Comments on: Privatized profits, socialized losses

By: Thomas

Thomas — Fri, 19 Sep 2008 19:31:59 +0000

Peter #33
Far from being a small bank, this was at one of the top 20 commercial banks in the country .

By: Peter Leavitt

Peter Leavitt — Fri, 19 Sep 2008 19:14:11 +0000

1. If CRA is to blame, why did the crisis take almost 30 years after its initial passage to emerge?

You need to read the City Journal article linked to above that was written in 2000. It often takes decades for faulty legislation to lay a flawed foundation and slowly over time prove to be deeply problematic. Another example would be the laws governing welfare that started in the thirties and were finally and drastically amended in the 90’s. My guess id that the outfit that will be created to mitigate this crisis will find a way to majorly amend the CRA and other regulations that have brought on this crisis.

If CRA is to blame, why is it that most of the institutions involved in the mess are those not covered by CRA provisions?

In fact the institutions involved, especially Fan and Fred, were covered by the CRA provisions. From the IBD article The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical “housing rights” groups led by ACORN lobbied for such loans. ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama

If CRA is to blame, why is that those banks that are covered by it have been making fewer, not more, of the riskier loans?

Huh, most urban banks, following the pressure of CRA regs were making these subprime and alt A loans right up until the housing market started tanking in 2006.

By the way, while the CRA is the taproot of this crisis, the easy money policy that the Fed established in the 2001-4 greatly exacerbated it.

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By: SteveG

SteveG — Fri, 19 Sep 2008 17:10:40 +0000

Peter: However, that article is hogwash for reasons Thomas and I have both pointed out to you.

1. If CRA is to blame, why did the crisis take almost 30 years after its initial passage to emerge?

2. If CRA is to blame, why is it that most of the institutions involved in the mess are those not covered by CRA provisions?

3. If CRA is to blame, why is that those banks that are covered by it have been making fewer, not more, of the riskier loans?

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By: Peter Leavitt

Peter Leavitt — Fri, 19 Sep 2008 15:05:21 +0000

Sorry, the link for the above is:

http://www.city-journal.org/html/10_1_the_trillion_dollar.html

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By: Peter Leavitt

Peter Leavitt — Fri, 19 Sep 2008 15:03:59 +0000

Thomas, your bank might be doing well with the CRA albatross, though many others have had serious difficulty with it. The best understanding of this comes from a 2000 City Journal article, The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities. You need to read the full article though the following gives a good flavor:

The Clinton administration’s get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. “To avoid the possibility of a denied or delayed application,” advises the NCRC in its deadpan tone, “lending institutions have an incentive to make formal agreements with community organizations.” By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, “CRA is the backbone of everything we do.”

My guess is that yours is relatively speaking a small bank that doesn’t have to deal with the pressures of large city banks. I have been a businessman in investing banking and know quite a few savvy bankers who regard the CRA regime as a nightmare.

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By: Thomas

Thomas — Fri, 19 Sep 2008 11:52:54 +0000

As simply as I can put it, SteveG is quite right, and Peter Leavitt is wrong with regards to CRA.

I work in banking, and for many years specifically in mortgage banking. For most of the time in mortgage banking, I reported to our Risk Manager, and was responsible for gathering data for our HMDA-LAR submission, and CRA compliance data. We went above and beyond the requirements of the law, creating pattern-shift reports to detect geographic trends and trending for our originations offices and even down to the level of individual loan officers. We did this not just to ensure compliance with CRA, which is a minimal standard, but because it is both prudent and the right thing to do.

CRA does nothing to force you to make loans. It merely says you actually have to do business and provide services to the neighborhoods (cities, census tracts, etc) where you are located.

You are never required to loan to a less-than-credit-worthy borrower. What you are required to do is demonstrate that you do not discriminate based on race, neighborhood, etc. A way to do this is to put side by side two similar loans – same type of credit history and scores, same characteristics – one that you’ve rejected for a minority, and one that you’ve approved for a majority applicant. You then need to show what the difference between the loans is – why you approved one but rejected the other.

You can tighten your standards across the board, but you had better do so uniformly.

We also later were impacted by sub-prime loans years before the current crisis became apparent. We were very proactive in working with the regulators helping to identify the bad apples among correspondent lenders with whom we had relationships.

Throughout, we have had a very conservative stance, excellent CRA ratings, and are doing very well lately.

But hey, if you want to cling to your mythical “liberal media” explanation, you go right ahead.

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By: SteveG

SteveG — Fri, 19 Sep 2008 03:41:40 +0000

And to put the end to it: http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis“>This

irst, 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.

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By: SteveG

SteveG — Fri, 19 Sep 2008 03:30:45 +0000

This is not true, by the way: If they don’t comply, they are threatened with stiff penalties under the Community Reinvestment Act, or CRA, a law that forces banks to make home loans to people with poor credit risks.

The CRA encourages banks to make loans within the communities they serve, even if they’re low-income, but it explicitly states –both the legislation and the regulations that implement it — that the loans are to be consistent with sound banking practices.

Nothing in the CRA requires banks to lend to people who are not good risks. It certainly doesn’t “force” them to. It encourages them to find people who are good risks within less affluent communities.

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By: SteveG

SteveG — Fri, 19 Sep 2008 03:26:10 +0000

I don’t buy the “liberal media” myth, Peter. I do realize that subprime mortgages are a component of the crisis. So are things like the Gramm-Leach-Bliley bill, written by the named Republican legislators and signed by President George H.W. Bush in 1999, which repealed regulations that prevented investment banks and consumer banks from co-mingling … which means that crashes in investment banks can hurt consumers who have no involvement in the investments.

This is not a simplistic problem. The Bush administration championed sub-prime mortgages just as much as the Clinton administration did (Republicans controlled Congress and the White House for the first six years of Bush’s time in office … if your party wanted to end the practice, they had the power to do it. But Bush’s “ownership society” theme benefited from it. And if Bush had had his way, part of our Social Security funds would be at Wall Street’s mercy too.)

I’m not going to have any patience for the Blame Clinton First approach to this. It’s been building since at least the 70s, and presidents and members of Congress of both parties have had a role in making it worse along the way.

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By: Peter Leavitt

Peter Leavitt — Thu, 18 Sep 2008 18:20:27 +0000

Steve, the CNN article doesn’t talk about the root of the problem which was primarily the Congress’s loosening of banking rules to accomodate sub-prinme lending that was accomplished through CRA. The reason you haven’t read about the CRA is that the liberal media won’t touch the subject.

A good summary of what happened at the ground level comes from the IBD article that I linked to above including:

Only, the risk-taking was her[Pelosi's] idea — and the idea of all the other Democrats, along with a handful of Republicans, who over the past 30 years have demonized lenders as racist and passed regulation after regulation pressuring them to make more loans to unqualified borrowers in the name of diversity.

They were the ones who screamed — “REDLINING!” — and sent banks scurrying for cover in low-income neighborhoods, where they have been forced to lower long-held industry standards for judging creditworthiness to make the subprime loans.

If they don’t comply, they are threatened with stiff penalties under the Community Reinvestment Act, or CRA, a law that forces banks to make home loans to people with poor credit risks.

No fewer than four federal banking regulatory agencies are responsible for enforcing the law. They subject lenders to racial litmus tests and issue regular report cards, the industry’s dreaded “CRA rating.”

The more branches that lenders put in poor neighborhoods, and the more loans they make there, the better their rating. Those lenders with low ratings can not only be fined, but also blocked from mergers and other business transactions needed to expand.

The regulation grew to monstrous proportions during the Clinton administration, obsessed as it was with multiculturalism. Amendments to the CRA in the mid-1990s dramatically raised the amount of home loans to otherwise unqualified low-income borrowers.

The revisions also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages. The changes came as radical “housing rights” groups led by ACORN lobbied for such loans. ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama.

HUD, in turn, pressured Fannie Mae and Freddie Mac to purchase more subprime mortgages, and Fannie and Freddie, in turn, donated to the campaigns of leading Democrats like Barney Frank and Pelosi who throttled investigations into fraud at the agencies.

Soon, investment banks such as Bear Stearns were aggressively hawking the securities as “guaranteed.” Wall Street’s pitch was that MBSs were as safe as Treasuries, but with a higher yield.

But they weren’t safe. Everyone in the subprime business — from brokers to lenders to banks to investment houses — absolved themselves of responsibility for ensuring the high-risk loans were good.

Frankly, yesterdau I purposely didn’t get into the blame game on this, following Paulson’s and Bernanke’s lead; however the media and politiical rhetoric has become so fierce in its blame of the corporations, today I decided to state the investment banker’s side of the issue.

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