Did “minority lending” drive the crisis?

by on September 30, 2008 at 11:25 am in Economics | Permalink

This is one of the queries I receive, in varying forms, every day.  Did policies such as the Community Reinvestment Act significantly worsen the housing bubble and the subsequent collapse?  Basically not, although in my view these were bad policies for other reasons.  They contributed to our current problems by only a small amount and of course these policies have been around for a long time before the housing bubble ever got started.  Here is one back-of-the-envelope debunking of the "diversity recession" idea.  Matt Yglesias links to some other debunkings.

You can, however, cite the general obsession with extending home ownership as strong evidence that putting Democrats in charge does not suffice to solve our regulatory problems.

Only polite comments will be left standing…

1 nelsonal September 30, 2008 at 11:30 am

I still say the biggest factor was the capital gains tax cut (and it’s timing occuring a few years before the stock bubble popped). Those two started everyone in to invest in housing (even though the legit reason was priced in) and the demand was fueled by the low post 9/11 interest rates.

2 David September 30, 2008 at 11:45 am

I’d say the biggest factor was keeping interest rates too low for 7 years, with allowing Fannie/Freddie to purchase Alt-A/subprime as a distant second.

3 Anonymous September 30, 2008 at 11:51 am

Can anyone explain why the Dow is UP almost 300 points today?

I know that still means a net loss of over 400 points for the past two days, but I thought not passing a bailout would mean massive financial meltdown. It doesn’t seem to be happening.

4 mickslam September 30, 2008 at 11:53 am

This post actually gets to one of my biggest problems with honest conservatives. You don’t push back hard enough on the wackos in your camp.

This very issue is being used as the reason for this crisis on talk radio across the land. My dad brought it up to me as the PRIMARY reason why we are in this crisis.

With power and NYT editorials comes responsibility and this post is not enough of a response to this issue.

5 bernard Yomtov September 30, 2008 at 12:00 pm

Thanks for saying this, Tyler.

The CRA story has become the preferred explanation for too many people.

6 Fundman September 30, 2008 at 12:05 pm

I tend to agree that this is a multi-causal event, but reading isteve’s post I was surprised that Tyler cited a “back of the envelope” arm-chair “guesstimate” of demographics to explain away this problem. Furthermore, the American Prospect piece that Yglesias cites really only serves to underscore that CRA was only a smaller part of the problem – not without blame. Quotes like “pleasantly low” default rates could mean a lot of stuff. I’d rather see more concrete research and avoid phrases like “significantly” until we know what the betas are.

7 Xmas September 30, 2008 at 12:12 pm

I’m starting to wonder if the relaxing of mortgage rules at Fannie and Freddie help start things. They are the government rule-makers for mortgages. Other mortgage companies wouldn’t get in trouble if they did the same things Fannie and Freddie did.

I’m picturing something along the lines of how Medicare reimbursement rates affect Medical Insurance reimbursement rates.

8 Antiplanner September 30, 2008 at 12:19 pm

The timing is wrong for the CRA to be a major factor in the credit crisis. But the timing is right for two other things to be a major factor.

First, the housing bubble resulted when numerous states passed growth-management laws that created artificial shortages of housing. By 2000, almost half of all housing prices were being inflated by such shortages. In states lacking such laws, prices did not bubble. See “The Dog That Didn’t Bark.”

Second, from 1995 on, HUD — whose mission is to promote homeownership but which also had oversight authority over Fannie and Freddie — directed Fannie/Freddie to dramatically increase their purchases of mortgages made to low-income buyers. By 2004, HUD was requiring that 56 percent of mortgages that they purchased were made to “low- and moderate-income buyers.” This ;ed them to buy hundreds of billions of dollars worth of subprime mortgages, legitimizing the secondary market for risky loans. See “HUD’s conflicting missions.”

Land-use regulation caused the bubble. HUD regulation of Fannie and Freddie created the subprime market. Other actions contributed, but without both of these actions, there would be no credit crisis today.

9 Jay September 30, 2008 at 12:24 pm

I tend to find the “CRA as the root cause” argument fairly compelling.

I would not argue a racial angle beyond that, except to the extent that passing the CRA may have been racially motivated.

Steve Salier’s point seems well made. Black and Latino owners alone may not be enough to account for the entire amount. Then again, they may have been. The analysis is extremely informal.

Yglesia’s point, as well as the more detailed “debunking” (loaded term) he links to are extremely uncompelling, and would better be described as politics, not economics.

10 Barbar September 30, 2008 at 12:34 pm

But nevertheless that was the cause of this crisis: deficient math skills among the bankers.

Deficient math skills… that led to them earning billions and billions of dollars in bonuses. For years.

11 $9,000,000,000 Write Off September 30, 2008 at 12:37 pm

Respectfully, I think you misstate the position, which makes the counter-argument easier. Let me try:

Many politicians wanted more loans made to minorities, but framed it as helping the poor get loans. Fannie executives wanted to buy sub-prime loans to increase their earnings. Both groups exerted influence on more agnostic or disiniterested politicians. They combined, over much accurate, on the money and (it must be said) Republican (a video of same) objections, to loosen the GSE standards for risky loans.

With their size as buyers, the GSEs fueled the market. Those loans did what was expected– tank at high rates– and triggered the asset devaluation.

So, those pushing for diversity loans were an imporatnt part of the consensus that rammed through the GSE’s lower standards.

12 CJS September 30, 2008 at 12:40 pm


Also, in the late 90s, Congress pressured Fannie/Freddie to increase their purchases of subprime loans.

See: http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=print

and http://articles.latimes.com/1999/may/31/news/mn-42807

The purpose was for the same policy goals that were the motivation for the CRA rules changes – but the pressure of Fannie/Freddie arguably had much more effect.

As to the loose money by the Fed – obviously a factor – but how much of a factor was all of that foreign money coming in to buy the mortgage-backed securities? I don’t have a link for it, but there was a WSJ story from April 25, 2005, that talked about all the foreign money, particularly from Asia, coming in to buy the securities right when we were starting to worry a lot about a housing bubble. The title of the article was “Housing-Bubble Talk Doesn’t Scare Off Foreigners”, it was on page A1, and it was by Ruth Simon, James R. Hagerty and James T. Areddy.

13 Gene2 September 30, 2008 at 12:45 pm

Dirk, you’re serious right? You know that many of the people on wall street who did these analyses had Ph.D.’s in Math, Physics, Economics, or Statistics. Presumably, innumeracy was not one of the issues there.

The main problem with the math, from what I am able to gather, is that Wall St was using historical default rates for the rate of default on a mortgage. They then increased that by a small factor to account for potential errors, and voila, they got a price on Senior and Super-senior CDO tranches (which is what a lot of the banks ended up holding because the par price for these tranches was computed to be too low for any investor to want to buy it).

Now, part of the issue is the severe deterioration of underwriting standards that affected the 2005 and 2006 vintages of mortgage bonds that underlied the CDO’s. It made the default probability assumptions wildly off since those assumptions assumed underwriting standards as before. The deterioration of underwriting standards was largely the fault of Fannie and Freddie since they set the tone for such standards by requiring lenders who did business with them to sell certain kinds of products and underwrite them in a particular way. The great article in the Village Voice about Andrew Cuomo as HUD secretary, as well as the deal Barney Frank struck with FM^2 years later in exchange for looking the other way on the accounting scandals helped create this.

No, black people aren’t at fault. And I’m not sure that anyone has claimed that black people were at fault. If they did, they’re nuts and racist. I think the claim was that in attempting to satisfy racialist constituencies like ACORN, Rainbow/PUSH, etc., the government helped loosen underwriting standards. In particular, this happened at Fannie and Freddie who pressured lenders to offer products (to people of all races, but in the name of ending supposed racial discrimination in mortgage underwriting) that were suspect. I’m not sure that one can deny that this happened and was one of the three major causes of the crisis (along with Wall Street being more than happy packaging these into CDO’s to make a killing off fees and bid/ask, and stupidly low interest rates… which apparently John McCain wants at near 0).

See also the report put out by HUD/Justice under Deval Patrick’s watch that even Clinton’s FDIC and other government economists disavowed (claiming that lower lending rates for blacks is evidence of discrimination). See also Deval Patrick’s subsequent sweetheart job with Ameriprise (the lender that recently ran into lots o’ subprime trouble in Massachusetts) as a result of his persecution of the firm under his watch.

14 Andrew September 30, 2008 at 12:49 pm

A picture is becoming clearer.

It’s starting to look to me that the same zeitgeist that caused the CRA also caused these other things. The “planning” and “smart growth” things I’ve always wondered if they were lipstick on the pig of housing discrimination by the folks already on their little sliver of suburbtopia.

15 floccina September 30, 2008 at 12:51 pm

IMO if those bad loans were not made to blacks and hispanics other bad loans would have been made to whites. Now one could make a case that CRA hurt blacks and hispanics.

16 AL September 30, 2008 at 12:59 pm

If 10% if the sub-prime borrowers were minorities, and were granted loans through CRA, it would still cause problems.
1) Banks are forced to grant these loans by CRA.
2) The banks packaged them up with more stable loans, lets say in a ratio of 9 good loans to 1 bad sub-prime loan.
3) The Bank then sells this “Mortgage Backed Security” (MBS).

Suddenly, that 1-in-10 loan defaults, which makes the whole MBS instrument “toxic”. A default on a 300k sub-prime loan is more than the potential profit on the remaining 9 good loans. Nobody wants to touch it because it is likely one of these sub-prime loans will make the whole MBS instrument a money-losing prospect. Becuase no-one wants to touch it, the “paper-value” of the MBS goes to zero, creating this void in the economy that the government is hastily trying to fill with 700 billion of tax-payer money.

The issues are much more complicated than a simple back-of-the envelope calculation.

17 Phillip Huggan September 30, 2008 at 1:03 pm

This crisis was the opposite of the Great Depression. Then the credit supply dried right up, now way too much credit has been given by Republicans to rich Americans to loot their Treasury and become a banana republic. True the 1920s was a bubble… the money could be used to subsidize loan rates for employment intensive sectors, could be used to subsidize mortgages for homeowners that are just short, like B.Clinton suggested on Daily Show, could be used to subsidize bank-to-bank loans…
The problem is derivatives, from what I remember looking at BIS figures, have grown to encompass about 7 years of global production, from only about 2-3 years of production a decade ago. When you get a crap administration, instead of looting 2-3 years, they take America down for the remainder of boomer boom. The solution is to get better administration or fewer derivatives. Neocons don’t realize big players can position their capital elsewhere and this can get much worse.

18 Cowcup September 30, 2008 at 1:13 pm

A Ponzi is a Ponzi. There are two things to the Ponzi. One is the initiators. The other is the coverers.

What the stupid “debunking” says is that initiators can’t be the only bad guy. Big News!

19 Cowcup September 30, 2008 at 1:20 pm

The way to fight bubbles is to expose them and let them burst when they are small.

The bailout (and the previous policys) is to caring the bubble, making it so large, so that Bernanke panics, … so everyone wants to continue this Ponzi.

This is Cocaine.

That being said, if Paulson is not such an arrogant ****, he could break up the big pile into smaller ones. And the Ponzi might be able to continue for a while. It might be just a cigarette instead of cocaine. We can accept cigarette, right?

But this arrogant **** blew it up.

20 Andrew September 30, 2008 at 1:28 pm

If I were a banker I wonder if I’d know whether I was in trouble for housing discrimination or predatory lending. I have no idea whether it contributed to it or not, but in a problem that involves 20 or 30 to 1 leverage, and a small change in default rates from whatever it was, maybe 2% to 4%, or who knows what, which is in fact the problem, saying that it is counter-evidence that only 10% of buyers are in the implicated group is not convincing. What is their percentage of the increase in defaults?

“Why can’t we accept that this crisis was not caused by bad government at any level? It was caused by Wall St.”

Because it hasn’t been proven. It was not caused by Wall Street because Wall Street is in large part the victim. Yes, high paid CEOs assumed their salaries and that competitors were getting rich doing the same things validated that the ship was in for smooth sailing. However, the investment banks were left holding the bag. They played their part, and their part was to play the patsy. Executive compensation issues within corporate governance weren’t invented by this crisis.

“The people who work for Wall St. screwed up. They did the math wrong and miscalculated how much those securities were worth.”

But why did they miscalculate? It’s easy to calculate the value of a bond if the borrower pays off. Their problem wasn’t the lack of math, it was too much math. They tried to calculate something precisely and forgot that their assumptions and the error terms were the biggest contributors. They didn’t run any tests because things were hoppin’. But, then why did the underlying assumptions change? Government agencies, Ratings, default rates, interest rates, Fed inflation hawkishness misreading a commodity bubble, etc. This is what the gov’t has to account for.

21 Dirtyrottenvarmint September 30, 2008 at 1:35 pm

I remain agnostic regarding the true effects of CRA on the mortgage market and their contribution, if any, to recent events. Tyler’s post, however, leaves very much to be desired; in fact I am quite shocked that he wrote it.

It is generally a wise policy to disprove a hypothesis through the application of actual evidence, rather than by some other means not generally in keeping with the definition of the word “disprove”. Of course there are many potentially true alternative explanations for any occurrence. We could even just suspend all pretense of rationality and assert that something is true, because. If we are not to do so, however, then it is nigh impossible to “debunk” a factual hypothesis (“the CRA has been a major cause of the current credit market tightness”) without building a factual case against it.

The major points of all of the “debunking” posts seem to be, (1) the CRA was passed too many years ago to have affected events today, and (2) the CRA doesn’t apply directly to most of the problem (sub-prime) loans.

On neither of these points do the “debunkings” linked above offer even one statistic, let alone enough to make a claim with any reasonable confidence that the hypothesis has been disproved. Surely such information is readily available and it should be relatively simple for someone who wishes to debunk our null hypothesis to develop a dataset on which to test the hypothesis. It’s likely that many would then argue over the interpretation of the results, but the fact that none of the “debunkers” has yet seen fit to even produce those results is, to say the least, very odd.

The viewpoint of the debunkers seems to be that because of (1) and (2) above, it is not worthwhile to attempt to disprove the hypothesis with actual facts. To re-state: (1) is the assertion that the CRA was enacted too many years ago to be the cause of today’s problems; (2) is the assertion that the CRA is evidently not the cause of the problem because the CRA did not apply to most of the problem loans.

Clearly (1) is not a valid hypothesis in general terms, and (2) evidences a willfully ignorant view of basic market economics.

To disprove (1) in general terms – the idea that events from 25 years ago do not influence events today – one can for example point out the many people alive today because they were born 25 years ago. There are many other examples of past events affecting future outcomes, but surely this is example enough to prove false the assertion that events of 25 years ago cannot have a significant impact on events today. Perhaps the CRA is a special case and it somewhat uniquely did not affect events in our present time. Any evidence in favor of this is, however, missing from the “debunkings”.

(2) in general terms – the idea that events that affect the price of one economic good do not affect other economic goods in the same market – is so obviously incorrect that, my penchant for honest, factual analysis notwithstanding, I shudder at the thought of actually needing to explain to readers of an economics blog that prices are relative and that supply and demand for one economic good affects supply and demand for other economic goods. As in, for example, the mortgage market. I am not sure what reason Professor Cowen had, in writing this post, not to point out the blatant and appalling ignorance of basic economic fact inherent in the obviously false claim that the CRA could not have had market effects beyond the specific loans to which it applied. Surely this cannot be what Tyler teaches his students. My suspicion, based on admittedly imperfect information, is that either a mercantilist doppleganger has taken Tyler’s place, or Tyler when writing this post was suffering from a severe and debilitating brain cloud which caused him to write economic gibberish. Since I am comfortable trusting to Tyler’s ability to defend himself against mercantilist dopplegangers, I would like to ask all of my fellow readers to join me in wishing for Tyler’s speedy and full recovery.

22 Tom September 30, 2008 at 1:43 pm

From the comment section at Steve’s site:

“Here’s a list of top 500 foreclosure zipcodes from June 2007. Detroit appears there pretty often. I ran the top 5 zip codes on that list through a site called zipskinny.com. It simply shows census data for each zip code.

The top zip code for foreclosures, 44105, located in Cleveland, is 61.3% black. Number two on the foreclosure list is 30310 in Atlanta. According to zipskinny it’s 92.1% black. The third highest foreclosure rate was in 80219 in Denver. It’s 62.3% Hispanic. Number 4 is 48228 in Detroit. It’s 69.4% black. Number 5 is 48205, again in Detroit. It’s 84% black. I stopped at five.”

Now, if somebody is willing to give me a loan I should not have, then it hard not to blame the lender at least equally. As noted above, they have quite smart people in charge. They gambled when the went from a traditional 10x leverage to over 40x, and deserve to get what they are getting.

23 Cowcup September 30, 2008 at 1:45 pm

And don’t forget that (in)famous “multiplier,” our intellectual heritage from the last Great Development of economics.

Oh, the one thing good comes out of this mess that I can see so far, is those idiotic topics of Steve Levitt and his disciples are going to be kicked out of fashion! Thank God! The old sh*t still stinks the most!

24 Dan September 30, 2008 at 1:57 pm

CRA was one important step on the road to pumping air into the housing bubble, as were the various legislative tinkerings in the next 25 years. To make a perfect storm there needs to be a number of factors and a stoked profit motive by investment bankers on Wall Street played a role. But let’s face it, if there were not large numbers of subprime mortgages bought by Freddy and Fanny there would be no fuel for the fire in the first place. Not all sub-prime mortgages were owned by minorities–that’s why we call them minorities, after all. This isn’t about race, except ideologues like Barney Frank and Chris Dodd made it part of their life’s work to financially ruin many minority borrowers with their ill-advised social policy tinkering. Talk about unintended consequences. To the extent that the Bush administration went along with the drive to increase the percentage of home ownership in America, it owns part of the blame as well.

25 James September 30, 2008 at 2:03 pm

Minority lending did not cause this problem. The mortgage meltdown came about because of lending industry deregulation, led by Republicans with a lot of Democratic help. Before 1995, profitable and performing loans were the same. Deregulation led to fragmentation of the industry which then gave a financial incentive to all people in the mortgage origination-to-sale chain to create profitable as opposed to performing loans, which are loans that people pay every month. In 1995 the Republicans in control of Congress changed the RESPA anti-kickback rules for mortgage brokers, thereby allowing lenders to pay brokers a yield spread premium (also called a par plus payment). In a nutshell, this is a payment made by the lender to the broker if the broker originates a loan that is a higher than par rate for that borrower. For example if a broker has an “A” rated borrower based on his loan application, and now his FICA/Fair Isaac score, that qualifies for the lender’s best 6% loan, the lender will pay the broker a premium if the broker can lock and close that “A” borrower into a higher 8% loan. That 8% loan has more value to the lender than a regular 8% loan because an “A” borrower, who is less likely to default, is paying an interest rate that a “B” borrower would pay, who is more at risk of default. Consumer lawyers around the country argued that this payment was a kickback for the referral of business, the higher par loan, made illegal under RESPA because the broker does no more work to close the loan at 6% than he does at 8%. The broker is being paid by the lender to refer the lender the higher than par rate loan. The mortgage industry got Congress to eliminate this anti-kickback rule so that consumers had to prove the overall broker compensation was unreasonable,an impossible task because most states allowed lenders to charge up to 10% of the loan amount for his commission. The non bank lenders led by Countrywide, Ameriquest, Home Eq., ect saw this as a means to eliminate offices, and the overhead and management issues of having an office in every city. Countrywide created a nationwide network of brokers who they would pay yield spread payments for originating higher than par loans. Countrywide would get short term money to fund the loans, which had to be “qualifying loans” for Fannie and Freddie to buy, then turn around and sell them to fannie or freddie. The broker would qualify the borrower by giving him an adjustable loan with a 1 year discounted teaser rate and qualify the borrower at the lower monthly payment. So, for a simplified example, an “A” borrower goes to a mortgage broker and says “I need a $100,000.00 loan”. Since he is an “A” borrower he qualifies for 6%, but the broker would search for the lender who would pay him the highest yield spread, usually Countrywide and tell the borrower all he can get is a 8% loan, but I can discount that t0 4% for the first year.” THey would also tell the borrower to pay down non-secured debt to make the loan more attractrive i.e. the credit cards and car loan, thus driving up the total principal and their yield spread payment. Now the loan is at $125,000.00. At closing Countrywide would draw $125,000.00 on its short term line of credit, and fund the loan, paying the broker the yield spread. Countrywide would then sell these qualifying loans in the secondary market. The loan was “teased” to 4% for the 1st year so the borrower qualified under that lower rate. The broker would tell the borrower “Do not worry about the increase, just come back when the loan increases and I will refi you.”

Allowing interstate banking, then Gramm-Leach-Bliley bill that eliminated the wall between investment banks, deposit banks, and insurance companies, with a boost from the parity statute created a huge non-qualifying pool of money to lend (they did not have to sell to Fannie or Freddie but to now deregulated investment banks). This allowed Countrywide to take this pool of loans, a mixture of “A” “B” “C” and “D” grade borrowers and go to someone like Merrill Lynch and say “I have 1,000 loans average $125,000.00 each with an average 10% yield over 30 years with a present value of $150,000.00. I will sell you the loans for $140,000.00.” Countrywide would then pay back its credit line and just made $25,000.00 per loan less its yield spread less its costs of money for 1,000 loans, or lets say $15,000.00 per loan which is $15 million. Meanwhile Countrywide kept the servicing rights for these loans which also generated another income stream for Countrywide. Merrill Lynch who before deregulation was prohibited from entering the mortgage business but now was an unregulated lender, has an income stream from Countrywide as the servicing agent, then securitizes and sells the pool of loans to Bank of America (who after buying Countrywide and Merrill Lynch has a vertical monopoly in the mortgage business from Countrywide’s network of brokers, to BOA’s ability to short term fund the broker’s loans, to Countrywide’s mortgage servicing business to Merrill Lynch who would securitize the pool, to BOA who acts as Trustee for the securitized loans), as a non-regulated security i.e. they in essence sold shares of stock in the pool of mortgages. The rating of these pools of loans was essentially privatized, which means that a company like Moody’s was given the rating task – a job that they never had before. Moody’s had no idea how to rate a pool of loans which had a mix of “A” through “D” loans, all with greater degrees of risk of default because these borrowers were now paying slightly higher interest rates than they would be expected to pay, and would probably not pay when the rates changed, and Moody had no idea if the homes – the collateral – were properly appraised and was sufficient to cover the defaults. What happened in essence was that Moody’s saw that say 10% of the pool of loans were “A” borrowers and so rated the pool as AAA which was its highest degree of safety. So the pool of in essence junk loans was sold as AAA rated securities to entities like Bank of America, as Trustee for “ABC” asset backed securities. (As I understand it they later divided these pools into tranches or 3 different degrees of safety and sold them accordingly). No one had a financial incentive to make sure the originator closed a performing loan – a loan that the borrower would pay back, and if not had sufficient collateral. The Broker and Countrywide as originator, and Merrill Lynch and Bank of American only had an incentive to close profitable loans – loans they could sell. They could care less if the loans were performing loans. Everything was “sellable” as long as the pool was sold before too many of the loans started to default. There were no underwriting rules because these “lender’s” Countrywide and Merrill, were unregulated so you started to see non-income qualifying loans i.e. stated income. Many people gave the correct income info to the broker, who then submitted an application to the lender with false income information. These loans were justified because of the values of the properties. The brokers would get friendly appraisers to give a high-ball appraisal then submit the loan package. The appraiser would either give the higher appraisal or he would lose that broker’s business. This was the first wave of foreclosures that went through the courts. These sub-prime loans defaulted because they were based on 1) borrowers who qualified for lower (teased) rates; 2) inflated income by the broker who wanted to close the loan and get paid; 3) high-ball appraisals, 4) and all the borrowers were paying higher interest than they should have paid after the discount expired because of the yield spread.

The next wave we will see is when deregulation compounded the problem by allowing the 4 option mortgage. This mortgage allows a borrower to elect to pay on 1 of 4 options each month: 1) ½ of the interest that was due on the loan with the remaining ½ put on the back end of the loan. At the end of a fixed period, usually 3 or 5 years the borrower would have to amortize the full mortgage principal plus back end interest at whatever the rate was; 2) interest only; 3) amortize over 30 years; 4) amortize over 15 years. The Countrywide broker now could qualify a borrower if his income allowed him to pay ½ of the interest. This opened up a whole new category of borrower who could not otherwise qualify for a 30 year amortized loan. The broker would sell this 4 option mortgage to the consumer by telling him “just come back in 3 years or 5 years when the loan adjusts and we will refinance you because the house will go up in value” The broker used the same appraiser to over-appraise the value. Here is an example of how that loan works. A $100,000 10% mortgage would require $10,000 per year interest or about $850.00 per month. The broker would qualify the borrower at $425.00 per month which is ½ of the interest. After 3 years, the $100,000 principal is now $115,300.00 and costs about $1,200.00 per month to fully amortize over 27 years. The borrower’s payment almost triples. These are the loans that we are starting to see come through the foreclosure division in my county now and we will see this wave for a few years.
You have to remember, too, these are amateur borrowers who have maybe 1 or 2 mortgages in their lifetime, relying on professional lenders who are closing 1 or 2 mortgages a week. The borrower usually relies on the lending professional to give good advice because the borrower thinks the broker is working for the borrower when he is not.

The Broker is working to maximize his yield spread payment. The incentive for the broker is to close as many loans as he can to maximize his profit. He has no stake in making sure the loan performs as long as he gets paid. If he worked for a bank that kept the loan and he closed too many loans that defaulted he would be fired. Countrywide had an incentive to pay brokers large yield spread premiums and turn around and sell the loans as fast as possible. They did not care if the loan performed, so they closed an eye to the bad underwriting that went on and in fact encouraged its employees to qualify everyone – who cares at Countrywide as long as the loan is sold before it defaults. If Countrywide were a bank that kept the loan, a performing loan is paramount to keep them from failing. Merrill Lynch does not care if the loan performs as long as the pool is AAA rated and can be sold. This is why we are where we are. The problem has a simple cure. Regulate the mortgage brokers prohibit yield spread payments, un-fragmentize the industry and enforce proper underwriting guidelines with oversight that has a bite.

26 Michael Foody September 30, 2008 at 2:16 pm

Home ownership makes people less likely to vote for democrats. Now I know that the american dream involves a home of your own and a car but elevating this situation as though it contend some kind of moral imperative is silly. If you value owning your own place and driving a car that’s cool pay for it. If you want to rent a place and take the bus that’s cool pay for it. It isn’t as though either way of doing things deserves subsidizing.

27 Steve Sailer September 30, 2008 at 2:27 pm


You shouldn’t just cherry pick the politically correct stuff from my site!

As part of Karl Rove’s plan to turn Hispanics into Republican voters by helping them become homeowners through easy credit, George W. Bush made several speeches rallying enthusiasm for his October 15, 2002 White House Conference on Increasing Minority Homeownership. For instance, there was his classic Bushian effort on June 18, 2002:

“The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. †¦ So I’ve set this goal for the country. We want 5.5 million more homeowners by 2010—million more minority homeowners by 2010. (Applause.) †¦ ”

The five and a half million marginal minority homeowners that Bush bunglingly called for is a big number. At a mortgage of, say, a modest $127,000 each, that would add up to, let me check my calculator, oh†¦

$700 billion. Well, whaddaya know †¦

Bush rattled on:

“I’m going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector. (Applause.) †¦

“And so what are the barriers that we can deal with here in Washington?”

Bush and Rove didn’t have a plan for helping minorities earn more. Instead, they had a plan for helping minorities borrow more.

Bush went on in his June 18th speech:

“Well, probably the single barrier to first-time homeownership is high down payments. ”


Traditional standards requiring “high down payments” existed for, as we see now, very good reasons. Being able to pony up 20 percent, or even just 10 percent, was cold, hard evidence of borrowers’ credit-worthiness. It showed you hadn’t spent every penny you ever earned. And a big down payment meant you instantly had substantial skin in the game. That you had paid out tens of thousands of dollars meant you were likely to do whatever it took to avoid losing your house by failing to pay off the loan.

To Bush and Rove, however, old-fashioned down payments were just keeping minorities from their fair share of the American Dream. Bush burbled on:

“People take a look at the down payment, they say that’s too high, I’m not buying. They may have the desire to buy, but they don’t have the wherewithal to handle the down payment. We can deal with that. And so I’ve asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)

We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year—40,000 families a year—will be able to realize the dream we want them to be able to realize, and that’s owning their own home. (Applause.)”

If you do the arithmetic, you’ll see that Bush’s silly little American Dream slush fund for subsidizing 40,000 families per year would take, not the eight years Bush promised to add 5,500,000 minority households to the ranks of homeowners, but 137.5 years. But, obviously, subsidizing all 5.5 million new minority homeowners out of the taxpayers’ money would be so insanely expensive that white voters would rebel.

No, it had to be done on the sly, through the magic of fractional reserve banking, which, as the Federal Reserve notes, “permits the banking system to ‘create’ money.” By taking more risks, by handing out more mortgages to likely deadbeats, the financial system could simply “create” the cost of 5.5 million homes for minorities.

CNN reported after Bush’s June 17 speech at the St. Paul African Methodist Episcopal Church in Atlanta:

“Fannie Mae, Freddie Mac and the federal Home Loan Banks—the government-sponsored corporations that handle home mortgages—will increase their commitment to minority markets by more than $440 billion, Bush said.”

In December 2003, when signing the American Dream Downpayment Act, Bush bragged:

“Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we’re making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. (Applause.) And there’s more that we can do to achieve the goal. The law I sign today will help us build on this progress in a very practical way.”

What was truly significant about Bush’s 2002 speeches was not the legislation he endorsed—-but the unsubtle message he was sending to lenders and, most importantly, to his own employees, the federal regulators.

Let’s put Bush’s influence in perspective. I’m not saying that financial institutions would intentionally make hundreds of billions of dollars worth of bad loans just on the President’s say-so. But what I am saying is that federal employees, such as financial regulators, do listen closely to what the Chief Executive says about what he wants done regarding those iffy loans.

Let’s review: As long as the federal government ends up bailing out lenders, financial regulation is a necessity.

Lenders like to lend. That’s what they do. That, typically, is for what they get paid bonuses.

Overly exuberant lending, unfortunately, leads to financial crises. And taxpayers and savers always seem to wind up paying to resolve them, either through formal programs like the Federal Deposit Insurance Corporation, or through ad hoc bailouts (of which we’ve seen so many in 2008).

Thus, since the government is on the hook for excessive lending, the government regulates lending.

The job of these federal regulators is to “take away the punchbowl just as the party gets going,” as former Fed Chairman William McChesney Martin said long ago.

In his many speeches on minority housing, however, President Bush was telling his underlings to keep their hands off the punchbowl. Heck, maybe the regulators should add another bottle of Everclear just to be hospitable.

This orchestrated push for more minority homeownership wasn’t some random caprice of the President. It was part of the master plan of his political Svengali, Karl Rove. As Rove told every reporter who would listen in 2000 and 2001, Bush was supposed to be the new William McKinley, whose 1896 campaign manager Mark Hanna had figured out how to build a Republican coalition combining the business interests with (some) new immigrants to make the Republicans dominant until the Great Depression.

Worst of all, the Bush-Rove assault on credit standards meant that the white majority could qualify for doubtful debt, too.

White people sometimes get up in arms when the quotas get too obvious. Thus, it’s often easier for politicians just to toss out all the standards, such as substantial down payments. And that often makes the deleterious effect more pervasive than if a straightforward quota had been used.

The Bush jihad against traditional credit standards meant that not only more Hispanics and blacks could get loans they couldn’t pay back, but whites could, too.

28 Gabe September 30, 2008 at 2:27 pm

“Oh, please don’t call Paulson pragmatic. A two and a half pages asking for $700b? That’s is anything but pragmatic.”

From reading your posts I think we agree on a lot here. However in this particular instance I’d have to say that Paulson was “pragmatic”. He says he likes free markets but he is pragmatic becuase he realizes “something” needs to be done and he has made teh good faith effort as a pragmatic public servant to get things started.

My goal here in this statement was to make fun of people who seem to think “pragmaticism” is more important for an economist than actual economics. You know the tpye that understands Milton Friedmans criticism of the Fed and says “yes the fed can only screw things up by tinkering with monetary growth and thus it should be replaced by a computer with a known public algorithm so players are on equal footing and predicatablity is given to capitalist….however to be pragmatic I must support our rotten to the core system of czar-like monetary planners.”

or yes the SS tax is a regressive tax that attacks the poor, but the New Deal saved capitalism so lets just accept that we need to steal from the young, poor and early deathers to fund the elderly,the wealthy and the healthy. At the same time lets call ourselves free market and supprot bailouts and billions in subsidies for Exxon(military budget and Goldman Sachs(bailout).

At this rate, the “marginal revolution” will save us all about 50 years after martial law is declared.

29 ogmb September 30, 2008 at 2:34 pm

It is generally a wise policy to disprove a hypothesis through the application of actual evidence, rather than by some other means not generally in keeping with the definition of the word “disprove”

You don’t need counterevidence if the hypothesis is internally inconsistent. The main thrust of the CRA blamers is that the CRA forced the lenders to take the money on the table. That’s where the discussion ends. A bubble is a bubble is a bubble.

30 joan September 30, 2008 at 2:52 pm

Looking at the housing market in isolation misses the most logical explanation for the bubble. Money flowed into the mortgage markets because the demand for loans in other sectors of the economy has been depressed since 2001. Buyers saw homes as a better investment than the stock market after crash of the dot com bubble. The mortgages lenders found it profitable to meet the demands in the market, and bank wanted part of the action so they bent the rules using what ever provision or loopholes they could find. This factors combined to produce a market failure of epic proportions, and everybody is now searching for the guilty, and finding their favorite targets.

31 c.gray September 30, 2008 at 3:37 pm

Neither those claiming this is all the fault of the Democrats & the CRDA, or of Bush & the Republicans, have bothered to explain why the FIRST major bank failure was in England (Northern Rock), and why real estate markets and financial institutions in Europe are as distressed, and perhaps even harder hit, as those in North America.

Good luck on that when you get around to it.

32 heller September 30, 2008 at 4:09 pm

Man, people will do absolutely anything, absolutely anything, to blame this on Fannie Mae and the poor. Even when confronted with clear evidence that the CRA effect was insignificant there is now a new story: “Fannie Mae’s push for low-income may have seeded the system.” Of course, this story has no basis in reality either. The subprime market was big and growing rapidly long BEFORE Fannie Mae got into the business as this Washington Post article clearly shows: http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111.html . Again conservatives have no basis in reality for any of their claims and even when confronted with plain contrary evidence they stick to their nonsense to the bitter end.

33 jc September 30, 2008 at 4:31 pm

heller, what are you talking about? after reading your article and these comments, its pretty clear you need to develop better reading comprehension skills.

34 Andrew September 30, 2008 at 4:53 pm

Is it the last straw’s fault the camel got a broke back?

I’m agnostic because I’d rather debunkers investigate proposed causes that could be changed today that might actually help now, e.g. mark-to-market.

If the problem is banks going out of business, and they go out of business because people find out that there’s no market value for their assets, and banks aren’t already out of business because they are hiding these values, why not let them hide it indefinitely?

It’s like the casual pot smoker whose only real problem is the cops tossing him in jail. If the banks don’t go bankrupt, then there is no problem. Debunk that.

35 nelsonal September 30, 2008 at 5:31 pm

That’s 22%-25% of the entire (9 tillion dollar) mortgage market, not the sub-prime market. They’d actually been losing share to non agency originations for a good long time.

36 Patrick September 30, 2008 at 5:34 pm

If the CRA was responsible for the mess, seeing as the CRA only applies to certain types of financial institutions, wouldn’t the following have to be true?

Financial companies subject to the CRA are failing while those companies not regulated by the CRA are solvent.

Of course, it is the exact opposite.

37 happyjuggler0 September 30, 2008 at 5:52 pm

By the way, to the individual who wondered why Northern Rock (a UK institution) failed, the reason was it depended on outside lenders (i.e. not depositers) for 3/4 of its operating capital, and it too securitized its loans.

When the securitized market, both secondary and initial issues, collapsed, outside lenders to all such banks pulled away, not knowing who was solvent and who wasn’t, and wanting to stay away from the whole area.

Losing 3/4 of your short term lenders has a wondeful way of killing your business model if it depends on just such loans. Oops.

38 james September 30, 2008 at 6:39 pm

Patrick, thank you. I know the post was long, but the history of how we got here is important to understand that the right wingnut argument blaming everything but deregulation on the mortgage mess is not supported by the historical evidence. Countrywide was not the only originator, and maybe not the first to figure this out, but they became the most prolific. I recall seeing some statistics showing that at its peak, Countrywide had a hand in originating or servicing 60% of the US home mortgage market. I do not know that much about the manner that the loans were packaged and securitized and insured – that is part of the derivitive issues.

Another thing overlooked is that after deregulation, the free market worked perfectly, which is what got us here, and resulted in this mess. Everyone in the loan chain had a financial incentive, and did what they did, to maximize profits, leaving the consumer borrower with the very short end of the stick. Paraphrasing John Kenneth Galbraith, modern conservatism is the perpetual search for new ways to justify greed!

One final point, the default rate is at around 6% and the foreclosure rate is a little over 2%. Very high by historical standards, but said another way 94% of all the home mortgage loans are performing timely and 98% are not in foreclosure. We are talking about a relatively small amount of mortgage loans that are bad loans. There are about 52 million home secured mortgages, so there are about 1.5 million in foreclosure.

39 RobbL September 30, 2008 at 7:21 pm

Well, I guess it goes to show you can take a horse to water, but you can’t make him drink! On the other hand who would expect Steve Sailor to leap out of the bushes? Kind of like the Spanish Inquisition.

40 Zorkmid September 30, 2008 at 8:28 pm

Hey, Patrick, you’ve got it backwards. The burden of proof is on you to show why government’s “subsidize housing purchases by minorities” policy did not cause the bubble– the case that it did just that has already been made. You can’t prove your case by showing that non-minorities took out lots of mortgages because the rest of us are blaming CRA-ish policy for lighting the bonfire and fanning it, not for providing all the fuel.

For decades there was no housing bubble, even though all the players in the market had those same incentives (commissions, etc.). Then the government decided to subsidize housing purchases by people who couldn’t really qualify for mortgages. The government openly, loudly did this to put preferred minorities into housing they couldn’t really afford (under time-tested credit standards). This had several side effects: easy mortgage terms became available to non-minority borrowers as well; the injection of government funding (spent directly or extorted by CRA-ish mandates) drove up prices; and the rising prices were taken (how seriously by insiders I don’t know) as proof that loans to unqualified borrowers were okay because they were well-secured by (ever more) valuable property. All the bogus AAA ratings on the upper tranches of MBS’s were based on the delusion, and helped suck more money into the mess.

To cap it, the government didn’t just provide one-time subsidies to “low income” borrowers– rather the goverment demanded that lenders show they were lending to a quota of “low-income” borrowers every year even as prices rose. (Both Congress and the President told F&F/HUD to subsidize CRA borrowers more every year as well.) Rising prices should have driven low-income folks from the market, but the government kept boosting subsidies, artificially creating demand which kept pushing prices up. Prices didn’t reach a ceiling until recently, when even NO-DOC (meaning no creditworthiness at all), 105%-LTV, 0% teaser rate, 40-year, negative-amortization “pick-a-payment” loans, were insufficient to purchase houses in California and Florida. When it finally got through to everyone that there could be no more greater fools, because it was impossible to ease credit terms any further, then the market stalled because new mortgages could not plausibly be repaid even by sales (the hope of getting them repaid by installments had already gone by the wayside).

Talk about a positive-feedback loop! The government pushed up prices by subsidizing purchases, then chased those prices up and up with more subsidies. There were multiple subsidized “low-income borrowers” bidding on the same properties, each secure in the knowledge that their lenders would fund them to meet CRA numbers.

Sure, all the non-minority, non-low-income folks got into the game. The less affluent ones sold their homes to “low-income” people and traded up (transmitting the price push to the next tier), the more affluent ones heard from their friends and from the TV that housing prices always go up and constitute a great “investment” so they went and bought (or worse, went and borrowed against the “equity” in the houses they already owned). Non-minority borrowers never got worse terms than minorities, because of lender retail competition.

Fee income coupled with indulgent “regulation” of things like capital ratios certainly paid for a lot of bad behaviour and for a lot of lobbying for more subsidies and more indulgence, but the whole thing started right there with Clinton’s version of CRA.

41 happyjuggler0 September 30, 2008 at 9:08 pm

I also left out at least one other contributing factor that I’ve noticed over the past couple of years. Namely, the lack of universal K-12 school vouchers, and the preponderance of government owned and run K-12 schools.

Privatize the schools, issue universal K-12 vouchers, and all of a sudden certain locations lose a lot of value, and certain other, cheaper, locations gain in value. This would tend to reduce the frequency (and perhaps the severity) of housing bubbles in locations with perceived “good schools”.

42 heller September 30, 2008 at 9:34 pm

Sounds like CRA and other political pressure to me, i.e. fostering affordable housing . Too bad the housing remained unaffordable despite (or because of?) the CRA being a supposedly good Act, both for borrowers and for taxpayers, both of whom got screwed.


happyjuggler, you truly have no shame. There’s absolutely nothing in the linked Washington Post article that says anything, anything at all, about CRA. Instead you are simply making things up. You say it “sounds like CRA” but again you have absolutely no idea what you were talking about. And if you knew anything, anything at all about the consumer mortgage market, or even if you had read the debunkings of this racist nonsense, it would be clear to you that CRA-based loans are simply an *insignificant* part of the market. What that Washington Post article makes very clear is that the bad loan business was booming before Fannie Mae got involved seriously. (The 22% number means nothing when you consider that Fannie Mae touches roughly 80% of all mortgages as a matter of industry protocol.) If you ever get any *evidence* or, you know, *numbers* and can even demonstrate that CRA directly promoted bad loans then, by all means, go to the media with it and publish a paper. Hell, you might even win a Nobel for reversing thirty years of common wisdom. But you have no numbers, no evidence, and no respectable economist will ever get behind this racist nonsense to blame minorities for the crisis. So keep peddling this stupidity and seeing CRA wherever you want to, but you’re not fooling anybody except the many other conservatives who want to keep this talking point alive.

43 Gregor J. Rothfuss September 30, 2008 at 9:46 pm

Ultimately, it is the fetish of “housing is the american dream” that is the root cause for all this nonsense, and a lot of other ills as well. Good luck finding a politician daring to tell people what they do not want to hear.

44 Zorkmid September 30, 2008 at 10:21 pm

Heller, you are the one making baseless statements. CRA quotas are real, are enforced by a variety of agencies on various lenders, and definitely compel lenders to make unwise loans. Furthermore, they require lenders to issue a proportion of their loans to less creditworthy borrowers as the price (government exaction) of doing business with more creditworthy borrowers. I don’t have time to waste providing you with a complete guide to this, but look at a representative document from the FDIC still available on its website with all sorts of other information including lists of all the FDIC-regulated banks audited for CRA compliance each month going back a decade:

Excerpt from FDIC “CRA strategic plan” guidance to banks (issued 1998 and still in effect): “The regulations state that the plan should include specific measurable goals to meet the credit needs of the assessment area, particularly the needs of low- and moderate-income geographies and individuals, through lending, investments and services. Generally, the plan should emphasize
lending and lending-related activity.”

There’s a whole industry of consultants who help lenders comply withCRA (and CRA-like) lending quotas (hit ^F, type “quota”).

45 happyjuggler0 September 30, 2008 at 10:59 pm


Thanks for the ad hominem attack calling me a racist (not to mention conservative), mixed in with Fear, Uncertainty and Doubt to confuse those who weren’t paying attention. You sir are the one who is truly without shame.

1) There isn’t a single racist bone in my body, and I defy you to find a single post I’ve made anywhere (I use this nic a lot online, on various sites) that a reasonable person (i.e. someone who isn’t trying to defame me) could even semi-plausibly call racist. If you search long and hard enough (the google is your friend, or in this case my friend) in your vain attempt to find me a racist, I’m sure that instead you’ll find several posts that directly contradict your very wrong assertation (e.g. posts where I am chastising racists one way or another).

Indeed it is precisely because I see the CRA’s mandate to give loans to people who can’t afford them (by a reasonable bank’s computer color blind programming based on historical stats) to be hurting poor people in genral, and poor minorities in particular to be grossly offensive and very wrong and hurtful to those very minorities that I am opposed to the CRA.

2) I am both conservative and liberal, something I am sure you will quickly realize if indeed you do an exhaustive online search for posts of mine. In my opinion calling me a conservative is not only wrong, but it is piss poor framing.

The proper framing is the libertarian/tyrant spectrum in my opinion. You can be a conservative, or liberal, or like me some combination of the above, and also be a strong believer in limited to no government. Just like me. Alternatively you can be a conservative, or liberal, or a combination of both, and be in favor of using the coercive force of government to force others to succumb to your beliefs. This is tyranny by any reasonable definition of the word. This by the way exempts government use of force from being tyrannical if it is genuinely used to defend the liberty of those who try to usurp such liberty.

Reading your earlier posts, as well as your mindless rant against me, and it is clear to me that you easily fit in the tyrant category.

3) To the subject of whatever substantive beefs you circuitously intertwined with pure bovine scatology (i.e. bs) in your offensive post:

Here is the full quote of mine (two and a quarter pargraphs) that you took out of context, all in boldface this time (because the original had italics):

Wow wow wow, how does a company manage to have toxic assets with an origination value of about ten times its capital base, not to mention countless other assets/liabilities on its books?

documents from the period, obtained by The Washington Post, paint a picture of a company with the dual incentives of fostering affordable housing and making money, and of one caught between the imperatives of increasing its market share while avoiding excessive risk

Sounds like CRA and other political pressure to me, i.e. fostering affordable housing [end of my post’s relevant quote]

My somewhat dramatic “wow wow wow” was in direct reference to wondering what could possibly possess a company to unequivocally (with 20/20 hindsite anyway, even you must agree this is unequivocal) deliberately make massive amounts of truly horrible loans (“horrible” from a fiduciary responsibily to shareholder point of view, not from an idealistic socialist point of view. Cough), so much so that they would eventually bankrupt the company and stick the taxpayers with the godawful tab (after Fannie and Freddie got formally nationalized)?

Hence the part you quoted, which was preceded by WaPo’s very own quote (from your very own link) that laid the blame squarely on its government mandate to securitize or insure bad loans. Why did the government put intense pressure (as pointed out by several others, with the occasional citation, in this very long thread) on Fannie and Freddie (the latter not mentioned in the WaPo article)?

In answer to that question I can only guess it is because some group of government people under the influence of the shoddy logic of the CRA decided it was a good idea to give loans to people who couldn’t afford them. Again, with the latter painfully and indisputably clear to all Americans by this point (i.e that the people getting these loans statistically couldn’t afford them).

What was once termed loans for “affordable housing” (using WaPo’s terms) has in both 2007 and 2008 been called “predatory lending” by the likes of well intentioned (one would presume “well intentioned anyway”, since he doesn’t wear a pointy white hat and white sheet, although both produce the same result, i.e. bad outcomes for minorities) folks like Barney Frank. For those who don’t know, Barney Frank is a congressman, a Democrat from MA, and head of the house banking committee, and perpetrator in chief of this destructive idiocy against poor people in general.

So…while your link may not have contained anything about CRA directly, it seems clear that its spirit, along with direct government influence on Fannie and Freddie, and indirect winks and nods at unregulated mortgage lenders who lent massively to poor people (i.e made subprime loans) who no longer had to fear attorney general probes into their “progressive humanitarian loans” to poor people, is hugely to blame (but not entirely as I continually point out) for our current financial morass.

Feel free to posit an alternative hypothesis why Fannie acted the way that WaPo in my quotes said it did, i.e. destroy shareholder equity by financing (one way or another) home loans to poor people who clearly couldn’t afford them.

Until then please refrain from moronically calling me a racist. By the way, Tyler please don’t remove his post, I think it is instructive to see the that unsavory name calling can come from “progressives” like heller, not just folks like Steve Sailer.

46 happyjuggler0 September 30, 2008 at 11:20 pm

(off topic)


I finally remember where I recall the name “heller” from. Please tell me that you aren’t “the” Heller who heroically (by result, not by sacrifice) got the Supreme Court to pronounce that the 2nd amendment applies to self defense (at home anyway).

The reason I say “please” is for the same reason I say “heroically”, namely that DC is a vicious paradise for criminals, in no small part due to their government banning guns, thus emboldening criminals.

Since approximately 90% of crime is committed by people of the same race as the victim, one can plausibly assert that handgun bans (in the US anyway) are rqcist in deed, if not intent, since they deprive honest citizens of defense against criminals, especially in areas (usually black) where the government, sometimes racistly, assuming racistly is a word, refuses to employ the neccessary police presence needed to protect citizens via that means.

47 Zorkmid October 1, 2008 at 1:00 am

Heller, amigo, do you know what the word “proportion” means? Perhaps you are too upset to read carefully, but I made it clear that CRA quotas are for ratios (of loans made to people who don’t deserve them versus loans made to qualified borrowers), not for fixed numbers of loans. It really is annoying to read your rants about assertions I never made. If you cared to address the real issues instead of burning down your strawmen your contributions would be much more interesting.

(I have glossed over the basically irrelevant regulatory use of various proxies, such as ratios of loans made to populations of different portions of a lender’s service area classified by income, etc.– perhaps the fog swirled around the core policy by such formulae confused you.)

It was nice of you to admit I was right even as you tried to deny it, saying that a CRA quota “boils down to a percentage of technically viable loans,” where no doubt “technically viable” is a euphemism for “meets specially-relaxed underwriting criteria for loans made to achieve CRA compliance!” Other commenters have linked to GSE guidance about the special programs they offered to purchase “CRA compliance” loans with easy terms.

Also, every literate American knows that in US government regulatory parlance “specific measurable goals” is just a variant spelling 😉 of “quotas.” The reason that last thing I linked to put “quota” in scare quotes is that it put scare quotes around many pieces of bankers’ and regulators’ jargon, such as (go look) “lending tests,” “performance context,” “LMI geographies,” etc.

The purpose of linking that stuff is so people who can read and comprehend a few lines of text can see that the FDIC (for example) has compelled banks to meet quotas for proportion of lending to certain groups, and that they’ve struggled to do that because those groups are not actually creditworthy.

48 Dave October 1, 2008 at 2:46 am

James: You’re right, the Wash Post link was broken. I just tried to link to it again, and they actually seem to have taken it down, which is odd. It was here: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.htm

The story was about HUD. I’m definitely not trying to blame lending to minorities for the bubble or current crisis. I do, however, think that the government encouraged lending to risky and low income borrowers (whites included, as you rightly point out) through changes to CRA in the 1990s and quotas from HUD. I suppose the HUD thing is a little off the main topic. But while we’re playing the blame game and identifying which deregulations were mistakes (I certainly agree with many points that you made), I hope that we can identify where the government also distorted the market with too much intervention as well.

49 Per Kurowski October 1, 2008 at 7:13 am

Did “minority lending” drive the crisis?

Of course not!

You can do very prime minority lending!

It was the credit rating agencies that led us into the crisis by awarding prime ratings to securities collateralized with very subprime minority lending!

50 James October 1, 2008 at 9:25 am

The “subprime” vs. “minority” and “low income” arguments miss the point, or perhaps do not understand the definition of a subprime mortgage. Fannie/Freddie define a subprime mortgage as follows: “Subprime mortgage: Generally, a mortgage loan made to a borrower with a weaker credit profile than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher likelihood of default than prime borrowers. Subprime mortgage loans are often originated by lenders specializing in this type of business, using processes unique to subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if the mortgage loans are originated by one of these specialty lenders or, for the original or resecuritized private-label, mortgage-related securities that we hold in our portfolio, if the securities were labeled as subprime when sold.” (See: http://www.fanniemae.com/ir/resources/glossary.jhtml?p=Investor+Relations&t=Glossary).

A subprime mortgage has nothing to do with income – it is all about the FICA/ Fair Isaac score. A borrower with $35K yearly income and a 750 FICA score (good credit pays all bills timely) is a prime borrower while one with $100K income and 550 FICA (bad credit perhaps a bankruptcy or a few I/R 90s on the credit profile) is a subpime borrower.

Another key is this part of the definition “many subprime loans arose from a broker who bprime mortgage loans are often originated by lenders specializing in this type of business, using processes unique to subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if the mortgage loans are originated by one of these specialty lenders or, for the original or resecuritized private-label, mortgage-related securities that we hold in our portfolio, if the securities were labeled as subprime when sold.”

In other words, a prime borrower may be classified as a “subprime mortgage” even if the borrower has $100K income AND an 800 FICA based only on the fact that a “subrprime broker” originated the mortgage, or the mortgage was sold in a pool labeled “subprime”. Moreover the brokers would often qualify and close borrowers into loans that artificially reduced the monthly payment for anywhere from 1 year to 5 years, but the borrower could not afford to pay the new increased payment (i.e. via “teaser rates” discounts, interest only and option payment loans). The pitch that the broker used to sell the loan to the borrower was that “Your home will increase in value and you can come back and refi when the payment increases.” That is why you read articles that cite statistics showing up to 60% of the loans in default were subprime, and anectodal evidence from many borrowers who thought they had great credit but were classified as subprime.

51 Dirtyrottenvarmint October 1, 2008 at 11:10 am

Scrolling through the comments thus far, I still see no examples – that is, none whatsoever – citing any dataset even a single study of which has been concluded by anyone to disprove the hypothesis that the CRA had some meaningful effect in contributing to the current credit market tightness.

I see quite a few anecdotal examples indicating that the CRA could have had some meaningful effect. While this certainly does not prove that the CRA did in fact have a meaningful effect, the fact that none of the commenters who argue CRA is not to blame offer even one shred of proof is very suspect. It may well be that these commenters do have evidence that indicates with some degree of confidence that the CRA was not a significant cause. However their silence on this matter might lead one to assume that they do not have such evidence.

Please note, commenters, that a newspaper article is not a dataset. Neither is a well-thought-out and logical explanation of why the hypothesis is probably wrong. Disproving the hypothesis with any level of confidence requires a statistically significant dataset, “testing” of the hypothesis on that dataset, and based on such testing a conclusion, with reasonable confidence interval, that the hypothesis is false.

Professor Cowen, if you are reading these comments, I implore you to impose some reasonable level of intellectual rigor on your own posts and to encourage the same in the comments. For example, you CANNOT cite the general obsession with extending home ownership as strong evidence that putting Democrats in charge does not suffice to solve our regulatory problems. This is not “evidence” at all. You can certainly say that it is your considered opinion. You can explain praxeologically that there is good reason to think that your considered opinion is correct. You cannot say that this constitutes “evidence”. If you do, you are wrong.

52 Zorkmid October 1, 2008 at 3:49 pm

Well if leftist propagandist Mark Thoma is the best you can offer…


you sure haven’t bolstered your side much. Go look at your own link. Thoma’s view is based chiefly on noted economist* Matt Yglesias’ assertion that CRA can’t have had any influence because it dates back to 1977 and the bubble obviously came later. That is pure misdirection! The original CRA was just hortatory. It was amended to be forceful in 1992 or so, then enforced with increasing rigor for the next decade. Furthermore, while it is convenient for all you “debunkers” to focus narrowly on the CRA and FDIC-regulated banks (so you can prattle about how big the rest of the market was), the actual hypothesis under examination is, to quote our host (see top of page):

Did policies such as the Community Reinvestment Act significantly worsen the housing bubble and the subsequent collapse?

Note the words “such as” in that question. The CRA, HUD policy, FHLBB policy, Fannie and Freddie policy, etc. were all pushed by the same people, justified on the same grounds, and operated together to produce significant upward price movement and downward loan-quality movement. They contributed mightily to the bubble.

If you can possibly deny that minority-targeted loans were of much lower quality than other loans and pushed up prices by funding new entrants (who were often speculators) with government money**, go ahead. Don’t forget to explain why special Fannie/Freddie loan-purchase programs and harsh regulatory compulsion on banks to fund such loans were needed if the favored borrowers would have been good risks in any event.

As for statistics, we’re all waiting for them. We don’t know yet what the default rates on bubble-era loans look like broken down by race (or analyzed in other interesting ways). Some big financial firms and government agencies probably know, but no substantial reports have come out yet.

(Silence is not evidence and I don’t suggest it is, but by now it would have been possible for someone (from say, B of A (vice Countrywide), or Fannie, or Freddie) to publish some of the information we’d like to see. There have been many mortgage defaults and all the associated data is lurking in various databases. We just have to wonder whether people have foregone publication because they lack time, or commercial/legal considerations make them reticent, or, just perhaps, because the results would be politically incorrect and embarrassing, leading to renewed charges of racism against lenders on the theory that any misfortune which touches a minority must result from white racism.)

*Yes, that was sarcasm.

**Don’t say it was private money. Any money that came from, e.g., CRA-pressured banks was extorted; it was economically equivalent to tax money. Money that came from Fannie and Freddie and so-forth only pretended to be private– we saw last month that it was really government money after all!

53 James October 1, 2008 at 7:26 pm

Interesting, right wingnuts want citations to authority, then when provided they attack the politics of the sites that provide the authority, and coincidentally cite no authority to support their nutty hypothesis. DRR is right – you guys are a hoot!

54 Zorkmid October 1, 2008 at 9:52 pm

I’m not sure who you’re calling a “right wingnut,” but the left-leaners here are the ones relying on citations to “authority” (really “authority figures,” though it is remarkable that anyone would consider Mark Thoma and Matt Yglesias to be such). The rest of us want citations to, you know, data. So which do you find more persuasive? The assertion that CRA mattered, backed up by links to the FDIC and to industry sources? Or the assertion that it didn’t matter, backed up by Matt Yglesias’ obvious claptrap, amplified by Mark Thoma’s credulous citation?

55 nyongesa October 2, 2008 at 8:36 am

108 comments on this topic illustares the depth of the roots of the role of scpaegoats in human social systems. zorkmid and others awaits “data dammit” to prove what they suspects…and what has always been suspected of “minorities”. Every crises in american history has been extensively analyses to root somewhere in the weakness of “minorities”. if you look closely enough and connect enough dots, you wiil find all the evidence you need. At least this time there wont be a pogrom.

The notion that a small group of people who have been enslaved for hundreds of years, then systemetacilly dis-enfranchised, and are wholly under-represented in every decision making role in America, are about to bring the U.S. economy to it’s knee’s because banks were no longer allowed to simply redline them, is poetic gibberish.

Zockmid’s data will form fit to show that “toxic citizens” generated toxic fumes that puit toxic mold into the banking system. The reality will more likely show that hundreds of factors convulsed to ferment the mold, not least will be the over ripe nature of the debt economy were pickling in.

56 James October 2, 2008 at 6:06 pm

Here is a link that debunks this right wingnut canard that CRA loans caused the meltdown. In fact it examines the data which shows they have no greater default rate than other loans: chttp://www.allbusiness.com/personal-finance/real-estate-mortgage-loans/677967-1.html
PS Zorkmid, you apparently cannot read. I did not cite the stories’s authors as authority, I cited to the links in the stories as the authority.

57 Payday Loan Advocate October 22, 2008 at 3:46 am

On Wednesday, October 14, 2008, the eyes of the world were fixed on Hempstead, New York and the third and final U.S. Presidential Debate. Sen. Barack Obama of Illinois entered the arena with an eight-point lead according to an average of national polls as compiled by CNN, and it appeared that he was content to sit on that lead. Sen. John McCain of Arizona took advantage of Obama’s laurel resting and brought the fight to him regarding the younger candidate’s policies, judgment and qualities of character. When Obama did adopt a more critical stance regarding the economic policies of the past eight years, McCain was quick to point out that he is “not President Bush.† He stated that he would enact an “across the board spending freeze,† take a hatchet to some programs and use a scalpel on the remainder once the dust settled. Obama’s stance sounded more conservative; he would “go through the federal budget page by page, line by line† in order to close programs that aren’t working as they should. Both candidates claim their economic plans will bring needed change to a broken America, but will it leave consumers with the ability to choose where and when they’ll have access to payday loans? That remains to be seen. Just because Americans see themselves as living in “the land of the free† doesn’t mean that interest groups (i.e. banks and credit unions) want them to have the freedom to choose.

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58 Payday Loan Advocate October 27, 2008 at 2:15 am

Mortgage lending played a big part in our current economic crisis, which has been a significant topic that is disturbing the standards and values of America. Conversely, this problem does not target the American people alone, but has navigated to other parts of the world. The International Herald Tribune explicates the worldwide credit crunch that is happening in Europe as well. Small businesses like Dominique Boudier’s printing company, outside of Paris, generally depend upon credit with its suppliers in order to maintain the functioning of the company, and her creditors are cutting back their offerings by half. This was approved by the suppliers’ credit insurance companies. Like many others, Boudier’s business needs added cash flow to make up for their major fallbacks, considering a typical 60-day lag time in which clients pay. The future of her company appears shackled without the assistance of her own bank. Her bank, like many other banks across Europe, began to put their money to sleep instead of investing it back into other banks or the economy in general. When the banks began to fall short and liquidity was disrupted, the credit began to dry up. More or less, the European Central Bank is quite similar to America’s Federal Reserve Bank. They utilize a method which is based on the ability to create as much fiat money as necessary. Fiat-money currency, which in fact is credit money, loses value once the government refuses to further guarantee its value. We see this in high inflation rates as the world’s credit crumble. People believe stronger private banking systems that make responsible decisions can solve this problem. Until then, payday advance loans will surely be manageably obtainable for consumers who need immediate short-term help and can no longer depend on a faltering central banking system.
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59 club penguin May 19, 2009 at 9:39 pm

But didn’t the relaxation of rules not only expand the number qualified for mortgages, but also simultaneously expand the size of a mortgage others could take on? And weren’t politicians saying to Mankiw and others don’t criticize Fannie and Freddie policies lest you cause what you predict?

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