18 thoughts on “The Community Reinvestment Act

  1. Godzilla

    It was probably one of the causes yes but the main cause IMO was the low interest rates. Did you notice this happened not just in the US but all over the Eurozone as well? In both cases the main reason IMO was easy access to credit. We are presently at historically low interest rate levels curiously just like before the Great Depression. Contrary to what some people think it wasn’t only the poor people who defaulted on their loans.

    1. ken anthony

      Why aren’t you focusing on the source of low interest rates?

      Banks loan money for profit. They are a business. Unless government comes along and mucks up that very sensible arrangement.

      Govt. is loaning money to banks at almost zero interest. Is that the right thing to be doing with taxpayers money (borrowed at a higher rate no less.) These govt. folks shouldn’t be fired, they should be in prison. Again, who is it that is mucking up our economy?

      The C.R.A. came about during Carter right? Good intentions should never trump adult responsibility. The govt. in this case went beyond by forcing banks to comply with their idiocy. Only govt. can destroy the checks and balances that exist in economic laws. Let them work. Leave them alone.

      I’ve got my torch and pitchfork ready.

      1. Rick C

        “The C.R.A. came about during Carter right?” Yes, and it was enhanced repeatedly, particularly when Clinton was in office.

  2. Ed Minchau

    You’re right, Godzilla, it couldn’t have anything to do with banks being forced by law to loan to people who couldn’t possibly keep up with payments even under those historically low interest rates. Just like the 1981 recession when interest rates were sky high.

    1. Karl Hallowell

      Ed, easy credit creates economic bubbles. What I think the CRA did was create a weakness which helped start an asset bubble in real estate. It might have happened anyway. Where else was that money going?

      1. Karl Hallowell

        Heh, I read the graph a bit more carefully. Six trillion in affordable homes loans? That’s more than a weakness.

  3. Larry J

    My wife and I just bought a new home last Friday. The last time we took out a mortgage was for a rental property back in 2007. Prior to that, our last mortgage for ourselves was in 1999. Based in part on the excesses of prior years (back when you could get a mortgage if your bones showed in an x-ray) and reportedly in part due to the Patriot Act, getting this mortgage was a months-long exercise in frustration, and this despite credit scores over 800, a 33% down payment and a low 7-figure net worth. I went through a renewal of my TS/SCI security clearance earlier this year and it didn’t involve 1/10th the paperwork or hassle as this mortgage. As it was, we closed a day late and still didnt’ know if the loan was complete until a couple hours before closing.

    The previous excesses were absurd. People could get mortgages without any proof of income, often for 125% or more of the home’s assessed value. The mortgages were then sold (and often resold many times) before being sold as “mortgage backed securities” to gullible individuals and governments. The situation was ripe for fraud, both from the home buyers and the lenders. When the bubble popped, it weakened not just the US economy but economies around the world.

    Today, the pendulum has swung too far in the other direction. I’ve heard from others who have had just as much trouble getting a mortgage as we did. One step towards improving the housing market is making it possibe (but not absurdly so) for people to obtain mortgages. When I hear that housing sales are down, all I can say is “Well, duh.”

  4. JJS

    The irony of all this it the present government (Populated by many of the principals that caused this problem.) are running sham programs that help virtually no one stay in those homes they cannot afford (The logical thing to do.) and at the same time pat themselves on the back for “Trying” to help those that have been caught in the claws of the greedy corporate banking.

  5. Brock

    In part, but not really. Everyone’s gone looking for an explanation that fits their political views, and is finding them. But these things just made the situation marginally (in the econometrics sense) worse; they’re not the meat of the matter. Same for subsidies like VHA.

    I (am a lawyer and) was involved in a class action litigation against a major corporate participant in this whole lending debacle (you’ve heard of them; their senior management was in the news). I read their personal emails, both internal and with their counterparts within the financial system.

    The simple fact is that this was a normal financial hysteria, as happens fairly frequently throughout human history. Tulip bulbs, South Sea stock, railroad stocks, dot.com stocks, residential housing, etc. Trust me when I tell you that the major participants in this on the banking side were convinced that “this time it’s different”. Or rather, that it wasn’t different. There’d never been a +20% correction in residential housing before, so they assumed it could never happen in the future.

    Boom. Done. That’s the whole explanation.

    And the reason this was global is because the the banking sector is global, and the hysteria spread memetically. American bankers started selling packaged mortgages to European pension funds, and the European bankers were like “We need to get in on this action or we’re out of business.”

    There are a few banks and jurisdictions which escaped the real estate collapse pretty much unscathed, and the reason is that they never participated in instruments that allowed for runaway price growth. Simply put, houses were going up in price because (1) there were new instruments that allowed them to use more leverage, and (2) some Banks were dumb enough to sell them.

    Specifically I am speaking of (1) HELOCs and 80/20 loans (some were even 80/25!) that let mortgages exceed 4:1 leverage, (2) ARMs, and (3) any sort of balloon mortgage. And especially any loan that uses all three of those tools.

    You see, most people don’t buy a sticker price. Especially the financially illiterate ones with bad credit. They buy the monthly payment. If they can “make rent”, they buy the house. Even if it’s disclosed 6 ways from Sunday that this payment “May increase” after 5 years when the balloon comes due and the ARM resets, they don’t plan that far in advance. That’s why they’ve got bad credit in the first place. (Trust me – I saw the internally generated consumer surveys)

    Check the link in my name for just one example. Texas restricted just some of these instruments and saw a huge benefit in terms of avoiding both the hysteria and the hangover.

    Germany had even more strict lending requirements (lower leverage/more cash up front, no balloons or ARMs, etc.) and guess what? No bubble.

    —————————

    I realize this message is difficult for libertarians to read, but sometimes people do make really stupid decisions en masse. Even when it’s in their best financial interest to act carefully. Still happens. That’s not an open shut case for regulations “protecting people from themselves”, but before we can even talk about whether those regulations are good or not, you need to understand the problem.

    1. Curt Thomson

      You seem to be saying: “Get rid of the instruments…” sorry… “Get rid of the instruments and… Boom. No crash.” Did you even read the link?

      We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often.

      Every. Quarter. … sorry… Every. Quarter.

      You don’t have to lean libertarian to see where it all began. It’s right there. I realize it’s a tough message for those who are convinced that greed has got to be at the bottom of it all. But there it is. The financial industry has been creating new instruments for as long as it’s existed. In it’s never ending quest for greater efficiency it will continue to do so. When governments tell banks they must make loans to people who can’t pay the money back, one can expect trouble.

      Boom. Done. That’s the whole explanation.

      1. Brock

        Yes, I read it. I’ve also read plenty else on the subject, including many materials not subject to public review. (Only the emails submitted into evidence as part of a litigation are a public record. The rest are still private.) Sorry to pull the authority card, but it’s the best I can do and still keep my law license.

        I understand perfectly well that CRA added to the problem “at the margin”. So did loan subsidies that lowered the rate. But that is not the primary driver. The main driver was the combined power of (1) the perception of (non-) risk in the portfolio by bankers, and (2) the high-leverage/ARM/balloon mortgage products that allowed financially illiterate people to bid up housing prices.

        Essentially what happened here was credit inflation that focused on housing. The bankers started lending massive new amounts of credit to buyers, which essentially multiplied the money supply. Normal inflation and auction processes then drove up prices (just like art goes up when times are flush in finance or tech, and down when times are bad). When the money supply/credit was sucked out of the system in 2006 – 2008, crash.

        I don’t have a spreadysheet to break these numbers out, but I’d call it (conservatively) 80% hysteria, 20% bad government programs.

        1. ken anthony

          Brock, You’re saying consumers bought the snake oil. But that’s not the cause.

          First, I think it’s common for people that got an A.R.M. to try to get a fixed rate at their first opportunity. They understood going in they had a ticking clock. You can question consumer intelligence, but they do regulate markets. They are not the source of the problem.

          The banks are a business. They loan money for profit. If nobody is twisting their arms they do a good job of that or they fail so those that are doing a better job take up the slack. The banks are not the source of the problem.

          People are stupid and greedy. Economic laws handle that. What they can’t handle is political manipulation. As long as we allow scapegoats to misdirect the real cause goes uncorrected.

          1. Brock

            Sorry Ken, but I disagree.

            Maybe you didn’t buy the snake oil. And I certainly didn’t buy the snake oil. (Despite making good money as an attorney I waited until 2012 to buy my first home) But many people DID buy the snake oil. There were retirees cashing out their 401k money so they could play the buy-and-flip condos game in Miami (really). That is the very definition of “mania”, as in “too crazy for crazytown”.

            Further, if the banks are a business that loan money for profit, they’re doing a really bad job of it. They’ve lost billions and billions on bad real estate loans. AIG, Freddie Mac and Fannie Mae have lost over a trillion all together.

            People ARE stupid and greedy. Unfortunately, during the oughts, their stupid overpowered their greedy.

        2. Curt Thomson

          Essentially what happened here was credit inflation that focused on housing.

          “credit inflation” that was “focused”. Why was it focused?

          1. Brock

            “Why was it focused?”

            Because housing was the asset that banks thought couldn’t go down. They wouldn’t lend money to buy sailboats. Everyone knows boats have virtually no re-sale value. But homes? Those “always” have “excellent” resale value.

            Credit inflation isn’t like money inflation. Money inflation inflates everything. But credit decisions are made on a case-by-case basis, so only the “good credits” get inflated.

            Same idea behind why student loans keep inflating. Their non-dischargeability makes them a “good credit”.

          2. Curt Thomson

            No. It was “focused” because the government stepped into the market and told everyone they were changing the rules. They said “don’t worry, what we’re doing won’t affect anything significantly, just at the margins.” 30 years of margins later the rooster came home.

  6. Peterh

    Banks could borrow at ridiculously low rates from the Fed (effectively government), instead of at free market rates from depositors.

    Banks could sell risky mortgages for Fanny and Freddy (effectively government), passing off the risk.

    Banks were threatened with consequences for “discrimination”, handed down by government, if they didn’t offer mortgages to certain uncreditworthy borrowers.

    Bottom line, Banks made foolish and risky loans they as a rule would not have made in a free market.

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