Did Liberals Cause the Housing Crisis?

Vic

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Jun 12, 2001
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http://www.prospect.org/cs/art...se_the_subprime_crisis

Did Liberals Cause the Sub-Prime Crisis?

Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It's a useful story for them, but it isn't true.

Robert Gordon | April 7, 2008 | web only


The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."

Last week, a more careful expression of the idea hit The Washington Post, in an article on former Sen. Phil Gramm's influence over John McCain. While two progressive economists were quoted criticizing Gramm's insistent opposition to government regulation, the Brookings Institution's Robert Litan offered an opposing perspective. Litan suggested that the 1990s enhancement of CRA, which was achieved over Gramm's fierce opposition, may have contributed to the current crisis. "If the CRA had not been so aggressively pushed," Litan said, "it is conceivable things would not be quite as bad. People have to be honest about that."

This is classic rhetoric of conservative reaction. (For fans of welfare policy, it is Charles Murray meets the mortgage mess.) Most analysts see the sub-prime crisis as a market failure. Believing the bubble would never pop, lenders approved risky adjustable-rate mortgages, often without considering whether borrowers could afford them; families took on those loans; investors bought them in securitized form; and, all the while, regulators sat on their hands.

The revisionists say the problem wasn't too little regulation; but too much, via CRA. The law was enacted in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it's conceived as a quid pro quo for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.)

The law imposes on the covered depositories an affirmative duty to lend throughout the areas from which they take deposits, including poor neighborhoods. The law has teeth because regulators' ratings of banks' CRA performance become public and inform important decisions, notably merger approvals. Studies by the Federal Reserve and Harvard's Joint Center for Housing Studies, among others, have shown that CRA increased lending and homeownership in poor communities without undermining banks' profitability.

But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."

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.

And that is not political correctness. It is correctness.

The bolded are the crucial points IMO. I cannot stress enough that the 'subprime' loans often referred to as 'toxic' or even 'predatory lending,' and which most people rightly associate with the housing bust, were almost all lent outside the scope of the CRA.

edit: fixed formating error
 

JS80

Lifer
Oct 24, 2005
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There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this. Everyone likes to blame something or someone for it, and CRA is a very nice and easy target to fingerpoint at especially considering the complexity of the issue and the ignorance of the masses.
 

Vic

Elite Member
Jun 12, 2001
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Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this.

I completely agree. This thread was created because I have been attacked several times for arguing against this talking point that the CRA was entirely to blame. Apparently, Rush has really been spinning it out to his faithful lately.
 

miketheidiot

Lifer
Sep 3, 2004
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if banks were being forced into making sub-prime loans and other loans to low and middle income people, than why was that wamu's enitire business model?
 

bamacre

Lifer
Jul 1, 2004
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I'm also sick of people blaming the "free market."

Fox News had a line up earlier, "Are "Free Market" Capitalists Now Dead?"
 

Vic

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Originally posted by: bamacre
I'm also sick of people blaming the "free market."

Fox News had a line up earlier, "Are "Free Market" Capitalists Now Dead?"

I agree with this too, because a large factor was how much money the Fed was pumping into the economy. Lenders could not lend it out fast enough.
 

sactoking

Diamond Member
Sep 24, 2007
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Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this. Everyone likes to blame something or someone for it, and CRA is a very nice and easy target to fingerpoint at especially considering the complexity of the issue and the ignorance of the masses.

That's BS. I blame it on the Rubik's Cube/Shia Le Boof/blinking.
 

AstroManLuca

Lifer
Jun 24, 2004
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There are a million reasons we got into this crisis, but there's one really big reason why we won't get out of it.

Politicians not doing their job when we need them the most.
 

ElFenix

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reckless lending, reckless borrowing, the GSEs were too big increasing the risk, realtors telling people the market was going to keep going up, far too many people believing that lie, HGTV making everyone think they could put $5000 of landscaping into a house to turn $70,000 profit in a month, too many banks doing this as a huge part of their business (just like bill heard chevy), ridiculously low interest rates because greenspan wanted to save the day in the asian currency crisis a decade ago, etc.

it all simply adds up to too many people who never should have had houses buying houses. when the price of gas went up and the economy started slowing, they couldn't go bankrupt anymore because of the BAPCPA*, so they told the bank to take the keys to the house.







*the banks, ert, congress, wrote BAPCPA so poorly that you can get to 7 by filing as a 13 and then converting.
 

Engineer

Elite Member
Oct 9, 1999
39,230
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Originally posted by: Vic
Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this.

I completely agree. This thread was created because I have been attacked several times for arguing against this talking point that the CRA was entirely to blame. Apparently, Rush has really been spinning it out to his faithful lately.

I turned on AM radio yesterday for about 3 minutes and Hannity was going nuts blaming this very thing on the Democrats. So yes, conservative radio is spinning it from top to bottom.
 

JS80

Lifer
Oct 24, 2005
26,271
7
81
Originally posted by: sactoking
Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this. Everyone likes to blame something or someone for it, and CRA is a very nice and easy target to fingerpoint at especially considering the complexity of the issue and the ignorance of the masses.

That's BS. I blame it on the Rubik's Cube/Shia Le Boof/blinking.

That's no rubik's cube. It's a transformer.
 

Special K

Diamond Member
Jun 18, 2000
7,098
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76
Originally posted by: Vic
Originally posted by: bamacre
I'm also sick of people blaming the "free market."

Fox News had a line up earlier, "Are "Free Market" Capitalists Now Dead?"

I agree with this too, because a large factor was how much money the Fed was pumping into the economy. Lenders could not lend it out fast enough.

Are you referring to the rate cuts following the bursting of the .com bubble, or the rate increases that started in 2004? If the Fed cuts rates, that means they are increasing the money supply, but if they raise rates then they are decreasing it, right?
 

AstroManLuca

Lifer
Jun 24, 2004
15,628
5
81
Originally posted by: Engineer
Originally posted by: Vic
Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this.

I completely agree. This thread was created because I have been attacked several times for arguing against this talking point that the CRA was entirely to blame. Apparently, Rush has really been spinning it out to his faithful lately.

I turned on AM radio yesterday for about 3 minutes and Hannity was going nuts blaming this very thing on the Democrats. So yes, conservative radio is spinning it from top to bottom.

Sean Hannity is such a fucking tool. I can't believe anyone actually listens to him, but then I remember that "Fear Factor" was on the air for six seasons and my faith in humanity disappears yet again.
 

chess9

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Apr 15, 2000
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Vic:

I've been having this argument with a friend of mine who likes to blame Clinton for everything. I'm sure Clinton is responsible for the bad sectors on my hard drive too...but I digress.

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

The excesses of LENDERS who would sell, for instance, no doc loans with ARMS to people who really didn't understand all the risks involved is a big source of the problem. With falling home values and a weakened economy, those loans are now in trouble.

All you need to do is step back and read some of Countrywide Fundings advertisements from just two years ago. And they aren't the worst.

The states are just as much to blame as the Feds too because many states do a very poor job of screening mortgage brokers. There was a piece on tv a few months ago about a mortgage broker who was a convicted felon, and he'd made some truly horrific loans.

LIve and learn, but this is going to be a very expensive lesson.

Now, notice, I haven't exonerated YOU from blame. You are a known liberal sympathizer, so you probably single handedly caused the failure of thousands of banks. Rush and Hannity would go with that too.... :)

-Robert
 

charrison

Lifer
Oct 13, 1999
17,033
1
81
Vic,

I wont argue the data, however cra played a not so trivial part. And I agree it is not the only player. The GSEs freddie and fannie also played a part as they were believed the govt would not let them fail. This allowed companies to take more risk than they normally would have. Add in the low interest rates of the last 15+ and that is how we got here.

While your right the CRA was not completely to blame, it still noteworthy to see who wanted to reform these bad regulations and institutions and who wanted to keep policy the same. Much of this probably could have been averted if warnings had been headed years ago.
 

ZebuluniteV

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Aug 23, 2007
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Originally posted by: Vic
Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this.

I completely agree. This thread was created because I have been attacked several times for arguing against this talking point that the CRA was entirely to blame. Apparently, Rush has really been spinning it out to his faithful lately.


While disgusting, I'm not surprised this is what Rush and co. are up to. If you're someone who clearly has no qualms about telling biased garbage, if not outright lies, and your entire political career you've basically been a conservative, small government, anti-regulation, free-market zealot, then spinning the blame for a crisis that clearly demonstrates your economic theories are total BS on the ultimate conservative bogey-man, welfare-style government intervention for the poor, is the ?logical? thing to do.

In any case, thanks Vic for finding/posting that article, as I was looking for a something debunking the CRA-caused-the-crisis rhetoric for some friends.
 

charrison

Lifer
Oct 13, 1999
17,033
1
81
Originally posted by: ZebuluniteV
Originally posted by: Vic
Originally posted by: JS80
There's no one thing/person/action to blame. It's a combination of all the shit that happened that caused this.

I completely agree. This thread was created because I have been attacked several times for arguing against this talking point that the CRA was entirely to blame. Apparently, Rush has really been spinning it out to his faithful lately.


While disgusting, I'm not surprised this is what Rush and co. are up to. If you're someone who clearly has no qualms about telling biased garbage, if not outright lies, and your entire political career you've basically been a conservative, small government, anti-regulation, free-market zealot, then spinning the blame for a crisis that clearly demonstrates your economic theories are total BS on the ultimate conservative bogey-man, welfare-style government intervention for the poor, is the ?logical? thing to do.

In any case, thanks Vic for finding/posting that article, as I was looking for a something debunking the CRA-caused-the-crisis rhetoric for some friends.
It played a part, just like freddie and fanny. Part of it could have been stopped had reforms not been blocked.
 

ElFenix

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Mar 20, 2000
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Originally posted by: chess9

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

-Robert

afaik, banks CRA didn't apply to were making those loans anyway. CRA, if it was ever necessary, hasn't been necessary for a long while.
 

chess9

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Apr 15, 2000
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Originally posted by: ElFenix
Originally posted by: chess9

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

-Robert

afaik, banks CRA didn't apply to were making those loans anyway. CRA, if it was ever necessary, hasn't been necessary for a long while.

Exactly right, but you won't hear that from the exactly wrong.

Very few loans were made under CRA as a percentage of all loans.

:)

By the way, Freddie bought a lot of bad loans. They should have stopped that practice 5 years ago, so, yes, I blame them for not rejecting some loans. They had eased their standards so low that almost any loan could be sold to them. Fannie Mae lent money to lenders who engaged in practices that by conventional lending standards were awful. They too should have stopped the practice at least 5 years ago. These two institutions however, have been essentially bought out. Their issues are mostly separate from the issues on Wall Street.

-Robert

 

charrison

Lifer
Oct 13, 1999
17,033
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81
Originally posted by: chess9
Originally posted by: ElFenix
Originally posted by: chess9

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

-Robert

afaik, banks CRA didn't apply to were making those loans anyway. CRA, if it was ever necessary, hasn't been necessary for a long while.

Exactly right, but you won't hear that from the exactly wrong.

Very few loans were made under CRA as a percentage of all loans.

:)

-Robert

Well according to the op, we are talking 25-50% were under cra. I think that is more than very few. CRA was a player.
 

Squisher

Lifer
Aug 17, 2000
21,204
66
91
Originally posted by: chess9
Originally posted by: ElFenix
Originally posted by: chess9

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

-Robert

afaik, banks CRA didn't apply to were making those loans anyway. CRA, if it was ever necessary, hasn't been necessary for a long while.

Exactly right, but you won't hear that from the exactly wrong.

Very few loans were made under CRA as a percentage of all loans.

:)

-Robert

As I understand it, 30% of all mortgage borrowers are behind in their payments. 20% of those behind are CRA loans, so we are talking about 6% of the total playing field being bad CRA's.

Vic, I realize no one ever was compelled to loan anyone money they didn't want to, but the CRA did contribute a little to the problem because it encouraged poor people to over extend themselves. Not that poor people should be immune to the bad decisions that the rest of society seems to have succumbed to, but they are they are ones least likely to be able to recover from it.



 

chess9

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Apr 15, 2000
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Originally posted by: charrison
Originally posted by: chess9
Originally posted by: ElFenix
Originally posted by: chess9

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

-Robert

afaik, banks CRA didn't apply to were making those loans anyway. CRA, if it was ever necessary, hasn't been necessary for a long while.

Exactly right, but you won't hear that from the exactly wrong.

Very few loans were made under CRA as a percentage of all loans.

:)

-Robert

Well according to the op, we are talking 25-50% were under cra. I think that is more than very few. CRA was a player.


Here's what the article says:

"Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Simply because the institutions were governed by CRA doesn't mean all the loans (25%) were made with CRA guidelines. There is a huge difference. A lot of CRA institutions were lending in the burbs to white folks.

What is obviously offensive about this attack is that it is racist at its heart. It really says nothing about the value of CRA or any mistakes they may have made under CRA. Until I've seen a full-blown loan by loan evaluation of CRA loans, I will continue to believe that at worst CRA loans were maybe 5% of all sub-prime loans.

The fact that Rush is shouting this stuff on the radio is just incredible, but the right wing will swallow any swill if it's got some racism attached to it.

-Robert
 

chess9

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Apr 15, 2000
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Originally posted by: Squisher
Originally posted by: chess9
Originally posted by: ElFenix
Originally posted by: chess9

Anyway, no one MAKES lenders make a loan. The problem was that lenders were not willing to make loans to qualified blacks who lived in certain zip codes. The practice is called redlining. It's a blunt instrument of economic racism, IMHO.

-Robert

afaik, banks CRA didn't apply to were making those loans anyway. CRA, if it was ever necessary, hasn't been necessary for a long while.

Exactly right, but you won't hear that from the exactly wrong.

Very few loans were made under CRA as a percentage of all loans.

:)

-Robert

As I understand it, 30% of all mortgage borrowers are behind in their payments. 20% of those behind are CRA loans, so we are talking about 6% of the total playing field being bad CRA's.

Vic, I realize no one ever was compelled to loan anyone money they didn't want to, but the CRA did contribute a little to the problem because it encouraged poor people to over extend themselves. Not that poor people should be immune to the bad decisions that the rest of society seems to have succumbed to, but they are they are ones least likely to be able to recover from it.

Where did you get those numbers from?

-Robert