Friday, September 02, 2011

Stating the Obvious

For those who can't determine the link between the CRA and the collapse of the housing market, look here (read it in its entirety):
The data shows that the principal buyers [of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages] were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

No surprise, really. The logic of the CRA ensured this outcome to anyone more sentient than Barney Frank.

20 Comments:

Blogger Bret said...

I don't think the link is right.

September 02, 2011 10:32 AM  
Blogger Susan's Husband said...

On what basis do you think Frank didn't realize this was inevitable? I don't think he's too dumb to figure it out, I think he's just fine with it as long as he and his cronies do well. And that they have.

September 02, 2011 11:02 AM  
Blogger erp said...

Link brings you right back here.

The CRA started the ball rolling in, I think, a deliberate effort to cause a meltdown. In the same way that Obama is deliberately destroying our economy. The only problem is he has to walk the fine line which allows him to be re-elected before he delivers the final blow.

September 02, 2011 1:52 PM  
Blogger Hey Skipper said...

Bret:

Fixed, thanks.

SH:

As an entering first order explanation, I think incompetence is more likely than malice to be the correct.

September 02, 2011 1:53 PM  
Blogger Susan's Husband said...

I'd call it more "indifference" than "malice". I don't think Frank wanted the meltdown, I think he just didn't care.

September 02, 2011 2:02 PM  
Blogger Hey Skipper said...

erp:

I think the explanation is far more mundane.

It is a widespread assumption that home ownership creates better communities. Pressure groups like ACORN (correctly) perceived that minorities had a hard time getting mortgages, and paid more for those they did get.

ACORNish groups and politicians then (incorrectly) ascribed that difficulty to racism. The consequence was the CRA in its ever more intrusive variations. Its intent was to make the market do what it wouldn't do otherwise.

The actual effect, though, was to make the market do what it couldn't, not what it wouldn't.

Unfortunately, it seems the same people who mistakenly attributed the problem to racism also mistakenly believe government can make markets do things they can't do otherwise.

Adding injury to insult, that group was (and probably remains) incapable of perceiving the destructive consequences the CRA compelled.

Politicians and activists are, IMHO, disproportionately stupid.

I'll bet Barney Frank et al still have no idea of the fairly simple cause - effect relationship between the CRA and the mortgage market meltdown. They didn't want the meltdown, they wanted more home ownership. They were/are simply too stupid to recognize that the original problem not only wasn't amenable to legislative fiat, it may not have any solution whatsoever.

September 03, 2011 9:50 AM  
Blogger erp said...

Skipper you are far kinder than I about assigning motives because I don't believe for a second that Barney Frank or Barrack Obama care a fig for homeownership or any of the other high sounding rhetoric they spew. They may be ignorant, but they’re not stupid.

To recap: banks are in the business of paying a small rate of interest on money they take in as deposits and then lending it out for higher rates to financially qualified people for various reasons, one of which is a mortgage.

In the bad old days, social mores dictated who could live where, so if people wanted to buy a house where they weren't wanted, they couldn't get a mortgage no matter their financial situation. (There were ways to get around that using third parties, etc., but for all intents and purposes that was the case.)

The 1964 Rights Acts changed all that for the better, but just as affirmative action went from forcing public institutions into admitting all qualified students to forcing them to lower their standards to admit less qualified students, banks were forced to give mortgages not only to all qualified buyers, but to anyone in the targeted population many of whom could never hope to make even one payment nevermind 30 years worth. The probably apocryphal example of the migrant worker whose monthly mortgage payment far exceeded his annual salary comes to mind.

The left has a single-minded obsession to gain enough power to bring us into the world socialism family.

I hope I’m wrong.

September 03, 2011 11:02 AM  
Blogger Harry Eagar said...

And this explains the similar behavior in the commercial real estate sector how?

September 06, 2011 1:18 PM  
Blogger Hey Skipper said...

erp:

I don't believe for a second that Barney Frank or Barrack Obama care a fig for homeownership or any of the other high sounding rhetoric they spew. They may be ignorant, but they’re not stupid.

They are politicians, which typically makes them arrogant, on top of ignorant and stupid.

Venting aside, Republicans were as involved in this, and for the same reasons, as Democrats. On the face of it*, home ownership is beneficial. Why not make the market do what should happen?

* The unasked question is whether the benefits arising from home ownership are due to that, or whether there is nothing more going on than the "birds of a feather" effect. The answer to that has implications for tax policy ...

Harry:

The subject is not the real estate market, but how the logic of the CRA would inevitably poison the home mortgages.

You have taken the position that the CRA had nothing to do with anything. The cite -- and logic -- say otherwise.

September 07, 2011 3:55 PM  
Blogger Harry Eagar said...

well, since the financial crisis began in August 2007 with the failure of the auction rate securities scam, I don't see how real estate entered into it all.

September 10, 2011 12:37 PM  
Blogger Hey Skipper said...

The point of this post is the role of the CRA in the residential real estate bubble and its collapse.

Not commercial real estate, or derivatives, etc.

You have maintained the CRA was irrelevant; based upon all the evidence I have seen, not only was it relevant, the underlying logic of the CRA made the ultimate outcome inevitable.

September 12, 2011 10:26 AM  
Blogger Harry Eagar said...

The CRA had no influ3ence in my county. I read most of the foreclosure petitions.

They are, overwhelmingly, by originators who did no banking in my county.

Statistically, we can posit that my county is more or less typical, in that the foreclosure rate is within a fraction of a percentage point of the national average.

There are, however, places with much lower or higher rates; but since CRA was a national law, the effects should have been close everywhere, other things being equal.

No question the financial system was headed for a crash. It always crashes, unless New Deal circuit breakers are in action. If Bear, City, AIG etc. had not been involved in a single residential loan, they all would have crashed, because they were all insanely overleveraged.

September 12, 2011 1:33 PM  
Blogger Harry Eagar said...

Bloomberg just reported:

"Nakheel PJSC, Dubai’s biggest developer by assets, told creditors it wrote down its real estate by 78.6 billion dirhams ($21 billion) after property values in the Persian Gulf emirate fell by more than half."

CRA, no doubt about it.

September 12, 2011 1:36 PM  
Blogger Hey Skipper said...

There are, however, places with much lower or higher rates; but since CRA was a national law, the effects should have been close everywhere, other things being equal.

There is no reason to believe that Hawaii, due to its remote location, is typical of the US -- it is just as atypical as Alaska.

Which makes your invocation of ceteris paribus very questionable.

And asserting that a difference in rates somehow says something about the underlying logic of the CRA even more so.

So, sticking to the point. ACORN, et al, insisted that certain communities were under served with respect to mortgage availability due to racism.

Assume for a moment that ACORN was at least partially wrong. Do you see now how the underlying logic of the CRA was bound to destroy the residential housing market?

(What happened in Dubai could not possibly be less relevant here; use that example in a discussion about China's mercantalist monetary policy.)

September 13, 2011 10:37 AM  
Blogger Harry Eagar said...

No. Some markets were redlined. I wrote about that more than 25 years ago in Iowa.

It was not underserved areas where the bad loans were made. They were made everywhere.

It was not CRA that induced entrepreneurs to overbuild luxury gated communities in Phoenix, and it wasn't brown people who moved in.

September 14, 2011 12:19 PM  
Blogger Hey Skipper said...

Some markets were redlined.

Yes, they were. But describing "what" does not answer "why".

If bankers are the amoral money grubbing parasites you say they are, then the answer to "why" cannot be racism.

Which means the CRA had to be toxic.


It was not underserved areas where the bad loans were made. They were made everywhere.

Exactly.

September 16, 2011 11:20 AM  
Blogger Harry Eagar said...

I don't see why a moneygrubbing parasite cannot also be a racist.

The racist polices of Jim Crow made everybody poorer, not just blacks. The white establishment thought it was a good bargain, though.

September 17, 2011 2:04 PM  
Blogger Harry Eagar said...

I'd also like someone to explain to me how those scheming Acorns forced AIG to lose all that $

September 18, 2011 3:21 PM  
Blogger erp said...

Gosh, Harry if you haven't gotten it yet, you'll just have to wait for the movie.

September 18, 2011 4:10 PM  
Blogger Hey Skipper said...

I don't see why a moneygrubbing parasite cannot also be a racist.

That is a variation of the "heads I win, tails you lose" argument.

You may remember when age-discrimination laws were implemented, because money grubbing corporations were firing older, and more expensive workers, in order to make more money.

Because, after all, that is what money grubbing corporations do.

More recently, the Lilly Ledbetter fair wage act was intended to stop sexist corporations paying women less than men.

Having completely forgotten that since corporations are money grubbing, they should have been competing for cheaper women, thereby arbitraging the disparity -- which doesn't exist, but don't let that get in the way of progressive fantasies -- out of existence.

Money grubbing or sexist?

Money grubbing or racist?

September 20, 2011 11:34 PM  

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