems, the scapegoat is Bush. But who’s really to blame? Well, you’ll NEVER hear a politician tell you the truth to that question, because s/he can’t afford to lose too many votes.

    Did Barney Frank play a large roll in protecting Fannie and Freddie as they accumulated billions in bad loans? Yes. Did Bush not push hard enough for more regulation of these two firms? Yes. Did the government play a role in the lending fiasco by essentially changing the rules by which banks were valued from “quality of loans” to “quantity of loans”? Yes. We all know these things. Here’s the thing though folks….NONE of this would’ve mattered had the American people simply paid their bills.

    If these loans didn’t go “bad”, then the securities backed by them wouldn’t have either. If people paid their bills, then banks wouldn’t have an issue, would they?

    So continue to jump up on your pedestals and point at the other side here folks, but make damn sure you don’t point at your neighbor as his house is foreclosed.

    It wasn’t his fault. It was the “predatory” lenders fault that he came to them and asked for more money than he could ever hope to pay back. It wasn’t his fault that he felt a sense of “entitlement” like no other generation in the history of our great country.

    You want to know who’s to blame for this mess? It’s pretty simple. Everyone reading this bears some responsibility. Every single one of us.

  26. Add to the low interest rates the fact that productivity had increased significantly while the average wage stagnated. Given tax breaks on the high-income end plus the added leveraging of derivatives there was an incredible amount of credit available with middle class America capital poor. All it took was a little creative mortgage lending to set the inevitable in motion.

  27. I call BS on the Kroezner study. Many of CRA loans were given out by census tract. If your census tract qualified as low income, you got special preferences, whether you were poor or not.

    Now if your argument is that CRA and the sub prime were used by the non poor. Fine. Tell me something new. The whole welfare State apparatus is really there to fund the welfare state bureaucracy, not the poor. The poor are only their cover.

    CRA was a welfare state scam. Pure and simple. The vast amount of the lending abuse, by the banks, the appraisers, etc, was in low income areas, not necessarily by and for the poor.

    But the fact remains that people with little or no collateral, poor credit histories, and insufficient income shouldn’t be given loans and mortgages they can’t repay.

    And don’t tell me Fannie and Freddie didn’t abuse their charter. Where did the over a trillion dollars in Fannie backed MBS derivatives come from? You know the ones our government had to cover because they were sold almost exclusively to the national banks of China, Japan, Russia, Belgium, etc.

    You guys can prattle on all you want about how conservatives are liars and cheats, and drove the economy into a ditch. The voting public has heard enough of this line of crap, and has seen what Paulsen, Rubin, Summers, Geithner, Bernacke and Obama have done with almost unlimited power. The voters know things are not getting better; they know things are getting worse and who is to blame. No amount of phony studies will help you now. Time to start telling the truth. Or come November, you’re going to get a whoopin you won’t believe.

  28. I got this off of Andrew Sullivan’s website. Of course original credit goes to the creative guys of SouthParkStudios. If you grew up a low-income white or a minority in a wealthy suburban area the true genius of SouthPark cartoons will ring so true to you. When I saw this on Sullivan’s site every Republican who has tried to blame CRA for the economic crisis instantly came to mind.
    http://www.southparkstudios.com/clips/256710

  29. To those who still want to push the stupid assertion that CRA caused the crisis, it’s past due time to put up or shut up.

    Follow this link and see if you have what it takes to challenge the Master.

    http://www.ritholtz.com/blog/2009/06/100000-cra-challenge/

  30. But we never got the title of that book from Moopheus did we??? I doubt if he has the ISBN number for the book he “proofread” either. Guess he’s still looking through all those invoices…………

    You sure are a clever one quidditas (he said as he guffawed at it own punch line).

  31. The CRA was created to make sure that worthy borrowers who happened to live in areas not looked on favorably by lending institutions were not discriminated against.

    It’s funny how those who don’t see a problem with discrimination don’t want to see that. These are the same people who don’t see a need for Affirmative Action, the Equal Rights Amendment, the Ledbetter Act or, for that matter, the Civil Rights Act or Brown vs. the Board of Education.

    The fact remains that people with collateral, those with good jobs whose incomes were not keeping up with the governments understated inflation, those with good credit histories and those who were nearly maxed out on their credit cards were happily given loans by a greedy finance industry who were desperate to keep the good times going. Those good times had made many small fortunes, all based on the extending of credit. Deny it all you wish, but these fragile good times were the product of Republican economic policies and were based on nothing but paper and promises, lies and greed.

    President Obama may indeed suffer in the next election, but it took President Reagan 2 or 3 years to get this country out of the recession of 1981, which Republicans still blame on President Carter (yes, the same Republicans that tell us that we can no longer blame President Bush for the current crisis.) President Reagan brought us out of that recession by initiating an incredible spending program that grossly added to the national debt. Government spending is how we managed to climb out of the great depression. The problem we have now is that President Bush already created a crushing debt load for this country and the spending President Obama is undertaking, no matter how necessary, scares the very people who allowed it to happen during the previous 8 years.

  32. Did the Community Reinvestment Act (CRA) by itself cause of the mortgage meltdown? No, after all CRA loans made up only 8% of subprimes. However, if you looked beyond that single data point and analyze the root causes of the crisis, you would uncover the critical role “affordable housing” advocates played using the CRA, Fannie, Freddie and even the Fed in unwittingly undermining the mortgage market.

    In 1992, the Boston Federal Reserve conducted a study of mortgage lending and found evidence of racial discrimination. This study spurred regulators, Congress and the Fed to correct loan discrimination. Congress set mandates for Fannie Mae, Freddie Mac and banks with CRA loans to meet ever-increasing annual “low-income” loan targets. To achieve these mandates, banks and thrifts were forced to lower their underwriting standards. The 1995 revision of the CRA in 1995 removed the requirements for proof of income, source of down payment and credit history to qualify for CRA loans. The Boston Fed produced a widely circulated and influential manual for mortgage lenders that encouraged banks to drop underwriting standards for low income borrowers, such as 28/36 ratio (share of net or gross income that can be devoted to mortgage payments). Fannie Mae and Freddie Mac started allowing temporary income like overtime, welfare payments, seasonal wages and unemployment benefits to be counted as valid income. To compete, non-CRA lenders and independent mortgage brokers were forced to lower their underwriting standards. Eroding underwriting standards in the riskiest part of the market soon spread to the rest of mortgage lending.

    Historically, banks and thrifts originated loans and held them on their balance sheets. Lenders bore the loan risk which ensured that they scrutinized every loan. However, under the 1995 CRA revision, a bank would receive credit for meeting its low income loan targets by originating the loans and reselling them. These rules encouraged banks to sell the loans they originate; divorcing them from the risk of default. In addition, the revision also allowed originators to package CRA loans into securities. Bear Sterns bundled the first CRA loans into securities in 1997. With securitized mortgages, the originators lacked an incentive to screen loan applications; their only incentive was to write as many loans as possible. Private label securitization exploded as investment banks found these products to be a very profitable with seemingly little risk. Likewise, Fannie Mae used securitization to fuel their subprime purchases which exploded from $600M in 1995 to over $17 Billion in 1999. Then in September 1999, the Clinton Administration pressured Fannie Mae to further eased credit requirements on loans it would purchase from lenders, making it easier for banks to lend to borrowers unqualified for conventional loans.

    These policies undermined underwriting standards and disconnected the loan originator from its risk. So, when Congressional leaders like Barney Frank pressured Fannie Mae and Freddie Mac in 2004 to deluge the housing market with billions of dollars for “low-income” mortgages, the traditional checks and balances were no longer in place. Unqualified borrowers flooded the market driving up housing prices in the short term, and defaulting in the long term.

    Incidentally, the Boston Federal Reserve study that helped launch the “reform” in mortgage lending, was found in 1998 to be so riddled with errors that its conclusions were wrong. There was no evidence of bias in the data, after all.

  33. That’s a little unfair to us libertarians who have quit the Republican party is disgust.

  34. The CRA might not have directly caused the housing bubble but it didn’t help either. I think there are so many different aspects to why the housing bubble happened that it is stupid to blame only a few institutions. As a whole, most Americans buy more than they can afford and the people in charge let them do this. We need to regulate a little more and do more research before we invest in people, realestate or anything else for that matter.

  35. Here is the short answer on your causality challenge:

    “One is that the CRA should only have an effect in low-income communities, and unless the people buying houses in the Nevada desert were all people who had been priced out of low-income communities by the CRA, it’s hard to blame the real housing price craziness on the CRA.”

    As I say in my presentation, the CRA and affordable housing stimulus started big time in 1993 and drove the homeownership rate up starting in 1995 – mainly at the lower price/income portion of the market. This new demand drove prices up on the bottom 1/3 of homes, which drove a move-up market (the other 2/3 of homes). The 1997 tax law change effectively eliminating capital gains on homes also made a substantial contribution – particularly in areas like FL, NV, etc. (see New York Times: http://www.nytimes.com/2008/1...)

    “Another is that the CRA itself has provisions that say that lenders do not have to make loans that are unprofitable.”

    I debunk this in my presentation. These loans (if held in portfolio) were not as profitable as regular loans and the Fed data proves this. However one has to read the entire studies, not just the summaries.

    “A third is that if the CRA was forcing banks to make unprofitable loans, then you would expect the nonbank lenders to stay out of those market segments; in fact, we saw just the opposite.”

    Note above, I said “if held in portfolio” – 90% of CRA loans were not. These loans and those originated by the subprime lender in chief and Fannie’s biggest customer, Countrywide, were worth more because they were CRA/affordable housing (AH) loans. Banks bid these up and bought at a premium to meet their CRA obligations. Fannie and Freddie regularly got into bidding wars over these loans, particularly towards the end of the year. All this was common knowledge in the industry. In fact, Countrywide was the master at profiting from the credit allocation mandates of CRA and AH loans. Countrywide also participated in HUD’s CRA-like program for non-depository lenders (Countrywide was the 1st national lender to sign on – in 1994) and was responsible for $731 billion in CRA/community development loans over 2001-2007. It was a major originator of state housing finance agency loans.

    “It’s predatory lending — they found that for various reasons it was easier to steer poor people into unnecessarily high-cost loans.”

    Again this is debunked in my presentation. Simply put, Fannie, Freddie, and FHA loans (these did not have so called predatory characteristics) are performing horribly – which makes them unsustainable or predatory. Why? Because they are high risk. Many community groups focused on interest rate not risk. The interest rate is not particularly relevant – sure Fannie, Freddie, and FHA loans had lower rates – this just allowed borrowers to buy more expensive homes (and drive up prices), since the constraint was debt-to-income ratios. A 97% or 100% LTV loan is risky at 6% or 8%. By the way, the failure of Fannie and Freddie, and the likely need for a bailout of FHA demonstrates that these loans were mis-priced. However, the real problem was not pricing – there is no amount of interest (or insurance premium) that makes a bad loan good. The problem was risk – too many low downpayment, credit impaired, and other non-traditionally underwritten loans flooded the housing finance system.

    By the way, FHA is continuing this madness. I am projecting that FHA’s 2005-2008 loans will have the same total loss percentage as fixed rate subpime loans (97% of FHA loans are fixed rate).

    Edward Pinto

  36. “Architects of Ruin: How big government liberals wrecked the global economy—and how they will do it again if no one stops them” Peter Schweizer.

    A-hole.