The Community Reinvestment Act

Fannie Mae and Freddie Mac, and the Safety and Soundness Act

Subprime Predation

Prime: 521,000 loans averaging $202K each ($105B).

Subprime: 721,000 loans averaging $177K each ($127B).

Why Would They Do That?

Okay, You're Not Helping

The TL;DR Version

Lending institutions were unwillingly forced to loan money to NINJA applicants.

Determination: FALSE CRA regulations only affected 20-30% of the institutions issuing subprime loans.

CRA/SASA loan defaults account for the overwhelming majority of mortgage defaults.

Determination: FALSE About 1 in 8 mortgages (12%) have resulted in foreclosure as of Feb 2008. While 20% of CRA loans (the numbers vary) wind up in foreclosure, 10% of all loans are CRA, which puts the total CRA contribution to 2% of those 12%. Fully 6 times as many loans being foreclosed now are non-CRA.

Myth: Busted.

Finally, a nice video explanation in case TL;DR is TL;DR

Recently pundits and bloggers everywhere have been volleying back and forth accusations about who is responsible for the whole financial meltdown in general and the subprime meltdown in specific.Naturally, it's political. A lot of the rightwingnuts blame the Democrats entirely; it's their fault for forcing banks to hand over cash to No Income No Job/Assets (NINJA) applicants. Well, specifically, brown people. They also claim that the Republicansto stop them repeatedly but were completely impotent to do so (even though they controlled the entire fucking government from 2000-2006).So everybody seems to be lobbing around "facts" and proving them by pointing to everyone else lobbing "facts," eventually getting to the point where they cite stuff as fact because "everybody knows it." But saying it (or just repeating it) doesn't make it true, and it's been really hard to find any actual concrete provable information that wasn't just referentially true because someone else said it also.I mean like the whole "government forced banks to make bad loans" thing. Well, okay, you could be right. The government forces people to do things by making laws. So, show me the law forcing banks to make bad loans? And show me that they would not otherwise have made those loans if it hadn't been for those requirements?That's all I ask.Since good research doesn't just take someone's word for it, I set about doing some original research myself. Y'know, go to the actual agencies involved, look up the statistics, cite references, correlate data, analyze the timelines, etc.Following are some of my findings, originally written in response to the standard authoritative hand-waving I've been seeing on the topic lately At contention here is whether banks were required to issue loans to people who couldn't afford loans at all, and moreover whether that caused the financial meltdown.When people cite this, they're talking about the Community Reinvestment Act , a 1977 law under Carter that's been amended and modified over the years (twice by GHW Bush (let's not forget his own son's pivotal role in the savings and loan crisis in the 80's), thrice by Clinton, twice by GW Bush), and a similar body of legislation called the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 , which imposed similar policies for Fannie Mae and Freddie Mac, two federally-sponsored but privately-held agencies responsible for purchasing and securitizing mortgages so that the sourcing lenders can continue to have funds available for new loans.Before the CRA, banks routinely discriminated, even forcing black loan applicants to pay higher interest rates and maker larger down payments than their white customers. The CRA was also designed to stop banks from "redlining" geographic areas in which they typically refused to issue loans at all, and make them contribute something substantive back to the communities in which they are chartered.This was as an attempt (as the name indicates) to re-capitalize decaying urban areas. As such it's a bit of a misnomer to say that the CRA "forces banks to make loans to people who can't afford them." The "making loans to poor people" part just sort of falls out of that as a side-effect because they're about the only ones willing to work and live in these areas.Different kinds and sizes of banks are differentially subject to CRA guidelines, andbanks are subject to them. The act really only has teeth when it comes to a bank's CRA rating being a factor in approving their applications for new bank branches and in mergers/acquisitions. Even banks required to be CRA compliant aren't always so According to the federal reserve's 2006 analysis , CRA-related loans to lower-income individuals accounted for 10% of all loans originated.Also according to the federal reserve , 65% of all banking institutions (sized $1B->$30T+) report "about the same" rate of credit loss on CRA-related loans versus non-CRA loans. In fact, banks reported that roughly 82% of CRA-related home purchase/refinance loans were either "profitable" or "marginally profitable."Curiously, roughly 50% of 2006's subprime loans were extended by independent mortgage companies (not FDIC-insured banks at all, and not subject to CRA regulation (2004:51%; 2005:52%; 2006:46%)). These institutions had absolutely no requirement to make risky loans to NINJA borrowers-- but they did it anyway. An additional 20-30% of subprime mortgages were made by bank and thrift subsidiaries, which are beholden to CRA to some degree, but not nearly that of their parent corporations.Federal Reserve data show that 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. Between 2003 and 2007 , the dollar amount of subprime loans tripled ($332B->$1.3T). Meanwhile CRA loans actually fell after 2004, when Bush signed legislation relaxing the requirements.Freddie and Fannie have been widely accused in this mess too, specifically regarding their "requirement to lend money to people with poor credit."In 1999, the Clinton administration did indeed pressure Fannie Mae and Freddie Mac to buy more low/moderate income (LMI) mortgages. Simultaneously,pressured them to ease the credit requirements on the mortgages they were willing to purchase. This opened the door for those lenders to issue high cost, subprime loans at much higher interest rates, and still be able to unload them on Freddie and Fannie, shifting the risk.Anti-predatory lending laws enacted in 2000 disallowed Freddie and Fannie from counting those high risk loans against their LMI loan requirements... and those laws were dropped in 2004, once again opening that door.In 2003, Bush signed the "American Dream Downpayment Act," sponsored by Rep. Katherine Harris (R-FL) and Sen. Wayne Allard (R-CO). The ADDA helped lower income borrowers with their down payment and closing costs, further lowering the bar.It's worth noting that Freddie and Fannie can only buy loans that conform to the standards explained above. "Non-comforming" mortgages can still be bought and sold by private entities, like Countrywide, Bank of America, JP Morgan/Chase, Citigroup, Merrill Lynch, Bear Stearns, and the rest of the motley crew of suspects who now stand next to the broken economy going, "Oopsie!"So it turns out there is no direct linkage between subprime loans and CRA lending requirements. First, as noted, 70-80% of the institutions issuing subprimes weren't even subject to CRA regulation. Secondly, the CRA does not mandate that affected loans have the predatory terms they did. Nearly 20% of subprime mortgages issued were documented as "potentially prime" by the originating lender . In other words, these peoplebeen given much cheaper, less risky loan terms, but were "steered" into taking riskier and more expensive loans... many of which have since collapsed into foreclosure.How many dollars are tied up in foreclosed loans as of Q1'08?Many more institutions were issuing subprime loans than than were required to issue CRA-designated loans. And choosing to issue predatory loans, like ones that offer an initially tiny interest rate and then jack them up a couple of years later, is a completely independent variable. The criteria under which a loan is considered "predatory" are somewhat arbitrary, but as an example, 70% of all subprime mortgagespeople for paying ahead of schedule.In fact a 2008 study found that the default rate did not correspond to income level, but itcorrespond strongly to the type of mortgage product sold; people steered into expensive ARMs inevitably fared worse:Lenders issued subprimes because it was profitable to do so. Why? Because investors had an insatiable appetite for tiered-risk CDO's. Consumers only needed so many prime mortgages... but the demand from investors for new CDOs vastly outstripped the supply.Banks were thus encouraged to spray money out their loan-cannons, especially risky loans, because those loans would immediately get snapped up by investment banks because of their relatively high yield, and AIG was going to insure them anyway, right? So yay! Everybody's happy. Rich and happy.But not rich enough and happyGiven a high yield investment, how do you make a whole bunch more? You leverage it! Investors were leveraging CDOs and MBSs so excessively that the only way to stay competitive was to keep upping the ante. When AIG finally tipped over, they were leveraged by a factor of 11 to 1. At that point all it takes is a single tiny mis-step by one of the players in the game, and all of them come tumbling down.At a multitude of instances throughout his tenure, Bush's administration dropped interest rates, attempting to negate what now seem like laughably tiny market hiccups. Every time the prime rate went down, it re-catalyzed everybody to finance and refinance, to invest in real estate. In large part that drove the real estate bubble to ever-increasing new levels of investment.Post 9/11, as the economy started to flutter, Bush called out to American consumers,"Buy like there's no tomorrow. Go into debt if you have to but bottom line, BUY BUY BUY to save our economy." And they did. As a percentage of GDP, overall consumer debt hung at about 60% for the decades leading up to 2001. Then in 2001 it shot up like a hockey stick. Today, our consumer debt:GDP ratio is essentially flat; 1:1. $13T in debt to $13T in GDP:So to support the allegation that compulsory CRA/SASA lending was responsible for the global financial collapse, one has to prove the following:Did lenders hand over wads of cash to people they shouldn't have? Yes!Did the government force them to? No. The investment community's feeding frenzy of greed did.Obviously there's a wealth of blame to throw around in this mess. Consumers get a lot, banks get a lot, investors get a lot, the government gets a lot... actually we all do.Who, more than anybody else is responsible? Given all the above, and all my research on the matter, I've got to conclude that wall street itself is responsible; they're the ones who found loopholes in the regulations, they're the ones who exploited them, and they're the ones who over-leveraged transactions WAY past the point where they knew it would end in tears.And there's not a goddamn thing you or I can do to wipe that smug grin off their faces.Part 1:Part 2:But for God's sake... don't takeword for it. Go do your own research.