<p>I am happy to hear that some personal examinations are better than others. It does not change a thing though. We all have differences in our personal examinations, so?</p>
<p>MiamiDAP, I got an up-close look at the history of one large mortgage lender which operated through 2008 before going bankrupt, which allowed me to personally verify what caused them to do what they did. The lender initiated thousands of loans, many of them “toxic.” The company wasn’t under government regulation. They weren’t “forced” to lend anything to anyone. They did it quite enthusiastically, and made a lot of money doing it. The owners got rich and walked away with tens of millions before the company went bankrupt. </p>
<p>The company originated the loans, temporarily funded them, then sold the loans in bundles to major financial institutions - some banks, American and foreign, some not. Again - government policies about who should loan to whom had nothing to do with it. They were part of the creation of alternative lending processes in the first decade of this century, processes which flourished almost entirely outside of conventional banks and government regulation. </p>
<p>But that’s just my personal confirmation of a well-documented “actual fact” - the lending frenzy was led by a lending process which was outside of the traditional mode of conventional banks. The lenders who originated the loans - some of which were banks, some not - weren’t loaning their own money. They just acted as a conduit to other investors which held large groups of loans in portfolios. </p>
<p>You don’t actually know what the process of initiating, processing, funding, reselling and administering a mortgage is. You’re just repeating spin you’ve been told which corresponds to your quirky world view. But that’s why it’s good to go outside your fact bubble occasionally – to test your opinions against “actual facts.” Learning “actual facts” does change things.</p>
<p>A more balanced summary.</p>
<p><a href=“http://www.uvu.edu/woodbury/jbi/volume8/journals/SummaryofthePrimaryCauseoftheHousingBubble.pdf[/url]”>http://www.uvu.edu/woodbury/jbi/volume8/journals/SummaryofthePrimaryCauseoftheHousingBubble.pdf</a></p>
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<p>[Study</a> Says Community Reinvestment Act Induced Banks To Take Bad Risks - Hit & Run : Reason.com](<a href=“http://reason.com/blog/2012/12/21/study-says-community-reinvestment-act-in]Study”>Study Says Community Reinvestment Act Induced Banks To Take Bad Risks)</p>
<p>Maybe MiamiDAP is right.</p>
<p>According to the credit agencies the vast majority of mortgages sold under the CRA were AAA rated (or whatever stellar rating they use) so how is the CRA to blame? I thought the credit agencies were private businesses. Did the government force them to rate the CRA mortgages as they did?</p>
<p>Now if these loans were forced on the banks because of the CRA but the credit agencies rated them properly so the banks could not package and sell them how many CRA loans do you think the banks would have sold and held on their own? Is there any doubt in your mind that the banking lobby would have been able to say look these loans stink and they put the institution at risk. Instead the credit agencies failed us and the banks made money.</p>
<p>Here is a couple paragraphs about the CRA. Please note the last line- safe and sound operation.</p>
<p>The CRA directs federal banking regulatory agencies, including the Federal Reserve, to use their supervisory authority to encourage banking institutions to help meet the credit needs of all segments of their local communities. These communities, referred to hereafter as CRA assessment areas, are defined as the areas where banking institutions have a physical branch office presence and take deposits, including low- and moderate-income areas. The banking agencies periodically assess the performance of banking institutions in serving their local communities, including their patterns of lending to lower-income households and neighborhoods, and take the assessments into consideration when reviewing the institutions’ applications for mergers, acquisitions, and branches.</p>
<p>The CRA emphasizes that banking institutions fulfill their CRA obligations within the framework of safe and sound operation.</p>
<ol>
<li>The CRA has been in effect since 1977.</li>
<li>The CRA affects only deposit-taking banks, not loan companies. </li>
<li>From 2004-2006, 11% of all mortgages counted toward the CRA. Of these, 17% were out of the ordinary, meaning made under the CRA’s “special lending programs”. That 1.87%. </li>
<li>CRA loans were 70% less likely to default than loans made to similar borrowers outside the CRA (like through a loan company). A Fed study showed CRA loans were 60% less likely to be in foreclosure. </li>
</ol>
<p>But the main issue is the idea that somehow government policy “influenced” or “distorted” the market so it acted differently. It’s sort of an impurity idea that takes small effects and extends them as though they’re systemic poison. The CRA probably did have a small effect in encouraging more lenders to participate in lower-income areas. Why? Because CRA lenders were regularly profitable - or marginally profitable - with those mortgages. That speaks of a potential market opportunity. That is true every time government creates something - like a highway. That it doesn’t always happen, that “impurity” doesn’t induce markets to rely, is rather obvious: just go into any lower income area and you see government agency after government agency and no private money. The “impurity” idea is essentially that government induced more money into this market and that led other, apparently stupid and unsuspecting businessmen, to jump in. They don’t do that. Just go into a lower income area. They jump in when they see a chance to make money and they stay if they actually make money. That’s how gentrification works.</p>
<p>Other lenders did jump in, made much less careful loans - in many case because they just acted as originators - and the securitization apparatus misevaluated the credit, misevaluated the worth of the mortgages, misevaluated the default rates, and misevaluated the entire concept of creating “default proof” securities. Some people will always find a way to blame government for what private business did but if you look at the argument it means: the government told depository banks to make more loans in the areas where they take deposits and those banks did so, carefully, and made some profits with those loans, not a lot but some, and that invited a bunch of other players into these areas who then acted stupidly and greedily and these other players, relying on extensive mathematical models of their own creation which showed overall default was impossible, not only tried to extract profits from these areas but bet so much that they lost their entire businesses when the thing imploded. To most people, that process looks like the government did some good, that depository banks were in fact lending more in the communities where they actually took deposits, and then loosened regulations on lending coupled with the growth of an unfettered securitization industry created a massive bubble that didn’t center on CRA loan areas but which started in higher income areas and then spread into CRA lending areas as the massive securitization machine needed to be fed. But then the “purity” nuts will never understand logic.</p>
<p>So yes, there was a government role in creating realization that you can make money in CRA lending areas. But that’s true of any government role and yet only in this one case where private industry, freed of regulation, was allowed to go nuts. The securitization scheme turned out to be essentially a huge pyramid scam in which new money was required all the time to pay out the people up the pyramid. This scam was unleashed on us by private industry because they found a way to make profits out of trading pieces of paper that actually had little underlying value. By detaching value from the dirt, it no longer mattered much what was actually lent and to whom. The government didn’t do that. All the government did was show that rational people can make money if they’re careful in lower income areas. That happens all the time. It sometimes works and sometimes doesn’t.</p>
<p>There were many causes, but ignoring the influence of the CRA is simply silly and based on political agendas not the facts. </p>
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<p>Read More At Investor’s Business Daily: [New</a> Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com](<a href=“http://news.investors.com/ibd-editorials-perspective/122012-637924-faults-community-reinvestment-act-cra-mortgage-defaults.htm#ixzz2SKu3SnJP]New”>http://news.investors.com/ibd-editorials-perspective/122012-637924-faults-community-reinvestment-act-cra-mortgage-defaults.htm#ixzz2SKu3SnJP)
Follow us: @IBDinvestors on Twitter | InvestorsBusinessDaily on Facebook</p>
<p>Say what you want, but I’m going with the NBER.</p>
<p>We have a couple of priblems with these arguments. 0ne is people have trouble with arithmetic. If people did not have trouble with arthmetic, the cra arguments would be less likely to exist. </p>
<p>Which leads to this. People want to believe what they want to believe. Everybody has their own reality, but no, not all realities are created equal. Some realities are not real.</p>
<p>I could study up on brain surgery, but when an issue comes up, when push comes to shove, are you going to believe a brain surgeon who has done surgeries for 20 years, or me who has researched the topic a little? </p>
<p>If my politics or religion is right, some people are going to believe me over the surgeon. </p>
<p>I made markets in the financial industry for a long time. I probably traded with some of the posters. When the financial crisis hit, I was trading over 1 million shares of qqq… Everyday. I think the ticker was qqqq then. </p>
<p>So… When I am told how the financial crisis went down, and some writer in a political rag says some nonsense to score some ideological points, I realize this has nothing to do with me. Yeah… I would like people to believe me because I dont make stuff up to make people feel better. Yet, a part of me understands that people have to believe. It helps them get through life. I could see myself become delusional over some serious stuff myself. Not financial matters though.</p>
<p>I have a friend that thinks John Stossel knows more than me when it comes to financial matters. The guy is on tv. He is on fox.
Oooooook.</p>
<p>When I read some of the frustration of posters who really know, just remember, the reactions to your posts aren’t about you.</p>
<p>In economics averages are not very relevant as most important things work at the margin. On average most loans did not have trouble during the real estate bust. But when you go from a 1% default rate to 10% you have big problems. And the fallout of that to average home values can be very large as home prices also get set at the margins. That’s why CRA was more important than the average stats show and it also made the private loan marklet feel free to follow and reduce standards. Psychology matters too. Did the private sector do it to be good guys. Hell no but now they had a free pass from the feds too.</p>
<p>[Charlie</a> Munger says bankers ?are like heroin addicts.? | Kathleen Pender ? Net Worth Plus | an SFGate.com blog](<a href=“SFGATE: San Francisco Bay Area News, Sports, Culture, Travel, Food and Drink - SFGATE”>SFGATE: San Francisco Bay Area News, Sports, Culture, Travel, Food and Drink - SFGATE)</p>
<p>"In an interview on CNBC, He said that Cyprus demonstrates, “an old truth, you can’t trust bankers to govern themselves.
A banker who’s allowed to borrow money at X and loan it out at X plus Y will just go crazy and do too much of it, if the civilization doesn’t have rules that prevent it.”</p>
<p>
Actually, you’re not. You’re “going” with someone who submitted a “working paper” to NBER.
</p>
<p>Like I said before - right wing spinmeisters have generated a theory that CRA somehow “psychologically” made bankers (and the non-bank lenders, who were not covered by CRA) issue bad loans - an argument Barrons repeats above.</p>
<p>I find that to be the kind of argument you make when data doesn’t really support your claim. The idea that the existence of the less than 2% of the loans which were issued under CRA “special lending programs” nonetheless “forced” banks to issue lots of other “toxic” mortgages to other people simply makes no sense. That’s why you have to resort to “psychology” (or voodoo) as an explanation for why A caused B.</p>
<p>Believe me, the mortgage brokers I saw could not have cared less about CRA loans. They did care about the number of loans they could churn through the system, since their profits were based on loans funded and resold, and nothing else.</p>
<p>Incidentally, the article cited by Barrons in post 83 is a pretty good explanation of the entire process, without dogmatic overtones. Thank you for the reference, Barrons. I found this part to be particularly germane:
</p>
<p>Yet it was still not the defaults which caused the economic implosion.</p>
<p>It was the way they were truanched, cut up and sold off so that even high risk mortgages were valued and “insured” as AAA investments. And, even that wasn’t the real issue. The real issue is that these were held off balance sheet and nobody even knew how much risk they had on at these places.</p>
<p>In the end it was playing with the mortgages and the “market” that grew up around it that caused the market implosion, not the mortgages OR the defaults.</p>
<p>Poetgrl and kluge, I am sorry. It was rhe cra. I just know it.</p>
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<p>I used to own a mortgage brokerage. Employees working as mortgage originators receive commission based on making loans. They could care less whether there is a default. Mortgage companies that originate and also underwrite their mortgages (and then resell the mortgages to FNMA etc) care very much about who they place in mortgages and more particularly whether they comply with laws governing loan making. When people do not get loans, they get made. When people in certain areas of town don’t get mortgages they blame it on the lender and not their lousy financial history. It takes just one greedy lawyer with an agenda and the right jury to take down the mortgage company. The incentive to make loans was making money by selling your questionable loan to FNMA. CRA was the excuse justifying mortgage companies to take loans from people with bad financial histories or made up financial histories. If you think CRA had no influence on mortgage companies, you simply do not know what you are talking about. </p>
<p>The study compared lenders under the CRA to lenders not under the CRA and found that lenders under the CRA made more risky loans. It does not take much intelligence to figure out that the CRA affected lending practices negatively.</p>
<p>I can remember in the mid 90s watching (I think it was) Chuckie S screaming at lenders for not making loans to people who faithfully paid their rent but could not buy a house because they could never save up enough money for a down payment. The people who could not make their down payments were the type of borrowers who where the first to go under when interest rates when up.</p>
<p>Razorsharp, did your mortgage brokerage firm make loans that you knew could not be oaid back? </p>
<p>Private Mortgage firms were exempt from making cra loans, right?</p>
<p>So… Your firm did not make any cra loans, did it?</p>
<p>Cra loans had a slightly higher default rate than other mortgage loans before the crusus, right? That makes sense because the buyers were not well off.</p>
<p>I want to know how this works. Razorsharp, Which firms actually provided the mortgages before they were sold? Did you represent banks?</p>
<p>Who is Chuckie S and why was he screaming?</p>
<p>Seriously, it was the leverage on the off balance sheet instruments which imploded the markets. They had these truanches cut up and packaged and leveraged and they didn’t even know what the leverage on it was since they didn’t even know how to value it. It was all about hiding the actual value, so how could they know the leverage?</p>
<p>THAT imploded the economy. </p>
<p>Defaults on the bad mortgages would have created some headaches, but not the vaporizing effect we all saw.</p>
<p>A federal reserve study on cra…</p>
<p>Cra did not cause the financial crisis…</p>
<p>[Did</a> the CRA cause the mortgage market meltdown? - Community Dividend - Publications & Papers | The Federal Reserve Bank of Minneapolis](<a href=“http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136]Did”>http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136)</p>
<p>This… I know this link might not work…it is also in post 88
<a href=“http://news.investors.com/ibd-editorials-perspective/122012-637924-faults-community-reinvestment-act-cra-mortgage-”>Error - Investors.com;
defaults.htm#ixzz2SKu3SnJP</p>
<p>Where did the 6 trillion dollar number come from?</p>
<p>The mortgage debt in the United States is 10 trillion…
I am just counting 1 to 4 unit residences…</p>
<p>Bank of America said 6 percent of residential loans were cra loans…
Extrapolating that out would be 600 billion in cra loans…not 6 trillion…</p>
<p>Who can explain the 6 trillion for me in razorsharp’s link? The 6 trillion in the study…</p>
<p><a href=“http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm[/url]”>http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm</a></p>
<p>At least around here (Minneapolis-Saint Paul) the riskiest mortgages were not in inner city communities covered by the CRA, but in exurban fringe communities where ordinary middle-class (and predominantly white) folk got overextended on highly speculative real estate investments they couldn’t afford, based on a mutual mistake by both borrowers and lenders in assuming real estate prices could only go up. The borrowers were mostly just naive; they bought into propaganda from lenders and real estate agents that said buying real estate was a “no lose” proposition. The mortgage originators were more cynical: they may have recognized risk, but they knew they could offload that risk by packaging and securitizing the loans. The ultimate chumps were the supposedly sophisticated players in the secondary market–primarily investment banks, as best I can gather–who wrote off individual borrower risk by resorting to the theory that in a generally appreciating market, they are insured against individual borrower risk by spreading that risk across many borrowers, and by holding valuable property interests in land,which they falsely assumed would always be an appreciating asset.</p>
<p>The financial crisis, coupled with declining land values, made that deal a losing proposition all around. To blame all this on the CRA is pretty much to stick one’s head where the sun don’t shine.</p>