Sunday, January 06, 2013

Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

Yes, it did. And let's be honest, that was its purpose--couched in racial terms.


allen (in Michigan) said...

Yeah, the CRA along with a mandated reduction in the creditworthiness standards of Freddie Mac and Fannie Mae.

Once it became known that the FMs were willing to buy any skanky, old loan it was Katie bar the door.

Salmon P. Chaste said...

Will there be a Part II post?

Let us be conciliatory and assume the linked study is correct. I’d confidently bet $5 you didn’t spend $5 to actually ready the paper. The abstract was enough to confirm your ‘un-couched’ bias.

Perhaps tomorrow you’ll follow up by enlightening us about the inextricably linked Gramm(R)-Leach(R)-Bliley(R) Act. The Republican quid pro quo deal enacted if the Democrats got a strengthening of the Community Reinvestment Act.

GLB led to the repeal of the Depression-era Glass-Steagall Act, which historically separated commercial banks from Wall Street. Arguably leading to ‘Too Big Too Fail’.

Maybe Part III will be discuss the 2000 Commodity Futures Modernization Act that exempted over-the-counter derivatives like credit-default swaps from regulation by the Commodity Futures Trading Commission. You could mention Senator Gramm when he said that he would prefer a bill in which the SEC and CFTC have ‘no jurisdiction at all over swaps’. Then expound on the ‘Enron loophole’ and it’s exacerbating oil speculation.

I know the narrative you’re aiming for is that the financial crisis is the soft hand of low expectation Democratic fault. It’s just not that simple. There is plenty of blame to go around. Sure political hacks will emphasize one side while neglecting the other. Integrity would demand you discuss both sides.

Anonymous said...

Zombie wrote a very similar piece, well worth reading.

Darren said...

Salmon, no, I'm not going to chase down every wild goose you throw out. The first three words of the extract were "Yes, it did." Are you saying I misinterpreted those words? Or do you just *hate* it that I take a stand on something, and feel compelled to attack it?

Salmon P. Chaste said...

Maybe in Part IV you'll remind us of how it was approved.

I'll save you the time.

The House approved 343-86
Republicans 205–16;
Democrats 138–69;
Independent 0–1

The Senate approved:
54–44 vote along basically-partisan lines
53 Republicans and 1 Democrat in favor;
44 Democrats opposed

Darren said...

Which President signed it?

Bad law is bad law.

Salmon P. Chaste said...

I never said it was good law. I said you're only telling half the story.

Like most laws it had good intentions. Originally passed in 1977 by Carter. Re-upped in 1989 by H. W.

In 1999 it was attached to GLB. Everybody got what they wanted. Wall Street, Banks, Republicans, Democrats.

It's the 90s Dirty Little Secret both sides would probably like to forget.

Darren said...

I'm only telling "half" the story? What story, half or otherwise, are you reading? I posted two sentences, one of which was a copy from the link.

I think you're protesting too much, dude.

Anonymous said...

At least in the examples by Salmon the idea was to make it easier to make money.

The CRA was designed to what? Force loans that more people would statistically default on. Where is the winner there? Threaten institutions that don't comply with CRA and force them to make "bad" loans. Then tell them Fannie and Freddy will buy them. Allowing the least moral lenders to make all money by basically giving away money to those who can't pay it back. Thus forcing up house prices as people start throwing around their "interest only" loan funds.

Yea, I'd rather have the examples where making money for everyone is in play. Not the CRA that nailed all of us one way or another. (yes I got greedy and did a refi to buy a car...I don't have the car anymore, but I'm still paying for it)

Anonymous said...

Disclaimer, I did not read the study.

While the CRA, by design, was a tool to increase lending where the banks believed the lending was riskier than what they would like, I do not believe that the CRA shares much responsibility for the huge quantity of incredibly risky loans made in the years and months before the crash. Nor is the CRA responsible for all the models used by banks (and regulators?) that showed the risk being taken was reasonable, but where based on independent and normally distributed random variables. Financial assets tend to have a much larger amount of events significantly far from the the mean than a normal distribution would contain. And the variables look independent when assets are generally appreciating, but become highly correlated when assets decline in value.

Consider one of the more toxic loans during the bubble preceding the crash, the Option ARM. The Option ARM was not invented to help banks meet CRA requirements. Wachovia was largely taken down by Option ARMs in their portfolio from the purchase of Golden West, a company that specialized in Option ARMs. I remember reading mid 2000's a WSJ article making the case that with so many Option ARMs on the books, their income statements and balance sheets were very distorted from economic reality.

WaMu? Option ARMs could be found their. As an employee from 2002 to WaMu's failure in 2008 I attended a large meeting (multiple hundred in an auditorium) where one presentation was by the CFO who said that WaMu was only retaining the "seasoned" not very risky Option ARMs. However the Option ARMs being funded at that time were incredibly risky, but that was okay because WaMu was selling those like they were hot potatoes. (heavy paraphrasing) When I heard talk about CRA loans, that was a small part of WaMu's portfolio.

Country Wide? Option ARMs can be found their. Indy Mac? Option ARMs.

My understanding it the only banks offering Option ARMs were thrifts regulated by the Office of Thrift Supervision. The big problem on the commercial bank side, regulated by the Office of the Comptroller of the Currency was with those banks that had purchased thrifts. BofA purchasing Countrywide, and Wachovia purchasing Golden West.

Another note on my time at WaMu, for awhile I worked on the the Automated Underwriting System (AUS). The AUS had two possible outcomes for the loans applications it processed, approve(with contingencies) or refer for manual underwriting. We were not allowed to program the AUS to say, "This loan is so obviously a bad idea, I'm going to summarily reject it without involving a human." Manual underwriting cost something like $200 per application. The entire value of the AUS came from the loan applications it approved. The more it approved the more valuable it was. Nobody was scoring it on any increased risk the AUS may introduce by approving in appropriate loans. Guess which way the AUS was biased towards?

-- Anonymous Coward