How CRA led to the Crisis

Mav88 · Jun 28, 2009

I feel the need to.... well no not really. It's pretty simple really, what would motivate this subprime crap getting started in the first place? Gov't beatdowns of course. Finally somone with more time on their hands has shown it in a more substantial way. How many times must this be relived in history? Liberal economics=disaster because liberal economics is all about their vision of social justice and not wealth creation.

http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6

Beware folks, the same type of thinking that gave us the CRA garbage is now in power full force. Obama is setting up mortgage crisis x 10 with his leftist/multiculturist/tear-down-mean-white-america agenda.

How could a piece of 1977 legislation be significant to the deterioration of mortgage standards 25 years later?

The CRA was not a static piece of legislation. It evolved over the years from a relatively hands-off law focused on process into one that focused on outcomes. Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways. Banks responded to this new accountability by increasing the CRA loans they made, a move that entailed relaxing their lending standards.

Thatâs still too early. Why would changes in the mid-nineties result in a mortgage boom a decade later?

Throughout the nineties banks, as banks lowered their mortgage standards, mortgage rates remained high. The laxity was spreading but the incentives for borrowers to re-finance even under relaxed standards remained low. New buyers often still didnât know that some of the loosey-goosey mortgages existed. Speculators had an internet bubble, so they werenât yet attracted to real-estate. Treasury rates were not yet so low that investors seeking yield would pour into mortgage backed securities. Securitization levels were low enough that banks werenât yet willing to fully embrace the loose standards. The historical data on default and loss rates from the lax lending were not yet available, so they werenât embraced by banks or the broader market.

But as the years went by, these factors changed. The Fed pushed interest rates down. This made refinancing more attractive, and created an investor demand for yield. Fannie and Freddie popularized low-income securitization. Low defaults and loss rates from lax loans made them seem not as risky as previously expected. A shrinking consumer asset base thanks to the dot com bust created a demand for home-equity loans and high loan-to-value loans, as consumers exchanged high-interest credit card debt for low interest home debt. Speculators seeking higher returns and ordinary home buyers became aware that lax lending standards would allow them to buy bigger homes with little or no money down.

In short, the lax lending standards created in response to the CRA had dug a pit that was waiting to get filled when the circumstances were right.

Ah ha! So it wasnât the CRA that caused the mess. It was everything else!
Of course it wasnât the CRA that caused everything. The CRA was a factor in lowering lending standards. This was a necessary, although not sufficient, cause for the mortgage mess.

Wait a minute! Paul Krugman told me the CRA was relaxed during the Bush administration. What about that bit of evolution, buster?
Itâs true that the CRA requirements were relaxed during the Bush administration. But at this point the lax lending standards were already in place. In any case, the relaxation took a peculiar form that actually made CRA lending more important rather than less. You see, the government let banks drop things like putting in ATMs in rural areas in favor of letting their compliance be judged entirely on CRA loans. This means the CRA had more of an influence on home lending after the requirements were relaxed, not less.

What's more, George W. Bush was a major proponent of the kind of mortgages that banks had started making under the CRA. He urged low-to-no doc mortgages and the elimination of downpayments, just like the CRA regulators had long done. âWe certainly don't want there to be a fine print preventing people from owning their home,â the President said in a 2002 speech. âWe can change the print, and we've got to.â

What about "No Money Down" Mortgages? Were they required by the CRA?
Actually, yes they were. The regulators charged with enforcing the CRA praised the lowering of down payments and even their elimination. They told banks that lending standards that exceeded that of regulators would be considered evidence of unfair lending. This effectively meant that no money down mortgages were required. A Treasury Department study published in 2000 found that the CRA had successfully lowered down payments not just for CRA loans, but for all mortgages.

Explain the shift in loan to value away from the traditional lending requirement of 80%.
Again, the regulators told banks that much higher LTVs was an appropriate way to meet the CRA obligations.

What about the elimination of payment history? How about income requirements?

Regulators instructed banks to consider alternatives to traditional credit histories because CRA targeted borrowers often lacked traditional credit histories. The banks were expected to become creative, to consider other indicators of reliability.

Similarly, banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income. The problem, of course, comes when the con-artists and liars come into the game.

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

This was another lending innovation praised by regulators to the point that it became mandatory for banks. Those who were not employing automated underwriting would be putting their CRA ratings at risk. Automated underwriting was seen as a way of eliminating bias in lending.

Point out to me where in the CRA or any regulation that any of this is required.

I cannot. But this kind of legislative fundamentalism misconstrues the way laws constrain business activity. An unenforced law exercises little constraint, regardless of how onerous it is worded. Think of the way anti-trust enforcement changes from presidential administration to presidential administration.

In the case of the CRA, it was the activity of the regulators that matters. And each of these credit innovations described above was put into place to satisfy the CRA regulators.

Wouldnât lending standards have been lax during the boom even if we didnât have a CRA?

Thatâs an interesting question to which weâll never have a satisfactory answer. Itâs possible. But this kind of counter-factual is just a game. We know that we had the CRA and that it caused relaxed lending standards in the reality we actually live. In another universe, another reality? Well, if you get there send us a post-card and let us know how it turns out.

Couldnât the increase in CRA loans have been accomplished without these lax lending standards?
This is another interesting question about an alternate universe. It is possible that banks may have been able to meet their CRA obligations with tighter, more traditional lending standards. But weâll never know. We know that they thought they needed to employ lax standards, and so did the regulators. A banker who refused to relax standards risked the wrath of regulators, andâmore importantlyâif his unorthodox, novel attempts failed heâd be found to be in non-compliance with the CRA. In the real world, lax lending standards were the only known way of satisfying the CRA regulators.

Isnât it really securitization that is the culprit?
The government pushed for greater mortgage securitization in an effort to increase CRA lending. At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of âaffordableâ mortgages. The government was intentionally decreasing the risks to the original lenders in order to increase loans to low-income borrowers, and minorities in particular. In short, you canât blame securitization without coming back around to the CRA.

Werenât the majority of the subprime loans made by mortgage service companies not subject to the CRA?
This is true. But it is largely beside the point. A huge driver of the demand for subprime loans was the demand for CRA bonds. Banks operating under the CRA could meet their obligations by buying up CRA loans or MBS built from CRA loans. The CRA created a demand that the mortgage servicers were meeting.

What's more, many smaller mortage service companies hoped to be acquired by larger banks. Increasing their CRA lending made them more attractive take-over targets.

A study put out by the Treasury Department in 2000 found that the CRA was encouraging the mortgage servicers to provide loans to low-income borrowers, in part because the CRA loans had been so successful.

......
More...

Free Thinker · Jun 29, 2009

you should have no problem winning this 100k challenge then:

$100,000 CRA Challenge

http://www.ritholtz.com/blog/2009/06/100000-cra-challenge/
Iâve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate â the phrase is âagnotologyâ â only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: âIs the CRA significantly to blame for the credit crisis?â

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes â but interferes in the societal attempts to understand how these problems arose and then how to fix them. Perhaps this will help clarify the issue by forcing those with partisan agendas to stand behind their claims.

Which of the many âCRA was a major factorâ proponents have the courage of their conviction to step forward?

Iâve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate â the phrase is âagnotologyâ â only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: âIs the CRA significantly to blame for the credit crisis?â

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes â but interferes in the societal attempts to understand how these problems arose and then how to fix them. Perhaps this will help clarify the issue by forcing those with partisan agendas to stand behind their claims.

Which of the many âCRA was a major factorâ proponents have the courage of their conviction to step forward?

fhl · Jun 29, 2009

Quote from vhehn:

you should have no problem winning this 100k challenge then:

$100,000 CRA Challenge

http://www.ritholtz.com/blog/2009/06/100000-cra-challenge/
Iâve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate â the phrase is âagnotologyâ â only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: âIs the CRA significantly to blame for the credit crisis?â

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes â but interferes in the societal attempts to understand how these problems arose and then how to fix them. Perhaps this will help clarify the issue by forcing those with partisan agendas to stand behind their claims.

Which of the many âCRA was a major factorâ proponents have the courage of their conviction to step forward?

Iâve run out of patience with tired memes and discredited claims by fools and partisan.

The rhetoric of those pushing nonsense on the public in an attempt to confuse rather than illuminate â the phrase is âagnotologyâ â only serves to aid the lobbyists working on behalf of the Banks and Investment houses to maintain the status quo.

All is well, nothing to see here, move along.

Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate. The question for debate: âIs the CRA significantly to blame for the credit crisis?â

A mutually agreed upon time and place, outcome determined by a fair jury, for any dollar amount between $10,000 up to $100,000 dollars (i.e., for more than just bragging rights).

The nonsense rhetoric blogged about has no cost to those pushing these discredited memes â but interferes in the societal attempts to understand how these problems arose and then how to fix them. Perhaps this will help clarify the issue by forcing those with partisan agendas to stand behind their claims.

Which of the many âCRA was a major factorâ proponents have the courage of their conviction to step forward?
More...

The businessinsider article shoots this ritholz crap all to hell.

Free Thinker · Jun 29, 2009

Quote from fhl:

The businessinsider article shoots this ritholz crap all to hell.
More...

i suppose even you can find a way to blame cra for the loans described in this video. anything to deflect blame from the lack of regulation of the bush administration:

http://www.youtube.com/watch?v=sIVNF5eN3UY

Mav88 · Jun 29, 2009

I don't know, I guess people just don't want to read too carefully. One cannot 'prove' something like this since economics is not the empirical science it claims to be, the challenge itself is bogus. The fact it would be like a courtroom trial shows this, and who the hell wants to go through that? Even for $100K? Does this guy have the process for even vetting out a real impartial jury established (what that would be is beyond me)? No, I'm afraid the challenge is a bunch of moronic bluster, not intended to be taken seriously.

This was a serious look at the issue. CRA OF COURSE wasn't all by itself the problem, which probably would be enough for the moron with the challenge to claim victory, but it was a necessary condition for the mortgage crisis to happen. It was a catalyst for subprime.

Misthos · Jun 29, 2009

Quote from Mav88:
This was a serious look at the issue. CRA OF COURSE wasn't all by itself the problem, which probably would be enough for the moron with the challenge to claim victory, but it was a necessary condition for the mortgage crisis to happen. It was a catalyst for subprime. [/B]
More...

According to your theory, banks were reluctantly complying with CRA lax standards.

How does that make it a "catalyst" for subprime? The CRA focused on poorer neighborhoods with strict loan limits. They were full doc loans.

The jump to McMansions and no doc is just too much of a jump to be attributable to CRA - especially if you imply that banks were "forced" thus reluctant to lend with lax standards. Right or wrong, CRA had the lofty goal of expanding homeownership in poorer neighborhoods with commiserate sized loans/housing. Subprime, on the other hand, fed mostly on white middle class wannabees and their Mcmansions.

Thus, homeownership alone wasn't the goal anymore, but owning a bigger house than your friend's house became the goal. No CRA loan would get you that McMansion - but a subprime loan would.

Therefore, your conclusion in your first post:

"Beware folks, the same type of thinking that gave us the CRA garbage is now in power full force. Obama is setting up mortgage crisis x 10 with his leftist/multiculturist/tear-down-mean-white-america agenda."

Is pretty weak, not to say kind of ignorant. After all, I don't see anything "tear down mean white america-ish" when I look to who profited from lax lending, who crashed the economy, and who got bailed out the most as a result.

The answer as to who profited? Who was bailout out the most?

Wouldn't that be whitey? Is that a "tear down white america" policy? Obama has done more for white banksters than he has done for inner city blacks.

You can't have it both ways. You can't call a policy a failure of reverse rascism when it really benefits a few old white bankers. (Stan O'Neil, of course, is the exception, not the rule.)

Mav88 · Jun 29, 2009

Exacerbating factors in subprime, also necessary...mostly

1. greenspan's easy money
2. Glass-steagall (unknown influence, well all are unknown quantitatively)
3. David Li's algorithm

However CRA predates them all, fannie and freddie encouraged securitization before Li and Steagall.

In any nonlinear process there needs to be a seeding action, Li's algorithm doesn't mean anything unless there was an existing subprime market to act upon. The fact that you cannot directly link all later period loans to CRA requirements is not relevent. The environment had to be established very much before in order for the runaway effect to be initiated.

WaveStrider · Jun 29, 2009

Quote from Mav88:

Exacerbating factors in subprime, also necessary...mostly

1. greenspan's easy money
2. Glass-steagall (unknown influence, well all are unknown quantitatively)
3. David Li's algorithm

However CRA predates them all, fannie and freddie encouraged securitization before Li and Steagall.

In any nonlinear process there needs to be a seeding action, Li's algorithm doesn't mean anything unless there was an existing subprime market to act upon. The fact that you cannot directly link all later period loans to CRA requirements is not relevent. The environment had to be established very much before in order for the runaway effect to be initiated.
More...

Not sure about that - isn't that the "post-hoc ergo propter hoc" logic fallacy - "after this, therefore because of this" - a false attribution of causality?

By that logic, the repeal of Glass-Steagall could be attributed as the cause the subprime meltdown - letting banks become casinos again. Or securitization. If they made loans the old-fashioned way and kept them on their own books, they would have been deterred from bubbling them up.

Mav88 · Jun 29, 2009

Wave,

The problem is that there are no causual models, all economics is basically done like this. Certainly correlation is not casuality, however that precludes assigning any cause to this. We are left with legal type explanations and not logical.

The key question, which can never really be answered, is would the crisis have occurred without CRA in place? My position is that given the rapid acceleration of mortgage securitization and all the pressures on banks by Clinton in the 90s, this was the cause prima facie which was later amplified way out of proportion by later factors like the Li algorithm.

I keep asking, why did the subprime market even exist in the first place? If it was so apparently lucrative, then why did CRA even have to exist? The answer is that the subprime market had to be created by political pressure and then ways were found to make it lucrative ex post facto. Since that was successful, it took off out of control with the help of freddie and fannie.

WaveStrider · Jun 30, 2009

Quote from Mav88:

Wave,

The problem is that there are no causual models, all economics is basically done like this. Certainly correlation is not casuality, however that precludes assigning any cause to this. We are left with legal type explanations and not logical.

The key question, which can never really be answered, is would the crisis have occurred without CRA in place? My position is that given the rapid acceleration of mortgage securitization and all the pressures on banks by Clinton in the 90s, this was the cause prima facie which was later amplified way out of proportion by later factors like the Li algorithm.

I keep asking, why did the subprime market even exist in the first place? If it was so apparently lucrative, then why did CRA even have to exist? The answer is that the subprime market had to be created by political pressure and then ways were found to make it lucrative ex post facto. Since that was successful, it took off out of control with the help of freddie and fannie.
More...

Thanks for info. I see where you are coming from.

However, I am still not sure about the causal linkage.

For instance, the easy credit and low interest rates created liquidity that was searching for return. It happened to find it's outlet this time in the subprime market.

But the excess liquidity in the '90's found it's outlet in Internet stocks as the vehicle of that moment.

Certainly CRA might be pointed to as a crack in the dam of the current flood - but the crushing force of the water - the loose credit pressuring the dam and looking for a crack - any crack - would have found a weak part in the wall, whether I-net stocks or subprime or whatever. The SEC letting the banks leverage-up didn't help either.