From who did Obama "inherit" the economic mess?

[fishpoopoo]

Originally Posted by spence

Here's the Barney Frank response to this point...

I've not found a video of the testimony to assess the context, but I do know that David John is a die hard conservative in the Heritage Foundation. I'd like to see a detailed analysis of this...



-spence

Barney is full of mancustard. As one of the fiercest proponents and protectors of affordable housing, he of course has a vested interest in passing the blame.

The CRA itself was a fairly innocuous law signed by Jimmy Carter in '77. It wasn't until the Boston Federal Reserve came out with a flawed study in 1992 (late in Bush I's term) that banks were discriminating against Black people re: home loans, that it began to be enforced.

There were a slew of lawsuits that accelerated after that Fed report came out, under the auspices of the CRA.

For example, AG Reno (Clinton I) sued several banks in 1993 (First National Bank of Vicksburg and Blackpipe State Bank for racial discrimination and in 1994 sued Chevy Chase Federal Savings Bank.

Furthermore, the fed was under pressure to use CRA as a stick for banks seeking to open new branches and ATM machines and merge with other banks. For example, in 1993, the federal reserve denied an application by Shawmut to acquire New Dartmouth Bank. The transaction was only allowed to proceed after it paid a million fine to compensate minority applicants who may have been denied loans. This arrangement was squeezed out of the bank by AG Reno.

And so on (I won't list all the lawsuits and enforcement actions here).

Most people don't know this, but in 1995, at the behest of Pres Clinton, CRA regulations were revamped to give it more teeth.

The rules became more performance-based and established clearer and more objective performance standards for determining whether a bank was in compliance with CRA standards. “The new rules went into effect January 31, 1995 and featured: strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups [like ACORN – FWW] to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to target to groups to collect a fee from the banks (as of 2000 $9.5 billion had been paid to such nonprofit groups). The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were ‘risky mortgages.’” Clinton Administration Changes of 1995

I could on and on and on ... but the enforcement of CRA, that really began in earnest with Clinton, basically bullied banks into lending to deadbeats.

[spence]

Originally Posted by fishpoopoo

I could on and on and on ... but the enforcement of CRA, that really began in earnest with Clinton, basically bullied banks into lending to deadbeats.

I'm not sure the data really demonstrates this though. Clearly that's not the position of the Heritage Foundation expert I quoted above. My assumption is that he's undertaken a very thorough and conservative analysis of the situation.

There are a good number of articles by economists (i.e. not pundits or pundit economists ) that basically come to the same conclusion. That the CRA hasn't changed much since 1995, yet the sub-prime issue didn't inflate until a decade later, that the default rate of sub-prime loans originated under CRA regulation was about the same as prime, and that a huge % of sub-prime lending was actually made by banks outside of CRA regulation.

Sowell is being a bit misleading when he tosses out numbers like "HUD also set a 42% target for Freddie Mac and Fannie Mae (FM & FM) to buy mortgages for people whose income were less than an area's median."

This was certainly true from 1997-2000, although lending "below median" is a pretty big group and doesn't necessarily indicate sub-prime borrowers. The target for those actually considered "low income" was only 14% and nothing in the CRA stipulates a bank has to knowingly make a bad loan.

Interestingly enough, both these numbers were actually raised in 2001 (50% and 20% respectively) while Denny Hastert was Speaker.

Further, the act that started these targets was put into place in 1992. I believe the general idea is to keep the GSE's aligned with what they believe the market will actually be doing over the coming few years. In other words, it's reactive rather than proactive.

The net being that these regulations have been around for a while, but didn't seem to cause any problems until just recently. While the CRA may certainly be a factor -- as any regulation impacting the mortgage market would be -- it doesn't seem to deserve the "root cause" status that pundits like to give it.

Sowell is going to oppose anything that smells of free market intervention, although I'd note that the first commercial bank in the USA was a government run institution

-spence

[fishpoopoo]

Originally Posted by spence

The net being that these regulations have been around for a while, but didn't seem to cause any problems until just recently.

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.

[spence]

Originally Posted by fishpoopoo

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.

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

[fishpoopoo]

Originally Posted by spence

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.
-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.

[fishpoopoo]

Originally Posted by spence

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

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.

http://sec.gov/Archives/edgar/data/3...2877exv3w1.htm

Not later than 4 months after October 28, 1992, the corporation shall appoint an Affordable Housing Advisory Council to advise the corporation regarding possible methods for promoting affordable housing for low- and moderate-income families.

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



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.

Fannie Mae Eases Credit To Aid Mortgage Lending - The New York Times


September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
WASHINGTON, Sept. 29— In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

[fishpoopoo]

double tap.