Subprime Questions, We Are All Confused

CT

Recently I had a visit from a gentleman named, Chris. Chris seems to be left leaning and runs a fairly informative website on health care issues. If you are interested here is his link, Single-Payer Healthcare Blog. But Chris's political viewpoints are not the topic. He asked some very poignant questions about the Community Reinvestment Act in a polite post and was curious about obtaining some data. Here is Chris's post.

Thanks for this post. It clarifies a few things for me as information has been hard to find.

Regarding "a massive liberal community giveaway program. The regulations forced on these institutions, along with their greed, gave rise to the Sub Prime Bubble."

Are you aware of any data indicating why this is a "giveaway". Weren't these mortgage and business loans?

And are you aware of what was "forced" on the institutions? My understanding was that they were forced to consider underserved areas (i.e., no more redlining) but what else were they forced to do? It seems there were lots of people sounding alarms, but not that low income people were seeking loans they couldn't afford, but that lenders were sucking people into loans they shouldn't get. Hence, the push back against predatory lending in some states.

Any information you can provide would be appreciated!

I liked his approach so much that I figured a post would be the best way to answer his questions.

1) Are you aware of any data indicating why this is a "giveaway". Weren't these mortgage and business loans?

Is it a giveaway or entitlement program? Giveaway, no, Chris caught me on a semantic of poor verbiage. Entitlement, yes. Look at the definition of entitlement from Merriam-Webster online:

1 a: the state or condition of being entitled : right b: a right to benefits specified especially by law or contract

2: a government program providing benefits to members of a specified group ; also : funds supporting or distributed by such a program

3: belief that one is deserving of or entitled to certain privileges

But that was never my gripe, nor do I blame CRA loans or Community Development Financial Institutions, my major argument is that the CRA being paired with the FSMA is what set things into motion. Susan White Haag of the Brookings Institute wrote a very informative paper called COMMUNITY REINVESTMENT AND CITIES: A LITERATURE REVIEW OF CRA’S IMPACT AND FUTURE. Here is an excerpt from pg 33.

However, the literature reflects the mainstream secondary mortgage market becoming increasingly responsive to low income housing and community development needs in recent years, driven in part by the impetus of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which required HUD to set annual affordable loan-purchase targets for Fannie Mae and Freddie Mac; but also by demand for products that can satisfy the investment test compliance criteria.22 Thus, secondary market products, such as mortgage-backed securities and other instruments backed by affordable housing and community development loans, that provide a source of investment test credit at the same time promote the liquidity of the secondary market for the CRA loans that underlie the instruments. Thus, the revised CRA regulations are helping to foster increased secondary market activity by supporting both sides of the secondary market equation.

It did not work, this is what allowed Wall Street to come along and further abuse subprime loans due to the increased distribution form 1998-2006. If you need a visual on the rise of subprime distribution through those years please refer to An Obama Fact Check, Sub Prime Finger Pointing.

Chris's second question was about predatory lending. I personally have found no data on the statistics of predatory lending practices in regards to the subprime bust. But I can say that there was malfeasance on the part of mortgage companies and underwriters by misrepresenting the credit history of individuals seeking housing loans. How many exactly I do not know, but it is definitely part of the problem.

But the other part is the individuals seeking the housing loans, they bear a responsibility in this also. A person knows how much they can afford and how much they cannot. I understand the desperation in wanting your own home especially as low as home prices and interest rates were at the height of the bubble. It does not relinquish them of their responsibility either. One of the actual government intervention policies I am in favor of is raising credit standards, it might just force Americans to start saving instead of living off of credit. As far as banks being forced to comply with CRA regulations again refer to any number of posts I have written on the topic, look for labels with Financial Services Modernization Act, Financial Modernization Act ,subprime crisis, subprime mortgage, Glass-Steagall, or Gramm. These writes get repetitive and exhausting.

There a few things I would like to add to the end of this. The first, I actually came across the information about the CRA on September 15th and posted about it on September 16th. The only reason I am saying this is not to pat myself on the back or say I am ahead of the power curve. It is to show that I did not come across this because some partisan wonk wrote an article blaming just the CRA and I ran with it. That reasoning is to simplistic, as is the blame on deregulation. I actually did a little research and drew my own conclusions. If I can anyone can, I am no smarter or better educated than anyone out there, you have to be willing to get the information and look beyond partisan politics sometimes. Lastly, I would like to thank Chris for being decent and asking some great questions. This is why we need discourse, it keeps us honest.

-CT

"Happy Hunting!"