[Winstonm]

Quote

“Let me ask you, where in the CRA does it say to make loans to people who can’t afford to repay? Nowhere.”
-FDIC Chairman Sheila Bair

A conversation with my brother spurred these thoughts.

The conversation revolved around the CRA (Community Reinvestment Act) and its role in the housing crisis. A certain group keeps casting blame on the CRA as the cause of the current housing and credit crisis - and regardless of who points out contrary information or what facts actually point to, this group stays on point and blames CRA. Even after reveiwing the facts, my brother was unaltered in his view that "that Congress, the Feds, and the CRA" was mostly to blame.

Quote

"I want to give you my verdict on CRA: NOT guilty,” said FDIC Chairman Sheila Bair, according to a press release by the Federal Deposit Insurance Corporation. Before the Consumer Federation of America, Bair said Thursday she wanted to clear up the “myth” that the Community Reinvestment Act caused the financial crisis....

The idea here is not to bash a particular ideology - no matter how worthy of bashing they may be - but to understand the process that leads to the formulation of opinions. The underlying question is what causes some people to filter information through pre-determined biases instead of simply seeking accuracy?

John Maynard Keynes said, "When the facts change, I change my mind." This seems to be the polar opposite of what many people do - my brother included. This is my conundrum. Why?

What causes ideology to trump facts?

[Al_U_Card]

Laziness?

Insecurity?

Lazy insecurity?

Insecure laziness?


Oh yeah, right, STUPIDITY.

[Rossoneri]

Not wanting to admit that you were wrong. Being stubborn.

[kenberg]

My knowledger is slight here. To the best of my recollection I have not until now heard of the CRA, although I was aware of claims that banks were under pressure that pushed them towards unsound loans. Perhaps youor brother, or those who thik this way, could provide some of their arguments. Perhaps such people are insecure, stubborn, lazy and stupid as has been suggested. Perhaps not.

The quoted argument that nowhere in the CRA is it required to give loans to people that can not make the payments strikes me as a little on the cute side. Any bureaucrat worth his/her pay knows how to handle such matters. You want someone to perform action X, where X might in this case be to increase the number of loans to people who would not previously have qualified. You accomplish this by requiring extensive records detailing the situation of the people you loan money to. If few of these people are of modest means, then you require the bank to fill out detailed explanations of how this situation came about and suggest training sessions for their managers on how to improve there results. If, on the other hand, many loans are to people of modest means then no explanations or training sessions are required.

And by golly, miracle of miracles, banks come to see merit in loans that previously they would have rejected.


Perhaps something like this happened, perhaps it did not. I don't know. I wouldn't dismiss the possibility out of hand.


That bankers made really irresponsible decisions seems beyond question. Probably the people who made these decisions are not total morons. So it becomes worthwhile to consider how this came about. Asking about the effect of the CRA seems fair enough providing we do not prejudge the answer. Either way

[jtfanclub]

The CRA is just a tax, just like any other tax. It says "Instead of us taking $20 million dollars of your money and investing it in low income housing, you will take $20 million dollars and invest it in your low income housing".

And like all taxes, the banks raised their interest rates to cover it.

Theidea that the CRA was such a burdensome tax that the banks would somehow fail because of it is laughable. If the tax had been that onerous...

A ) The banks, which kinda own the Senate, would have had it repealed, or

B ) They would have gotten out of the mortgage business.

The truth is, the banks liked the CRA. Getting rid of abandoned homes is good for the mortgage business. Sure, they'd lose money on that particular house, but it would increase the housing values of all the homes in that neighborhood. As soon as some houses become 'unmortgageable' in an area, that's it. The whole neighborhood dies, and the banks are stuck with the tab.

What they didn't want is for, say, BankOne to be giving out the money-losing bad mortgages while National Bank made a profit because their existing mortgages survived. The law made sure every bank paid their fair share.

The CRA was good law and good business. The only thing it has to do with this disaster is that it gave the banks a bunch of known high risk loans which they then proceeded to play games with to get them off the books.

[kenberg]

I looked up CRA on the Wikipedia. I am not seeing how it can be described as a tax.


The explanation there is fairly long. Here is one, perhaps significant, sentence:

>The CRA mandates that all banking institutions that receive FDIC insurance be evaluated by the relevant banking regulatory agencies to determine if the institution has met the credit needs of its entire community in a manner consistent with safe and sound operations.

There is a lot more, but as I say, I am not seeing why it is a tax. But I will grab two phrases from the above:

"determine if the institution has met the credit needs of its entire community"
"in a manner consistent with safe and sound operations"

Suppose, as I imagine is sometimes the case, that meeting the credit needs of the community cannot be done in a manner consistent with safe and sound operation. The bank is then required to do what? Taking the command above literally, they are required to do both. But perhaps they cannot.

Government bureaucracies being what they are, I can imagine some heavy handed emphasis on the "meeting the community needs" taking precedence over the "safe and sound operation". Did this happen? I very much hope someone from the "blame the CRA" faction will say why they believe we should do so. I seriously doubt any one cause explains the disaster but an honest evaluation of various possible contributing factors would be useful I should think.

As a general rule I find that when proponents of a view are summarily denounced as stupid, lazy, whatever, often the view has some merit. Not always, of course. Even if Winston's brother does not play bridge, I would welcome him as an honorary bbo forum contributor. This hasn't reached the Cain and Abel stage I hope!

[Winstonm]

Ken,

The CRA simply said that - for example - if you opened a bank in Harlem and took deposits from Harlem that you should attempt within reason to lend to Harlem residents.

As you noted, it applied only to depository institutions - therefore, it did not apply to mortgage companies nor to mortgage brokers.

[mike777]

Interesting thread.


Loans are assets for banks. One would think the banks' owners and top management would want to create as many "within reason" loans, assets, as possible in Harlem or anywhere else. Those banks that created the most reasonable loans, thrive, those that do not fail in the marketplace. I guess one could ask are capital markets stupid compared to the central government?

I recently read somewhere that the biographer of Keynes thought Keynes would answer, yes.


In this crises it seems the banks took on many asset types that are difficult to price to market when the economy turns down. So many it caused massive panic in the system.

[kenberg]

Winstonm, on Dec 6 2008, 08:13 PM, said:

Ken,

The CRA simply said that - for example - if you opened a bank in Harlem and took deposits from Harlem that you should attempt within reason to lend to Harlem residents.

As you noted, it applied only to depository institutions - therefore, it did not apply to mortgage companies nor to mortgage brokers.

Ms. Bair's defense of CRA appears to concede that institutions working under CRA made a significant number of bad loans. If this were not so, surely her defense would have been that the numbers are not significant. If the argument: "Mostly the bad loans were not made by institutions responsible to CRA" could be backed by data, I imagine she would have said so. The fact that she made the much softer and less persuasive argument that CRA does not require banks to make bad loans suggests to me that the stronger (if valid) argument won't fly.

As mentioned, I know little to nothing about what actually happened. But we all know something about government bureaucracy. The Wikipedia article gives me the impression that while bad loans are not required (obviously no one writes a rule explicitly requiring bad loans) the law gives regulators the power to hurt a bank that refuses to make loans that may very well not be sound. How this played out in practice I don't know, but I do think of Ms. Bair's argument as standard bureaucratic cuteness.

[USViking]

Fact: CRA was an act ideologically motivated to pressure
banks to extend loans to people who previously would have
been considered unacceptible risks. Noncomplying banks
were to be threatened with loss of FDIC backing.

Fact: Consequently banks loosened their standards, and not
infrequently threw all standards out the window. You wanna
mortgage? You got one! See link:

http://bigpicture.typepad.com/comments/200...gist-for-f.html

Quote

During the hey day of no-income verification, "No Doc" loans, the builders finance people, as well as other mortgage brokers walked people through the application process. Mr. Cowen writes that "Too often, mortgage originators and middlemen looked the other way." That's a rather generous read on it. The reality is that THEY TOLD PEOPLE WHAT INCOME TO WRITE. They used sentences such as "Put down $150k." OTHER TIMES THEY APPLICANTS LEAVE THE INCOME SPACE BLANK; The reps later conveniently filled in the data on the own.

To claim mortgage originators and middlemen only looked the other way is putting too fine a point on it. THEY WERE ACTIVE COLLABORATORS IN ANY FRAUD.

Oh, and, don't take my word for it -- find some people from the industry and ask them yourselves. This is a very well known fact amongst real estate agents, mortgage brokers, and builders. 

Cute, huh?

Fact: the government- executive, legislature and bureaucracy
(including the FDIC)- looked the other way while standards were
being jettisoned: mortgage lending became de facto an unregulated
industry.

Fact: Previously uncceptible risks (i.e. the infamous "subprime"
portion of the market) subsequently came to make up about 25%
of all mortgages, and they were foreclosed at a rate of up to almost
20 times that of prime risk mortgageholders. See links for graphics:

(subprime share of market)
http://www.agorafinancialpublications.com/...122206Rude1.JPG

(foreclosure rates 1998-2007)
http://economistsview.typepad.com/economis...8/subprime1.gif

There were other players, culprits and plots to the story such as
Alan Greenspan, that poison dwarf and high priest of deregulation
run amok, and such as the "bundles" of "AAA" Wall Street bank
securities, which is where most of the subprime mortgages seem
to have physically wound up.

But is was CRA which opened the floodgates, and we are now reaping
the whirlpool, with no end in sight.

[kenberg]

I know too little to either endorse this or contest it but I'll stay tuned!

[JoAnneM]

I think the Internet is like the Bible - you can find text to support any argument.

[PassedOut]

The rating agencies also participated by selling ridiculously high ratings for profit: Debt Watchdogs: Tamed or Caught Napping?

Quote

Edmund Vogelius, a Moody’s vice president, explained the company’s business model in a 1957 article in The Christian Science Monitor.

“We obviously cannot ask payment for rating a bond,” he wrote. “To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.”

In the early 1970s, Moody’s and other rating agencies began charging issuers for opinions.

Quote

And in 2000, when Moody’s issued stock to the public for the first time, executives hungry to churn out quarterly profit growth had another incentive to redirect the firm’s focus from low-margin ratings of relatively simple bonds to highly lucrative assessments of much more complex debt securities.

As it rode the mortgage wave, Moody’s came to enjoy profit margins that were higher than those of the mightiest of Fortune 500 companies, including Exxon and Microsoft.

As individuals, the managers of all the companies involved in this mess took healthy sums for themselves while the getting was good. Cleaning up the mess, though, falls to alll taxpayers, including everyone who made investments relying upon the bogus ratings.

[kenberg]

Rating agencies taking fees is really unconscionable. If I recall correctly in the old days disc jockeys went to jail for taking money in return for promoting songs. The thought that we accept lesser standard for bond rating agencies truly boggles the mind.


Mostly we need to understand what happened as well as we, as non-financial experts, are able to so that we can vote and invest wisely in the future. But in the case of the rating agencies, it does seem to me someone needs to go to prison.

[Winstonm]

USViking

Fact: Your facts are crap.
Let's see what you claim as "fact".


CRA was an act ideologically motivated (you have proof or are you simply repeating unverifiable spin?) to pressure
banks (again, an unverifiable allegation - not to be confused with data.) to extend loans to people who previously would have been considered unacceptible risks. (Nowhere in the CRA does it require banks to increase or take unacceptable risk. Show us the data instead of spinning a tall tale.) Noncomplying banks were to be threatened with loss of FDIC backing. (There was no provision for penalty in CRA).

Your statement shows more about your prejudices than about any actual fact. But I press on, anyway, hoping an open minded individual will miraculously emerge.

This entire "fact" you claim is simply a series of non-verifiable allegations that comprise a single talking point made from inferior logic - the CRA was designed to help the poor obtain credit; subprime loans caused the crisis; therefore, the CRA is at fault.

What a bastardization of logic and what total crap!

You quote this from The Big Picture, as some kind of proof of CRA culbability???

Quote

"Too often, mortgage originators and middlemen looked the other way." That's a rather generous read on it. The reality is that THEY TOLD PEOPLE WHAT INCOME TO WRITE. They used sentences such as "Put down $150k." OTHER TIMES THEY APPLICANTS LEAVE THE INCOME SPACE BLANK; The reps later conveniently filled in the data on the own.

To claim mortgage originators and middlemen only looked the other way is putting too fine a point on it. THEY WERE ACTIVE COLLABORATORS IN ANY FRAUD.

Listen again - the CRA only appled to depository institutions. It DID NOT apply to mortgage brokers and other middlemen. It did not require 120% LTV ratios. It did not require AAA ratings on subprime CDOs.

Fact: You are doing exactly what my post implies is done - spouting ideological talking points with no statistical evidence to verify the claim. Interesting.

By the way, Barry Ritholtz of The Big Picture has been adamant that CRA is not responsible for the crisis. Here is what Barry Ritholtz has to say: (emphasis added)

Quote

There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

You said,

Quote

But is was CRA which opened the floodgates, and we are now reaping
the whirlpool, with no end in sight.

The purpose of the exercise is to figure out what worked, what didn't work, and then fix the problems so they won't again occur - apolitically. Unfortunately, the WingNuts turn this exercise into spin to defend ideology.

And they don't let facts stand in the way of a good scapegoat.
Why is it so difficult for the WingNut to say: You know what. I may have been wrong?

[Winstonm]

I felt compelled to provide the text (I think the link itself is dead) to what Barry Ritholtz of The Big Picture had to say about CRA, as The Big Picture was used by an earlier poster in an attempt to show CRA culpability.

Quote

"It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did."

-Robert Gordon, American Prospect

>


>

I have been meaning to get back to this issue, but events in the market have kept me a tad busy.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.

I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)



• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada;  Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?  

The answer to all of the above questions is no, none, and nothing at all.

The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron's, there is plenty of things to be angry at D.C. about -- but this ain't one of them.

If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed's part in supervising bank lending, allowing banks to give money to people who couldn't possibly pay it back.

The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with -- which they promptly did.

There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

Shame on them for their foolishness or cowardice.

Whenever I see a CRA proponent blathering, I have a "Star Trek moment." That's when Captain Kirk proves to some random alien computer that its basic programming is logically inconsistent. It's the AI (artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .

"You can fool some of the people some of the time and some of the people all of the time. That's usually enough."  

-MILTON BERLE

[Winstonm]

kenberg, on Dec 7 2008, 01:33 PM, said:

Rating agencies taking fees is really unconscionable. If I recall correctly in the old days disc jockeys went to jail for taking money in return for promoting songs. The thought that we accept lesser standard for bond rating agencies truly boggles the mind.


Mostly we need to understand what happened as well as we, as non-financial experts, are able to so that we can vote and invest wisely in the future. But in the case of the rating agencies, it does seem to me someone needs to go to prison.

I think you will find near total agreement on this issue. Surely, there had to be a provable criminal fraud commited somewhere.

[Winstonm]

I just copied this from The Big Picture website. This is what makes me nuts when I hear the WingNuts carry on about CRA, Fanny and Freddie.

Quote

Orson Benn, once a vice president at the nation’s largest subprime lender, spent three years during the height of the housing boom tutoring Florida mortgage brokers in the art of fraud.

MORTGAGE BROKERS - Not covered by CRA.

Quote

Orson Benn, former vice president of Argent Mortgage Co.,

Argent MORTGAGE Co. - Not covered by CRA.

Quote

From his office in New York, he taught them how to doctor credit reports, coached them to inflate income on loan applications, and helped them invent phantom jobs for borrowers.

While prosecutors looked at roughly $100 million in loans written by Benn and a cadre of co-workers, that represents just a portion of the loans they approved during his aggressive expansion into Florida.

Loans not covered under the CRA. Besides, the CRA did not require fraud.

Quote

The Miami Herald found that Benn’s network approved more than $550 million in home loans from Tampa to West Palm Beach to Miami, according to an analysis of court records. In Miami-Dade County alone, Benn’s office approved more than $349 million in loans on 1,913 homes — more than one in three have since fallen into foreclosure, the analysis shows.

Tampa to West Palm Beach to Miami - not exactly the low-income area the CRA was designed to help. But let's not let that "fact" destroy a good myth.

Quote

Valdes brokered at least 100 of those loans worth $22 million — nearly all based on false and misleading financial information, the newspaper found

Greed, fraud, and non-regulatory oversight by the Fed and SEC are most responsible for this travesty. To blame this on CRA is closer to escapism than realism.

It wasn't a Legislative Act that caused the housing crisis - it was Criminal Acts.

[kenberg]

Is it known what percentage of loans that have gone into recent default, say during October (I assume figures for November would not be yet available) were from institutions that were under CRA? As a first approximation statement, I would say that if it is less than 10%, CRA is off the hook. If it is more than 50%, then the possible effects of CRA are very relevant and worthy of discussion. If it lies between 10 and 50, then culpability may be in the eye of the beholder. I truly have no idea.


So: I am hoping for numbers to fill in the following:

x=Number of loans going into foreclosure October 2008


y=Number of loans going into foreclosure October 2008 that were generated ("generated" to be interpreted in some sensible way) by institutions subject to CRA

Q: Is y/x less than 1/10, more than 1/2, or in between 1/10 and 1/2?

Knowing the answer may not settle all disputes but for me at least it would be a place to start.

I'll be seventy the first of the year (mark the date, I expect birthday wishes) so mortgages are mostly behind me although we did take out a short term mortgage when we moved three years ago. I was stunned to see how much less transparent the whole process was compared to my first mortgage experience circa 1970. In the recent case, I couldn't tell you where the bank that would hold the mortgage was, or if it was a bank, or who worked for it. It was on the papers of course so I could have said at the time, but it was some out of state place I never heard of before or since. In 1970 I sat, walking distance from the house, in an office in the bank that would be holding the mortgage and worked with people whose role I understood. In the recent experience the people (mortgage brokers or some such thing) were honest, friendly, helpful, all of that, but I didn't know any of them and I was not too clear about who worked for whom. I suppose senility would be one explanation, but I don't concede that.

[barmar]

Winstonm, on Dec 5 2008, 03:32 PM, said:

John Maynard Keynes said, "When the facts change, I change my mind." This seems to be the polar opposite of what many people do - my brother included. This is my conundrum. Why?

What causes ideology to trump facts?

Cognitive dissonance.

In general, people are not nearly as rational as we usually assume. Read Predictably Irrational.