Spence, that is consistent with what I've been saying.

1) The crisis had its roots in the dumbing down of lending standards via CRA and broader "affordable housing" policies.

2) Low interest rates, beginning in 2001, provided the fuel for the underwriting.

CRA enforcement and amendments were only part of the hilarity that ensued prior to the housing bubble. You allude to HUD quotas (which were ultimately adopted by GSE's after HUD established them, not the other way around as you indicate).

By the way, I am an economist and do my own research.

But it doesn't take a rocket scientist to read a chart. Mortgage originations exploded fivefold after the federal reserve dropped rates to imprudently low levels from 2001-2004, even though the economy was recovering by late 2001. The data is publicly available if you want to verify.

http://i215.photobucket.com/albums/c...onsvsRates.png

I'm well aware of your background.

But all the chart indicates is the relationship between lending and interest rates. This relationship seems pretty obvious. The issue at hand is how much the CRA enabled this growth. Most of the non-political analysis I've read doesn't seem to support the argument that it had a major impact in new loans or defaults.

And my statement on HUD quotes isn't as you indicate. Reading the actual HUD charter, it looks like they're set in anticipation of where the market is going and then set upon the GSE's. My interpretation could be wrong though as I've just read the one HUD document and it's not completely clear.

-spence

Spence, most of the analysis is pretty straightforward and implicates declining underwriting standards. I'll save you the headache of going through all the federal reserve documents. Here is a snapshot of what happened.

Issuance by year, comparing 2006 vs. 2001:

2001: Traditional 30 year fixed rate mortgages = 57%
2001: Subprime = 7%
2001: Non-traditional loans: 3%

2006: Traditional 30 year fixed rate mortgages = 33%
2006: Subprime =19%
2006: Non-traditional: 14%

This is common-sense stuff. Remember that overall issuance quintupled from 2000. The growing mix of risky loans (as % of total underwriting) on sharply rising loan issuance was a recipe for disaster, as evidenced by sharply deteriorating loan delinquencies after 2004.

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 ("GSE Act") was signed into law on October 28, 1992. The timing is interesting, given the October 8, 1992 Boston Federal Reserve study which purportedly showed lending discrimination against blacks.

Fannie and Freddie adopted affordable housing missions ... in, surprise surprise, 1992.

The fleshing out of affordable housing policy implementation, apart from ad hoc DoJ enforcement actions, began in earnest in 1994 and kept going until 2007.

http://www.huduser.org/publications/pdf/gse.pdf

http://i215.photobucket.com/albums/c...ee/GSE1992.png

We're going to fast forward through a LOT of stuff here, but by 1999, not only were banks bullied into lending to deadbeats, but the GSE's were as well, with very specific goals.

double tap.

All the data you posted seems to validate is that a sub-prime explosion fueled by cheap money was a primary driver of the mortgage crisis.

And still, there's nothing that indicates the CRA was behind this, which is the context for this discussion, that the recession was caused by Liberal policies.

In fact, as I've mentioned several times now, conservative economists like David John have reported that the bulk of sub-prime loans didn't originate from CRA influenced areas nor did they suffer higher default rates.

Here's yet another analysis from someone with far better credentials than myself :hihi:
-spence

for the thousandth time Spence, it was not the CRA loans themselves but the culture created and fueled by the pracitces forced by government mandates and requirements....and threats....

There was another major change that has gotten little attention. Back in 1992, a Boston Federal Reserve study claimed to find evidence of racial discrimination -- claiming that minorities got denied mortgages at higher rates than whites even after important factors such as creditworthiness were accounted for. The data used in the study were riddled with typos and other serious errors. For example, of the 3,000 mortgages studied, 50 of the loans supposedly had the banks paying interest to the borrowers, 500 of the mortgages were not even in the data set from which the data was supposedly obtained, and some mortgages were supposedly approved for individuals who had negative net worth in the millions of dollars. When those mistakes were corrected, no evidence of discrimination remained.

Professor Liebowitz noted that Lawrence Lindsey, then a member of the Federal Reserve’s Board of Governors, "was warned about these errors in this study but the Fed ignored them."

The Boston Fed still used the study to produce a manual for mortgage lenders that said: "discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower–income minority applicants."

So what were some of the "outdated" criteria?

Credit History: Lack of credit history should not be seen as a negative factor.... In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. For lower–income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record. In these instances, paying off past bad debts or establishing a regular repayment schedule with creditors may demonstrate a willingness and ability to resolve debts....

Down Payment and Closing Costs: Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies to cover part of these costs. . . .

Sources of Income: In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part–time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments, and unemployment benefits.Accepting these new criteria was hardly voluntary. The Fed warned the banks:

"Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions."

And mortgage lenders followed these rules. Liebowitz explained that these changing financial standards "encouraged speculation -- potential homeowners could gamble on the price of homes going up without using any of their own money. Remember, 25 percent of homes being purchased were purchased for speculation."

Others dispute Liebowitz's claim that these changes in rules mattered. For example, James Carr notes that it "may seem on paper that these are a curious thing to count [welfare and unemployment benefits] as income, but they simply didn’t matter."

One lender singled out by Fannie Mae for special praise for following these new criteria was Countrywide:

Countrywide tends to follow the most flexible underwriting criteria permitted under [Government Sponsored Enterprises] and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the [Government Sponsored Enterprises] programs. When necessary — in cases where applicants have no established credit history, for example — Countrywide uses nontraditional credit, a practice now accepted by the [Government Sponsored Enterprises].

Or take a 1998 sales pitch from Bear Stearns, which also followed the Boston Fed manual:

Credit scores. While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with [Community Reinvestment Act] loans. Unfortunately, [Community Reinvestment Act] loans do not fit neatly into the standard credit score framework… Do we automatically exclude or severely discount … loans [with poor credit scores]? Absolutely not.

Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac, the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising.

Liebowitz said "such reckless behavior by [Fannie Mae and Freddie Mac] has lead to their financial meltdown and to the financial problems for the whole country. During Franklin Raines' chairmanship of Fannie Mae, they were a major proponent of relaxing standards."

Priceless. You should really read this a few more times :uhuh:

Next you're going to assert that interest rates didn't really go down, but rather Alan Greenspan was just moving backwards :jester:

-spence

[QUOTE=spence;829812]All the data you posted seems to validate is that a sub-prime explosion fueled by cheap money was a primary driver of the mortgage crisis. it was what eventually caused the crap to hit the fan

And still, there's nothing that indicates the CRA was behind this, which is the context for this discussion, that the recession was caused by Liberal policies. yes, LIBERAL POLICIES...giving people money with the approval and backing or threat of goverment reprisal with no accountability!

In fact, as I've mentioned several times now, conservative economists like David John have reported that the bulk of sub-prime loans didn't originate from CRA influenced areas no kidding??? nor did they suffer higher default rates

Good god man get a grip on yourself.

-spence

I guess I'm "all wee wee'd up" :jump1:

Full of crap is more like it.

-spence

Spence you're not listening.

Sub prime and CRA were the beginnings of the dumbing down of lending standards that contributed to this mess.

If you include everything done in the name of AFFORDABLE HOUSING policies, you would see how we got here.

Sub prime got the ball rolling for reduced down payment or no down payment loans, and reduced documentation loans, ALL of which were government creations in the wake of CRA.

CRA created moral hazard. If the federal government could force banks to lend to deadbeats and then GUARANTEE subprime loans, then why couldn't EVERYONE ELSE get hust as good of a deal?

Sub prime issuance was small relative to other products, but sub prime failures via the failure of two Bear Stearns hedge funds were the catalysts for the credit crisis.
Posted from my iPhone/Mobile device

once upon a time....

car repair shops were doing business in brake repair the way they'd always done and then one day a government official stopped in and told them that "too many people couldn't afford to have their brakes done" particularly in certain areas and that the car repair shops were going to be required to do brake jobs for much, much less, "we like to call it the CRA (Car Repair Act)", he said...the car repair shop was wondering how they could stay in business with these regulations and the government official told them that they could use much cheaper materials and parts and less qualified workers....the car repair shop said " that might not be safe and we can't guarantee the quality" but the government official said "don't worry, we'll stand behind you and guarantee your work as long as you go by our new guidelines", "just bundle your traditional warrantees together with your "newly improved" warrantees and send them along to our pseudo-government agency Freaky Mac..and we'll take care of everything"....well...years went by and the car repair shop did a brisk business and other brake specialty shops opened up doing the same and soon suppliers, repairers and everyone(even Freaky Mac through various book cooking exploits), involved profited greatly by being able to use the inferior materials and service to repair brakes not just on the cars in certain areas but on most cars and some really smart Ivy League grads invented even newer ways to fix brakes with cheaper materials, everyone was getting their car's brakes fixed for practically nothing and the business grew exponentially although some members of Congress were growing concerned about what they saw going in the braking business...they were told that there was no problem with the braking business and that the braking business regulators should be replaced(get it?:)) because they were racists.... and that removing the braking system from the list of things to check during an inspection would be a splendid idea....sadly, it soon became apparent that brake sysyems everywhere were failing and many, many people were dying in car accidents from failed brake systems....the government blamed the car repair shops, the shops blamed the government and their suppliers...the suppliers blamed the repair shops and the government...

and Spence claimed that the CRA had absolutely nothing to do with it :)

brakes fixed through the CRA(Car Repair Act) represent only a tiny number of deaths or brake failures compared to the the overall number of deaths or brake system failures attribute to changes in the way business was done and so therefore the CRA had no role in the ultimate overall failure of the braking systems....:smash:

The data seems to indicate that when properly regulated this wasn't the case. In fact as I've noted, even in the run up to the crisis CRA regulated sub-prime loans weren't the problem.

The "slippery slope" argument is dubious as it ignores the regulatory side of the equation. Sub-prime isn't evil, but when firms like Countrywide run wild there's a problem. Mortgage backed securities aren't evil, but when they're sent into a derivative black hole there's a problem.

Interestingly enough, the most detailed study of this mess has just been completed.

http://www.nytimes.com/2011/01/26/bu...uiry.html?_r=1

While there's plenty of predictable blame to go around, here's on line that stuck out...

Should make for some interesting reading.

-spence

you could have ended your post there.

Spence, that is a political document.

The sad thing is, regulators won't pay heed to that report. They can ignore it, because, it is a political document.

All the bad loans came from somewhere, and if you bothered to even see where a few of them came from and what kind of loans they were, regardless of subprime or prime credit, you'd have a clue.

But nobody bothers to do their own work anymore.

I got tired of all these economists saying the same thing so I figured we'd give the politicians a try :hihi:

What's most interesting are the dissenting opinions. The bulk of the Republican dissent (aside from Wallison who seems to think the market can do no wrong, guess that's why he works for the AEI) was that they felt the global nature of the credit bubble wasn't adequately included in the main findings. I didn't see any mention of the CRA in their dissent either.

I actually think the Republican dissent is more on the mark than the main findings. All together it's a pretty good look at how this happened.

Remember, the context of the discussion is how Liberal policy caused the crisis...The government forcing banks to make loans to dead beats remember? I still haven't seen any data that really backs this up...I guess I just don't have a clue.

-spence

can't argue with the last part...


by government forcing banks to change their established lending practices and standards for more "liberal" lending...and eventually encouraging the same be applied through the rest of the industry....

"Countrywide tends to follow the most flexible underwriting criteria permitted under [Government Sponsored Enterprises] and FHA guidelines. Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria. Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the [Government Sponsored Enterprises] programs. Countrywide uses nontraditional credit, a practice now accepted by the [Government Sponsored Enterprises].

Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac, the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising.

Glad we can agree on something.

That's a gross and misleading oversimplification.

The data shows is that a very small % of sub-prime lending can be attributed to the CRA, and even then, those loans didn't perform all that badly. Programs under the guise of "affordable housing" encouraged by both the Left and the Right certainly worked to lower standards to extend credit, but the data doesn't reflect a substantial negative impact to the overall system. If anything it actually increased home ownership which I'd think was a good thing.

That's not to say that deteriorated lending standards weren't a massive part of the problem...quite to the contrary...low rates and a demand for the mortgage backed securities started to drive the number of loans, but at the risk of increased defaults the products changed and we saw the explosion of ARMs with ultra low or no interest rates. This made it easy for anyone to get a loan that they could probably make payments on...at least long enough for the warranty to the underwriter to expire.

This deterioration in lending standards really didn't start until 2002 and combined with the other factors previously discussed led to the blow up...again, mostly of adjustable rate loans originated in just the last few years before the crisis. Affordable Housing mandates might have helped to build some of the infrastructure, but I've still yet to see any real data or thoughtful analysis that shows it was a signification contributor when put in context with the other factors.

I would expect any business to do what it can within the law to create shareholder value. That firms like Countrywide did it in such a reckless manner would seem to put the blame on them first and foremost.

-spence

The fault lies with the people who took out the crazy loans. They are the ones accountable as they are the ones that signed the loan/contract.
I agree that lending standards were lowered way too much by the banks and also agree that banks didn't have had the best "business practices". They didn't look out for the people but do any banks really do that with all the ATM fee’s, hidden charges, etc? All of that aside, they didn't actually FORCE anyone to take out these loans. Anyone who took a hour of their time and looked into what these loans were and how they were structured (risks involved) before signing them should have been smart enough to figure out that it was a gamble to say the least. Now they don’t want to be held accountable for their gamble.
I feel the responsible folks out there who educated themselves before making the “largest purchase of their life” and did the right thing are now stuck paying for the “poor me” people who won’t take responsibility but turn all of the blame on the banks.
Makes me shake my head whether it's a house, car, boat etc when people are only interested in "the monthly payment" but don’t look at the other details.

PS. I can't spell, this site needs SPELL CHECK

I think we'd all agree that personal responsibility was a large contributing factor...as was predatory lending.

Get Firefox, spell check is built in and works pretty well.

-spence

You haven't seen any of the data, period.

Get your facts and timelines correct, first.

Read the actual source documents for the articles you cut and paste with a jaundiced eye.

Have you even read the 500+ pages that constitute the latest congressional report?

Probably not.

Bump.

-spence

Is that why every time you mean to type "lose" as in "not win", you type "loose" as in "not very tight"? I thought it was because you were a dummy, but maybe it's all the Firefox's fault. Is Firefox related to the Carfox?

Probably. I've caught spell check changing my misspelled word to the wrong word on several occasions. I'm not a great speller to begin with...

-spence

spelling is so overated :)

Then you have not earned the right to definitively adjudicate on the subject matter.

All you have is your opinion based on others cut and pastes.

Having said that, it doesn't take a rocket scientist to figure this all out, if you have the patience to weave through all the data and the gov't publications.

Bump...

-spence

At this point does it matter who's fault it is, except to
learn from the past ?

Point is he has had 2 years to fix it, but chose to spend his
time pushing his HC agenda. :(