Subprime lending disaster Clinton admin's fault

F

fossten

Dedicated LVC Member
Joined
Apr 24, 2005
Messages
11,817
Reaction score
6
Location
Louisville
The Real Culprits In This Meltdown

By INVESTOR'S BUSINESS DAILY

Posted Monday, September 15, 2008 4:20 PM PT

Big Government: Barack Obama and Democrats blame the historic financial turmoil on the market. But if it's dysfunctional, Democrats during the Clinton years are a prime reason for it.

--------------------------------------------------------------------------

Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the "trickle-down" economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend.

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

Raines was accused of overstating earnings and shifting losses so he and other senior executives could earn big bonuses.

In the end, Fannie had to pay a record $400 million civil fine for SEC and other violations, while also agreeing as part of a settlement to make changes in its accounting procedures and ways of managing risk.

But it was too little, too late. Raines had reportedly steered Fannie Mae business to subprime giant Countrywide Financial, which was saved from bankruptcy by Bank of America.

[By the way, Raines works on Obama's campaign as an economic advisor]

At the same time, the Clinton administration was pushing Fannie and her brother Freddie Mac to buy more mortgages from low-income households.

The Clinton-era corruption, combined with unprecedented catering to affordable-housing lobbyists, resulted in today's nationalization of both Fannie and Freddie, a move that is expected to cost taxpayers tens of billions of dollars.

And the worst is far from over. By the time it is, we'll all be paying for Clinton's social experiment, one that Obama hopes to trump with a whole new round of meddling in the housing and jobs markets. In fact, the social experiment Obama has planned could dwarf both the Great Society and New Deal in size and scope.

There's a political root cause to this mess that we ignore at our peril. If we blame the wrong culprits, we'll learn the wrong lessons. And taxpayers will be on the hook for even larger bailouts down the road.

But the government-can-do-no-wrong crowd just doesn't get it. They won't acknowledge the law of unintended consequences from well-meaning, if misguided, acts.

Obama and Democrats on the Hill think even more regulation and more interference in the market will solve the problem their policies helped cause. For now, unarmed by the historic record, conventional wisdom is buying into their blame-business-first rhetoric and bigger-government solutions.

While government arguably has a role in helping low-income folks buy a home, Clinton went overboard by strong-arming lenders with tougher and tougher regulations, which only led to lenders taking on hundreds of billions in subprime bilge.

Market failure? Hardly. Once again, this crisis has government's fingerprints all over it.
 
List of the top 25 Congresscritters who received campaign donations from FreddieMac and/or FannieMae:


1. Dodd, Christopher J
S
DEMOCRAT-CT
$133,900

2. Kerry, John
S
DEMOCRAT-MA
$111,000

3. Obama, Barack
S
DEMOCRAT-IL
$105,849

4. Clinton, Hillary
S
DEMOCRAT-NY
$75,550

5. Kanjorski, Paul E
H
DEMOCRAT-PA
$65,500

6. Bennett, Robert F
S
R-UT
$61,499

7. Johnson, Tim
S
DEMOCRAT-SD
$61,000

8. Conrad, Kent
S
DEMOCRAT-ND
$58,991

9. Davis, Tom
H
R-VA
$55,499

10. Bond, Christopher S 'Kit'
S
R-MO
$55,400

11. Bachus, Spencer
H
R-AL
$55,300

12. Shelby, Richard C
S
R-AL
$55,000

13. Emanuel, Rahm
H
D-IL
$51,750

14. Reed, Jack
S
D-RI
$50,750

15. Carper, Tom
S
D-DE
$44,389

16. Frank, Barney
H
D-MA
$40,100

17. Maloney, Carolyn B
H
D-NY
$38,750

18. Bean, Melissa
H
D-IL
$37,249

19. Blunt, Roy
H
R-MO
$36,500

20. Pryce, Deborah
H
R-OH
$34,750

21. Miller, Gary
H
R-CA
$33,000

22. Pelosi, Nancy
H
D-CA
$32,750

23. Reynolds, Tom
H
R-NY
$32,700

24. Hoyer, Steny H
H
D-MD
$30,500

25. Hooley, Darlene
H
D-OR
$28,750
 
Last edited by a moderator:
The investors business daily article posted above is unsubstanciated garbage.
If you google "subprime lending disaster,"there are countless articles as to what caused it, and no where did I read of any government regulations that caused the greed that preceeded the lending crisis.
It was grossly tied to the ever increasing cost of houses, and the greed that took hold because of escillating housing cost.
Obviously the editors at investors business daily have an axe to grind with the former president and his administration.
It is so easy to blame when a crisis raises it's ugly head, and to spout off that one administration, or another is responsible, without also spouting the proof of the accusation.
Like everything else, one needs to read the facts, then decide which is the truth.
Frankly the investors business daily has not offered any proof of what they stated in the article.
"Google", then make up your own mind.
Bob.
 
Bob Hubbard said:
The investors business daily article posted above is unsubstanciated garbage.... Bob.
Click to expand...

B.S. Bob.
McCain back in 2005 tried to deal with this mess but was shouted down by the Dems. Google that! Here I'll help.
-----------------------------------------------------------------------------------------

Quote in 2005: by Sen. John McCain R-AZ

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac—known as Government-sponsored entities or GSEs—and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

I urge my colleagues to support swift action on this GSE reform legislation."
 
MonsterMark said:
B.S. Bob.
McCain back in 2005 tried to deal with this mess but was shouted down by the Dems. Google that! Here I'll help.
-----------------------------------------------------------------------------------------

Quote in 2005: by Sen. John McCain R-AZ

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac—known as Government-sponsored entities or GSEs—and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

I urge my colleagues to support swift action on this GSE reform legislation."
Click to expand...

I see nothing in this post that would support the contentions of investors business daily that tthe Clinton administration was at all responsible for the greed shown by Fanny Mac/ May or countrywide.
It is out and out GREED that caused this meltdown, pure and simple.
Bob.
 
Bob Hubbard said:
I see nothing in this post that would support the contentions of investors business daily that tthe Clinton administration was at all responsible for the greed shown by Fanny Mac/ May or countrywide.
It is out and out GREED that caused this meltdown, pure and simple.
Bob.
Click to expand...
Denial is a strong emotion. Your statement cannot possibly be true. Google the "Glass Steagall Act" and include the word "repeal" and see what you come up with.
 
95DevilleNS said:
There's a mess in America, the good ole "Clinton did it" to the rescue.
Click to expand...
Blah blah blah...did you even read the article? The repeal of the Glass Steagall act meant the government could and did force mortgage lenders to lend to higher risk clients, which put the lenders at higher risk. Fortunately, the government, read: the taxpayers, have been told that we're underwriting that risk. This policy was the policy of the Clinton Administration. It is also notable that McCain tried to fix this problem in 2005 and was rebuffed by Democrats such as Barney Frank.

Sorry to throw the cold water of facts on your smoldering embers of whine.
 
Who's whining? You're the one pulling out the "blame Clinton" card, as typical, when the problem goes well beyond just Clinton.
 
fossten said:
Denial is a strong emotion. Your statement cannot possibly be true. Google the "Glass Steagall Act" and include the word "repeal" and see what you come up with.
Click to expand...

I did as you suggested, and it made for some interesting reading, once I clicked on "source" halfway down the page.
It would appear, that this "shell game" had been going on for a long time, not just during the Clinton administration.
Most, if not all, was seriously in play, long before Clinton signed the bill.
Lobbyist, congress, and time are the culprits in this doing away with the act.
While reading the article, one can only think of the outlandish greed of all the participants involved in the repeal of the act.
I don't think the Clinton administration is any more to blame than the rest of them who were involved.
The bigger blame SHOULD rest on Clinton himself for signing the bill but, had he not signed it, I am sure the congress would have mustered up enough votes to over ride his veto.
This act was a dead horse the day corporate america, and congress starting messing with it.
It is trivial to blame one administration for it's demise.
It was an effort over several administrations to scuttle the act.
Bob.
 
fossten said:
Blah blah blah...did you even read the article? The repeal of the Glass Steagall act meant the government could and did force mortgage lenders to lend to higher risk clients, which put the lenders at higher risk. Fortunately, the government, read: the taxpayers, have been told that we're underwriting that risk. This policy was the policy of the Clinton Administration. It is also notable that McCain tried to fix this problem in 2005 and was rebuffed by Democrats such as Barney Frank.

Sorry to throw the cold water of facts on your smoldering embers of whine.
Click to expand...
Slow down there, nibble lips.

Know your facts.

Parts of the Glass Steagall Act were repealed in 1999 via the Gramm-Leach-Bliley Act, which was sponsored by Republicans and had bi-partisan support. It certainly wasn't a Clinton initiative, but he did sign it and therefore bears some responsibility.

Glass-Steagall had absolutely nothing to do with forcing "mortgage lenders to lend to higher risk clients". It had to do with separating commercial and investment banks, so as to avoid rampant speculation, conflicts of interest, and indulging in "creative" investments which partially led to the Great Depression. In other words, regulation. Its repeal reopened those doors that will likely lead to the next depression.

Nor did the CRA "force" any banks to take on bad loans. It specified that loans must be "sound". Furthermore, private mortgage companies, which account for around half of the bad loans given out during the housing bubble, did not even fall under the purview of the CRA.

No, banks freely gave out bad loans because they saw the huge money-making potential of mortgage fees--mortgages they could then bundle up and sell off as investment vehicles to some other entity along with all the risks. But as with any pyramid scheme, once the base dries up, the top crumbles.

The housing bubble is all about lack of government regulation and oversight, not the over-abundance of it.
 
FROM 2003
http://query.nytimes.com/gst/fullpa...932A2575AC0A9659C8B63&sec=&spon=&pagewanted=1

New Agency Proposed to Oversee Freddie Mac and Fannie Mae
By STEPHEN LABATON
Published: September 11, 2003

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

The administration's proposal, which was endorsed in large part today by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors. Nor would it remove the companies' exemptions from taxes and antifraud provisions of federal securities laws.

The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session.

After the hearing, Representative Michael G. Oxley, chairman of the Financial Services Committee, and Senator Richard Shelby, chairman of the Senate Banking Committee, announced their intention to draft legislation based on the administration's proposal. Industry executives said Congress could complete action on legislation before leaving for recess in the fall.

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.

''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.

The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.

At the time, the companies and their allies beat back efforts for tougher oversight by the Treasury Department, the Federal Deposit Insurance Corporation or the Federal Reserve. Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. This year, however, the chances of passing legislation to tighten the oversight are better than in the past.

Reflecting the changing political climate, both Fannie Mae and its leading rivals applauded the administration's package. The support from Fannie Mae came after a round of discussions between it and the administration and assurances from the Treasury that it would not seek to change the company's mission.

After those assurances, Franklin D. Raines, Fannie Mae's chief executive, endorsed the shift of regulatory oversight to the Treasury Department, as well as other elements of the plan.

''We welcome the administration's approach outlined today,'' Mr. Raines said. The company opposes some smaller elements of the package, like one that eliminates the authority of the president to appoint 5 of the company's 18 board members.

Company executives said that the company preferred having the president select some directors. The company is also likely to lobby against the efforts that give regulators too much authority to approve its products.

Freddie Mac, whose accounting is under investigation by the Securities and Exchange Commission and a United States attorney in Virginia, issued a statement calling the administration plan a ''responsible proposal.''

The stocks of Freddie Mac and Fannie Mae fell while the prices of their bonds generally rose. Shares of Freddie Mac fell $2.04, or 3.7 percent, to $53.40, while Fannie Mae was down $1.62, or 2.4 percent, to $66.74. The price of a Fannie Mae bond due in March 2013 rose to 97.337 from 96.525.Its yield fell to 4.726 percent from 4.835 percent on Tuesday.

Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.

''The regulator has not only been outmanned, it has been outlobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ''Being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.''

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.
 
Last edited by a moderator:
Marcus said:
Slow down there, nibble lips.
Click to expand...
Slow down yourself, tinybrain.



Parts of the Glass Steagall Act were repealed in 1999 via the Gramm-Leach-Bliley Act, which was sponsored by Republicans and had bi-partisan support. It certainly wasn't a Clinton initiative, but he did sign it and therefore bears some responsibility.
Click to expand...
I'm aware of this. However, you're leaving out the names of Clinton cronies who not only got rich off this, but also obtained large campaign donations.

Glass-Steagall had absolutely nothing to do with forcing "mortgage lenders to lend to higher risk clients".
It had to do with separating commercial and investment banks, so as to avoid rampant speculation, conflicts of interest, and indulging in "creative" investments which partially led to the Great Depression. In other words, regulation. Its repeal reopened those doors that will likely lead to the next depression.
Click to expand...
Never said it did, nerd pile. I said that the repeal of it caused this.

Nor did the CRA "force" any banks to take on bad loans. It specified that loans must be "sound". Furthermore, private mortgage companies, which account for around half of the bad loans given out during the housing bubble, did not even fall under the purview of the CRA.
Click to expand...
You're wrong about this.

No, banks freely gave out bad loans because they saw the huge money-making potential of mortgage fees--mortgages they could then bundle up and sell off as investment vehicles to some other entity along with all the risks. But as with any pyramid scheme, once the base dries up, the top crumbles.
Click to expand...
I was a mortgage broker, and I know how CRA works. You're wrong. Companies could be punished if they discriminated in lending, while at the same time they could be punished for predatory lending. They saw the writing on the wall.

The housing bubble is all about lack of government regulation and oversight, not the over-abundance of it.
Click to expand...
Oh, the CRA doesn't regulate anything? :rolleyes:
 
Bob Hubbard said:
I did as you suggested, and it made for some interesting reading, once I clicked on "source" halfway down the page.
It would appear, that this "shell game" had been going on for a long time, not just during the Clinton administration.
Most, if not all, was seriously in play, long before Clinton signed the bill.
Lobbyist, congress, and time are the culprits in this doing away with the act.
While reading the article, one can only think of the outlandish greed of all the participants involved in the repeal of the act.
I don't think the Clinton administration is any more to blame than the rest of them who were involved.
The bigger blame SHOULD rest on Clinton himself for signing the bill but, had he not signed it, I am sure the congress would have mustered up enough votes to over ride his veto.
This act was a dead horse the day corporate america, and congress starting messing with it.
It is trivial to blame one administration for it's demise.
It was an effort over several administrations to scuttle the act.
Bob.
Click to expand...
I would remind you that McCain tried to warn people in 2005, and Democrats like Barney Frank shut him down.
 
Stubborn Ignorance

Here's what the U.S. Constitution says: "All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills." How many times have we heard politicians, pundits and guardians of our news media say that President Bush cut taxes, or Obama is going to raise taxes? The fact of the matter is that presidents have no power to raise or lower taxes. They can propose tax measures or veto them but it is Congress that has the ultimate power to raise or lower taxes since they can, with a two-thirds vote, override a presidential veto. The same principle applies to spending. Presidents cannot be held responsible for budget deficits or surpluses. A president cannot spend a dime that Congress does not first appropriate. Given these plain facts, are politicians, pundits and media people -- who persist in talking about a president cutting or raising taxes, or creating a budget deficit -- ignorant, stupid or deceptive?

Did President Clinton create more jobs, or did President Bush? Let's look at it. In 1996, I landed a job at Grove City College team teaching a course with one of its faculty members, Professor Dirk Mateer. I would like someone to tell me how President Clinton created that job for me. Did he call the college president and say, "Hire Williams"? Did he give Grove City College, a private college, resources to hire me? He surely didn't call me up and say, "Williams, there's a job waiting for you at Grove City College." So what precisely do people mean when they say this president or that president created jobs? You might argue, "You're right when it comes to a president creating jobs, but Congress can create jobs through appropriating money for infrastructure such as highways and bridges."

That's true in one sense and false in another. You can see this by asking, "Where does Congress get the money to create the jobs?" They won't get it from the Tooth Fairy or Santa Claus; they must get the money from taxpayers. That means if Congress collects $100 from a taxpayer for highway construction, he cannot use that $100 for some other expenditure that would have created a job. If Congress borrows the money for highway construction, it causes interest rates to be higher and therefore less job-creating investment. The bottom line is that Congress can only shift employment or unemployment but cannot create net new jobs.

Many politicians and pundits claim that the credit crunch and high mortgage foreclosure rate is an example of market failure and want government to step in to bail out creditors and borrowers at the expense of taxpayers who prudently managed their affairs. These financial problems are not market failures but government failure. The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.

The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."
 
so, what about the Community Reinvestment Act of 1977? How did, or didn't this have an effect in the housing market collapse?
 
Here is another interesting post on this subject.

And then there is this article:

John R. Lott Jr.: Financial Markets Are in a Mess

Financial markets are in a mess.

Securities giant Bear Stearns, saddled with sub-prime loan debt teetered on the verge of collapse last week. The drumbeat in the media and among Democrats is that we are supposedly either in or near a recession. Even the positive news is reported with claims that it is an aberration.

Politicians always seem to know better. Not satisfied with telling people what types of light bulbs to use and the size of cars they can drive, politicians in Washington have decided to replace financial markets and try legislating away the laws of supply and demand.

Last week congressional democrats introduced regulations to stop what they complained were "wild interest rate hikes" on credit cards. Before that Hillary Clinton advocated a 90-day moratorium on foreclosures and a five-year freeze on interest rates for sub-prime mortgages.

Yet, price controls don’t solve the problems with high interest rates. If people want to borrow more money than is available, interest rates rise, both to attract more to lend and insure that those who need what scarce money there is, are the ones who get to borrow it. If regulations prevent interest rates from going up, you get shortages and credit rationing.

The current mortgage crisis arose because loans were made with virtually nonexistent underwriting standards. There was no verification of income or assets, little assurance of the ability to pay the mortgage, and little or no down payment. So, with rules like these, who wouldn’t have expected defaults? In January, the Federal Reserve stepped in proposing strict regulations on what conditions should be met before loans would be allowed.

Democrats criticized the rules as not going far enough in determining when loans could be made.

But if lending money to people with so little credit worthiness were so obviously such a boneheaded mistake that even non-bankers see it, why would people who had billions of dollars at stake and years of experience lend out money this way?

To critics the answer seems simple: Greed.

Yet, no matter how greedy you are, would you think that loaning money to people who are likely to default with little collateral in their property was the way to riches? Would you lend your money out that way?

Obviously, no.

So, why did they make the loans? Government regulation.

Some of the very people who are now advocating new regulations were the same ones that forced through the regulations over a decade ago that caused the problems that we are facing today.

This all started back in 1992, when a Boston Federal Reserve study claimed to find evidence of racial discrimination. The Fed later used the study to produce a manual for mortgage lenders that: “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 is on the list of Fed’s “outdated criteria”? Such “discriminatory” factors as the borrower’s credit history, income verification, and the size of the mortgage payment relative to income.

But it turns out that the original study was mistaken.

Economists discovered that there were errors in the data the study used. Some minorities were listed as having wealth up to hundreds of times greater than they actually had, making it look like wealthy minorities were being turned down for loans. When the data errors were corrected minorities with the same financial background as whites had been at no disadvantage in getting mortgages.

There was an expected consequence of these easier loans: minorities were hit by higher foreclosure rates. Ironically, people who point to these higher rates as evidence of discrimination don’t understand that the regulations setup to make it possible to get loans without the qualifications also meant that they are more likely to default.

Indeed, two academics, Professors Ted Day and Stan Liebowitz at the University of Texas at Dallas, who criticized the Fed policy back in 1998, warned : “After the warm and fuzzy glow of ‘flexible underwriting standards’ has worn off, we may discover that they are nothing more than standards that lead to bad loans … these policies will have done a disservice to their putative beneficiaries if … they are dispossessed from their homes.”

Nor is this the first time that the government has created these problems. Most economists believe that the Savings and Loan collapse in the 1980s was due to federal deposit insurance. The government charged all banks the same rate for insurance, no matter how risky their investments.

Banks that made riskier investments didn't pay a higher insurance premiums and could afford to offer higher interest rates than their competitors and attract depositors. But while these banks grew, they were also more likely to go bankrupt. It was akin to government flood insurance that encouraged people to keep on rebuilding their houses next to rivers that flood.

The “new” solutions such as a moratorium on foreclosures will have just as certain consequences. They will make lending money riskier, scaring away those willing to lend money, and raising mortgage rates.

One might hope that the mess that politicians have already made of the financial system would give them some humility. Yet, the pattern is all too familiar. Government regulations generate problems that lead to calls for even more regulation. Will politicians get the blame that they deserve for the financial mess that they created?
 
Money is worse than long words...

I give mine to a friend who is a top fund manager for Janus... I suppose I could have also kept it in my mattress...

But, he (one of the most conservative people I know) has me subscribed to this site - and they had an interesting article a few months ago -
http://tlrii.typepad.com/theliscioreport/2008/07/presidential-ec.html

I don't know how unbiased they are - but I thought it was interesting, actually I think it was one of only about four articles I have read on their site - Participation Rate and June withholding tax receipts could put me to sleep in about 2 minutes...

Oh, I do know the whole 'who controls congress' thing does stuff too... but I did think it interesting - there is something in the blogs about the stock market too... I couldn't read them all - I dozed off...
 
Last edited by a moderator:
Marcus - you aren't allowed to call Fossen nibble lips... he'll get queasy.
 
Since we're just copying and pasting from partisan websites, here's a counterpoint:

Did Liberals Cause the Sub-Prime Crisis?

Conservatives blame the housing crisis on a 1977 law that helps-low income people get mortgages. It's a useful story for them, but it isn't true.


Robert Gordon | April 7, 2008 |



The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."

Last week, a more careful expression of the idea hit The Washington Post, in an article on former Sen. Phil Gramm's influence over John McCain. While two progressive economists were quoted criticizing Gramm's insistent opposition to government regulation, the Brookings Institution's Robert Litan offered an opposing perspective. Litan suggested that the 1990s enhancement of CRA, which was achieved over Gramm's fierce opposition, may have contributed to the current crisis. "If the CRA had not been so aggressively pushed," Litan said, "it is conceivable things would not be quite as bad. People have to be honest about that."

This is classic rhetoric of conservative reaction. (For fans of welfare policy, it is Charles Murray meets the mortgage mess.) Most analysts see the sub-prime crisis as a market failure. Believing the bubble would never pop, lenders approved risky adjustable-rate mortgages, often without considering whether borrowers could afford them; families took on those loans; investors bought them in securitized form; and, all the while, regulators sat on their hands.

The revisionists say the problem wasn't too little regulation; but too much, via CRA. The law was enacted in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it's conceived as a quid pro quo for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.)

The law imposes on the covered depositories an affirmative duty to lend throughout the areas from which they take deposits, including poor neighborhoods. The law has teeth because regulators' ratings of banks' CRA performance become public and inform important decisions, notably merger approvals. Studies by the Federal Reserve and Harvard's Joint Center for Housing Studies, among others, have shown that CRA increased lending and homeownership in poor communities without undermining banks' profitability.

But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending. CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."

It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did.

And that is not political correctness. It is correctness.
 
You must log in or register to reply here.

Members online

No members online now.
Total: 62 (members: 0, guests: 62)
Back
Top