Sunday, November 27, 2011

Crash starts with CRA

This is an extension of Stating the Obvious.

During the four years that have elapsed since Homeaggedon, you would think there would be some consensus around its causes. No, I don't mean the obvious one: all bankers are the unremitting, Snidely Whiplash personifications of total evil. Rather, whether there was some systemic element that ensured a housing bubble replaced the preceding secular trend in housing prices while virally undermining our economy.

Pace the MAL, there is a principal cause that by its very nature had to engender the worst recession in 60 years. Even worse, that cause came about only due to a breathtaking combination of stupidity, wishful thinking, untreatable ignorance and, in at least one case, destructive intent.

I am talking, of course about the Community Reinvestment Act.

The CRA was offspring of two seeming truisms. First, bankers were happy to take deposits from anywhere, but were racistly reluctant to lend in minority neighborhoods. Second, because home ownership is so strongly correlated with stable, law-abiding neighborhoods, government policies must step in where the market was so obviously failing.

Even taking those seeming truisms as given, analytical effort falling well short of mental exhaustion is sufficient to see the crater at which the CRA must arrive (as well as ascertain the MAL's, and ODLs', pervasive reality distortion field).

Since rascist bankers won't lend to the melanin gifted, they must be first urged, then increasingly forced, to do so in the face unyielding racism, as evidenced by the continuing reluctance to lend. But that means that money-grubbing bankers eager to make a profit wherever they can, must be first urged, then increasingly forced, to lend despite poor or non-existent credit ratings, limited employment history, and non-existent down payments.

Of course, bankers have always been willing to lend to people bearing those unfortunate stigma, but at a price: interest rates that reflected the associated higher default risk.

This is where, right at the beginning, the crash became inevitable. See if you can follow along; it really isn't too tough:

  • Homeownership is an unalloyed good.

  • Racist profiteering bankers willfully underserve challenged neighborhoods.

  • The lack of employment history and savings is unrelated to default risk.

  • Therefore, bankers must be encouraged to overcome their unwillingness.

  • When enouragment proves insufficient, coercion follows and erosion follows.

  • Coercion takes the form of congressional intervention in banking business decisions, based upon compliance.

  • Erosion takes several forms: elimination of downpayment requirements, employment and credit history.

  • The underlying presumption is (pick one or more) [extremely racist | a perfect example of magical thinking | fully intended to undermine the banking system].

    • Racist, because melanin gifted populations with otherwise identically risk enhanced financial characteristics are not nearly as likely to default as their melanin challenged counterparts. (As it turns out, the Boston Fed, through through the kind of incompetence and mendacity that is always accompanied by the modifiers "monumental" and "criminal" directly abetted that preposterous conclusion.)

    • Magical, because it required believing a simple, government imposed, solution could possibly solve a much more complex problem that by its very nature had to lie beyond congressional fiat.

    • There were some who both advocated the CRA, and hoped for its intended effect. (Note: this isn't part of the logic train, but rather an unanticipated consequence of looking into how inevitable the crash was.)

  • In order for the CRA to function (a goal hoped for by the drooling lackwits of both parties), the following had to happen:

    • A vast expansion of GSEs and the secondary market.

    • Bundling of mortgage backed securities.

    • The hiding of high risk mortgages within those bundles


In short, the route from CRA to crater was so direct as to resemble the shortest, and most obvious, distance between points. It was a route that would never have been traveled without (mostly) well-intentioned idiots (Dodd, Frank, Clinton, Bush) forcing decisions that would never have occurred otherwise.

It is odd — okay, maybe it isn't — that the inchoate, incoherent, ill-educated (or wholly ineducable) flocks that comprise the ODLs never once mention the pivotal role that the CRA had in creating our crater. Just as no one seems to mention the Greek government, or the European Union, for the string of staggering stupidities that led them to their own perfectly foreseeable smoking hole.

Instead, it's all on Snidely.


It will take awhile to read these, but your time will be rewarded. Presuming, that is, you find being appalled rewarding:
Anatomy of Trainwreck: Causes of the Mortgage Meltdown
The Community Reinvestment Act, Evaluated
The Community Reinvestment Act's Harmful Legacy

14 Comments:

Blogger erp said...

That was one great string (nothing will convince me that tanking the economy wasn't done deliberately) and this is one great post, but I must disagree a teeny bit -- the melanin gifted weren't the only population that was redlined, but since they are most easily identifiable, they were used as the poster children for it.

"Homeownership is an unalloyed good."

It's amusing that this former truism carved in stone has now been tossed on its head and our betters are telling us that homeownership isn't for everyone and that it's far better for most of us to rent.

I still can't understand how you could think that the perps here were well-intentioned with the exception of Bush who really wasn't much a player.

BTW - Anything prompt this post now?

November 27, 2011 7:39 PM  
Blogger Susan's Husband said...

It's the typical logo-realism in action, where the MALists think that it's all symbolic. Because prosperous middle class people acquire marker X, poor people can be made in to middle class prosperous people by given them marker X as well. X can be "a house", or "a college education", or other things.

Interestingly, the MALists always look at material markers and not, for instance, relational ones like marriage (which is the largest single factor in avoiding poverty).

November 27, 2011 9:44 PM  
Blogger Bret said...

OK Skipper, now tell us how you really feel - don't hold back! :-)

I simply think you're being too harsh. I think that the concept of the ownership society has merit; people with skin in the game simply have behaviors that are better for society as a whole.

The problem is that taking that general concept through the political process will inherently produce a non-optimal solution and this just happened to be a particularly non-optimal solution. None of the players needed to be stupid, ignorant, or malicious.

Our political system has worked reasonably well for us and these sorts of things will emerge from time to time. Hopefully, we'll eventually recover from this one.

November 28, 2011 8:55 AM  
Blogger erp said...

Bret, the problem is that the people in question didn't have "skin in the game."

November 28, 2011 12:55 PM  
Blogger Hey Skipper said...

(nothing will convince me that tanking the economy wasn't done deliberately)

In reading about the CRA, it seems clear there was a prominent community activist (I'm too lazy to go back through the links to supplement my perfect-but-ever-so-short memory) who did, in fact desire to undermine the banking system, and did everything he could to use the CRA as a lever.

Absent a few exceptions, though, I remain convinced that politicians across the spectrum latched onto the notion that homeownership is an unalloyed good not only because it seemed true, but that there were also apparent reasons for this seeming truth that accorded precisely with their philosophical predilections.

The widespread finding of friendly justification for a presumed cause-effect relationship meant there was no available opposition to push the point that even if the cause-effect relationship held, that didn't mean there was a solution.

There are certain classes of problems that the free market can't solve — I think there are easily enough of them to utterly discount anarchism, miniarchism, and seriously undercut more fervent versions of libertarianism.

However, the housing market is well within the scope of what the market does very well. Had the politicians and other policy makers possessed merely the understanding of a glorified heavy equipment operator, they would have realized that they were faced with a can't get there from here situation, even if there entering assumption was true.

BTW - Anything prompt this post now?

Several things.

First, when it comes to posting on TDD, I am nothing if not untimely. I have thinking about this for years.

More recently, ODL and the reporting on it. I certainly won't defend bankers who made plenty of money riding a wave that they should have seen was heading straight towards the rocks. (No more than I would defend A330 pilots who were paid a lot of money for professional competence they didn't possess when it counted.)

However, the utter absence of any notion by the ODLosers that precisely the sort of policies they would reflexively advocate prodded, pushed, shoved and practically cattle-prodded bankers into doing what they did, along with the similar silence among the MAL, proved, umm, irritating.

Then beyond that, the Left (whose musings on economics would be so very cute if they weren't also unprettily destructive) continually insists the CRA had nothing to do with anything.

Which is utter bollocks. Just as it doesn't take a master mariner to know that running at high speed in ice-berg laced waters is eventually going to result in a very sudden stop, it doesn't take much analytical horsepower to suss that the CRA was destined to create a crash.

Which means I'm hoping to cited favorably in Restating the Obvious.

November 28, 2011 3:18 PM  
Blogger Hey Skipper said...

It's the typical logo-realism in action, where the MALists think that it's all symbolic.

I think that the concept of the ownership society has merit; people with skin in the game simply have behaviors that are better for society as a whole.

I think the correlation between substantial numbers of people being invested in their communities, and the health of those communities, is pretty ironclad.

But past that, iron pretty quickly becomes fog. "Correlation does not prove causation" is practically a cliche. And as with many cliches, it elides an underlying truth: there is no causation without correlation.

The question is, though, which is correlated with what?

Homeownership and stable communities are correlated. But homeownership and bourgeoise habits are also correlated. Come to think of it, bourgeoise habits and stable communities are correlated. And certainly birds of a feather stick together.

So, it is certainly possible that homeownership is as much a proxy for underlying habits as it is a cause of those habits.

Just as it could be, in a negative sense, a proxy for the lack of opportunity to demonstrate, and benefit from, those habits.

The MAList logo realism was in getting their central cart and horse completely backwards, before hooking them up in opposite directions. They completely ignored the culture — indeed, the humanity — of these underserved communities. Debt counseling videos will fix everything.

Having done the very light lifting required to significantly devalue, if not eliminate, the "homeownership is an unalloyed good" meme, it is just as easily to see the CRA as a brilliant case of ready, fire, aim. Only without the aim.

I'll completely grant that officially aggrieved underserved communities got that way through persistent discrimination, often quite official. I'll completely grant that one of the many very nasty consequences of that discrimination was to create groups who were situationally and culturally unable to access the means to invest themselves in their own communities.

Fine.

This is perhaps where the CRA is most thoroughly obtuse. The market did not create the problem; it merely responded to it. There was no "market failure".

Fixing what was not broke was not only bound to break what didn't need fixing, it was equally certain to leave the original problem completely untouched.

So, yes, the ownership society has merit. The problem still remains: somehow making ownership available to those with the required temperament but without the means. This also means understanding that without such a temperament, home ownership makes no more sense than giving a calculator to my dog because those who are numerate are more likely to have higher incomes.

November 28, 2011 3:54 PM  
Blogger Peter said...

Poor Snidely. Forced--forced, I tell you--to bundle all those mortgages and hide the risks within them.

November 30, 2011 2:46 AM  
Blogger Harry Eagar said...

'Which means I'm hoping to cited favorably in Restating the Obvious.'

You might get points for persistence, although as long as Iceland is broke I doubt you'll persuade me the CRA was the activating force.

Soon there will be a review of (Bernanke's mentor) Barry Eichengreen's 'Exorbitant Privilege,' which I will recommend highly. His version of events does not jibe with yours.

December 01, 2011 8:30 PM  
Blogger Hey Skipper said...

Peter:

Poor Snidely. Forced--forced, I tell you--to bundle all those mortgages and hide the risks within them.

In order for the CRA to work, that is exactly what had to happen.

By forcing banks to make loans to people who could not accumulate sufficient money for a downpayment, the CRA forced a huge expansion of the secondary market.

By stopping the banks from charging interest rates reflecting the higher default risk associated with lending to those an inadequate work history, poor credit rating, and no downpayment, the CRA forced the bundling of subprime and prime mortgages in the secondary market.

Harry:

You might get points for persistence, although as long as Iceland is broke I doubt you'll persuade me the CRA was the activating force.

The next time I have a problem with the concept of "non sequitor", I'll be sure to look this up.

Do me a favor. Read those links I provided. Particularly the first one, and tell me where it gets things wrong.

While you are at it, explain how forcing banks to make high-risk loans at low-risk prices doesn't require wrecking loan standards and hiding subprime mortgages. In doing so, it would be helpful do demonstrate how the counterfactual — Congress passing a law in 1995 requiring 20% downpayment on all mortgages — would have left the outcome unchanged.

And keep in mind, this is about the impact of the CRA on the US housing market. It isn't about Iceland, or Greece, etc.

Also, I am not making the case that the CRA was both necessary and sufficient, only that it was necessary, and that it necessarily entailed consequences that should have been readily apparent to anything more sentient than a calculator wielding dog.

December 02, 2011 1:26 AM  
Blogger Harry Eagar said...

I could have added Spain and other places -- and as a counterexample, Canada-- the point being that if the same thing happens in several venues, you might want to look for a common instigator.

The more places it happens, the less likely it was just a coincidence. But if it wasn't a coincidence, then the CRA couldn't have been important.

I have been extremely pressed for time lately but will eventually take this on at RtO. For teasers, Eichengreen's Chapter 6 is a history of the collapse from exactly the same viewpoint you are seeking to attack -- lending standards. He never even mentions CRA and barely even mentions residential mortgages.

The problems, as RtO has noted several times, were elsewhere. The the collapse did not begin with mortgages. I was pleased, but not surprised, to find Eichengreen picking out the same starting event that I had fingered; the collapse of the Bear Stearns hedge funds.

December 14, 2011 9:43 PM  
Blogger Harry Eagar said...

This comment has been removed by a blog administrator.

December 14, 2011 9:43 PM  
Blogger Hey Skipper said...

The more places it happens, the less likely it was just a coincidence. But if it wasn't a coincidence, then the CRA couldn't have been important.

Keep in mind that I am talking solely about the US mortgage market.

Did, or did not, every branch of government undertake, with increasing diligence over roughly 30 years prior to 2007, to lower lending standards?

For teasers, Eichengreen's Chapter 6 is a history of the collapse from exactly the same viewpoint you are seeking to attack -- lending standards. He never even mentions CRA and barely even mentions residential mortgages.

In looking at the collapse of the residential mortgage market, a discussion that barely even mentions residential mortgages is relevant how?

Like I suggested above, read Anatomy of a Train Wreck, and specify where it is wrong.

I couldn't help but note this quote from the paper:

After the warm and fuzzy glow of “flexible underwriting standards” has worn off, we may discover that they are nothing more than stan- dards that led to bad loans. Certainly, a careful investigation of these underwriting standards is in order. If the “traditional” bank lending processes were rational, we are likely to find, with the adoption of flexible underwriting standards, that we are merely encouraging banks to make unsound loans. If this is the case, current policy will not have helped its intended beneficiaries if in future years they are dispossessed from their homes due to an inability to make their mortgage payments. It will be ironic and unfortunate if minority applicants wind up paying a very heavy price for a misguided policy based on badly mangled data.

Yes, I know, 20-20 hindsight and all that.

Except for one thing.

It was written in 1998.

December 21, 2011 1:18 AM  
Blogger Hey Skipper said...

This is from a 2002 report praising the CRA:

Attempts to eliminate discrimination involve strengthened enforcement of existing laws . . . There have also been efforts to expand the availability of more affordable and flexible mortgages. The Community Reinvestment Act (CRA) provides a major incentive . . . Fannie Mae and Freddie Mac . . . have also been called upon to broaden access to mortgage credit and home ownership.

The 1992 Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) mandated that the GSEs increase their acquisition of primary-market loans made to lower income borrowers . . . Spurred in part by the FHEFSSA mandate, Fannie Mae an- nounced a trillion-dollar commitment.

The result has been a wider variety of innovative mortgage products. The GSEs have introduced a new generation of affordable, flexible, and targeted mortgages, thereby fundamentally altering the terms upon which mortgage credit was offered in the United States from the 1960s through the 1980s.

Moreover, these secondary-market innovations have proceeded in tandem with shifts in the primary markets: depository institutions, spurred by the threat of CRA chal- lenges and the lure of significant profit potential in underserved markets, have pioneered flexible mortgage products. For years, depositories held these products in portfolios when their under- writing guidelines exceeded benchmarks set by the GSEs.

Current shifts in government policy, GSE acquisition criteria, and the primary mar- ket have fostered greater integration of capital and lending markets.

These changes in lending herald what we refer to as mortgage innovation.


Yep, nothing to see here. Move along, folks.

December 21, 2011 2:26 AM  
Blogger Michelle said...

This comment has been removed by a blog administrator.

June 04, 2012 2:57 AM  

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