The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents."Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying -- along with assurances from banks that the troubled mortgages were OK -- regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
"These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.
Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.
Worst president ever.
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I would prefer to focus upon both the workability or non-workability of the ideas _and_ on the methods used to "ram them through."
Exploiting a crisis to push through reforms does strike me as being a bit unseemly. Of course, the ideal is workable ideas enacted via "normal" politics & processes. But I'd be more willing to forgive the crisis-inspired enactment of workable measures than unworkable measures enacted via "normal" politics & processes. (Of course, crisis enactment of unworkable ideas is just plain stupid.)
When your only defense against presumed criminal behavior is to make signifcant numbers of loans in places where no or few qualified people live...
Of course, banks could already deny loans based on credit scores or location of purchased property or anything. If there were legitimate, objective reasons to deny such loans, there was no objection to that.
All the CRA did was stop them from denying homes based on where the applicant lived as an 'objective' measurement, which was introduced solely as a clever way to place minority neighborhoods in the areas they wouldn't loan to, which gave them an objective way to keep from loaning to minorities.
This was akin to refusing to loan to people who listened to hiphop. That is not, technically speaking, racism, if applied evenly against whites who did that and not against blacks who don't. But it is hard to see what the point is except discriminate against blacks. There is no legitimate reason to consider someone's residential address when looking at a loan for a property at an entirely different address. (What kind of house they live in, owned or rented, how much it is worth, yes. But the actual street address, no.)
The idea that it forced banks to make bad loans is just incredibly naive, no matter imaginary third-hand accounts you've heard. Especially since only about 25% of loans were actually made by banks covered by the CRA. (The CRA covered parts of 25% of other institutions, but they could just make loans using other parts and not bother with the CRA at all.)
And, it is, of course, worth pointing out that loans that would have been redlined except for the CRA are failing at a slight lower rate than other loans of the same type. (I.e., primes less than other primes, subprimes less than other subprimes.) In other words, the entire argument is moot because the CRA has resulted in banks having better loans, on average.
This is probably because there is still the touch of racism which is causing such loans to be scrutinized a bit more, and a few of the bad ones from people in formerly 'redlined' areas actually being rejected for legitimate reasons, like lying on the loan application, whereas other people just have their lies sail right through. (I.e, thanks to racism, people were willing to make stupidly reckless and dangerous loans to white people and not as much to black people.)
The number of these loans may not be the cause of our credit problems, but they still exist. Further, it was the RTC (Resolution Trust Corp) that invented the securitized mortgage market. Before them, it had never been heard of.
Yeah, and astonishingly enough, that system of securitizing loans worked for 70 years.
The real problem, though, remains the same: It was the belief that SOMEONE ELSE WOULD BEAR THE LOSSES that ultimately caused the problems. Whether it was the gaurantees from Fannie and Freddie, or the bundling of the bad poisoning the rest of the good, the problem is the same. Widespread assumptions about loss being someone else's problem.
Fannie and Freddie actually had standards, and yes, they shouldn't have been slightly loosened, although it's worth mentioning that they would have been in trouble regardless as home prices fell. They really should have put their foot down and refused to purchase obviously-inflated-home-price loans, or rather, someone should have made regulations allowing that. (I'm pretty sure they couldn't refuse to buy any loan that was 'conforming'.)
But that was, at best, a minor problem. Fannie and Freddie may have created a market, but when they assumed responsibility for loans, they actually assumed responsibility. If worse came to worse, it would just take them out...and it did, and we bailed them out. If they had been at the root of the problem, that would have been it.
Problem over. They were designed to remove good loans from the market, and they did, for slightly lax standards of 'good'. Any problem with them, by definition, would not affect the market on the home loan side, and if the government backed their securities, which it has, it wouldn't cause a problem on that side either. They were a magical black box that turned loans into perfect securities, and have continued to do so, although now they're doing it at taxpayer expense. This couldn't be harming the rest of the market in any manner.
However, the trading of loans and securities of those loans and 'insurance' that isn't really insurance among banks in a rather delusional and totally unregulated manner meant that, unlike the Fannie and Freddie loans, the risk never left the financial market, but banks were allowed to pretend it had somehow. That is the current problem. It was a game of hot potato where everyone started with hundreds of hot potatoes and just traded their potatoes with everyone else and considered the matter settled.
This is obviously extremely stupid and shouldn't have been allowed. Banks have rules about how much capital they have to have, and how much risk they can have, and they shouldn't been allowed to pretend they had no risk and imaginary capital. But it was, thanks to lack of regulations. Lack of regulations the Republicans were praising and supporting to high heaven.
I humbly and respectfully suggest that the labels being employed are a big part of the problem. Yeah, that's a bit sarcastic, but not too much so. :-)
My arm is so long. My stomach is so big. I stand around a vast vat of nutrition I need to survive, but as big as it is, it is still finite.
When there are few arms at the vat, competition is not so intense. One can clearly see that greed is the prime motivation for those who take more than they need, but the impact on the rest is little or none.
When there are many arms at the vat, competition will often mean the difference between enough and not enough. Civilization imposes passive restraints on the many individual arms (not with 100% success, of course). Greed is a threat, and is dealt with as others see the need and are capable of making the consequences fit the need for imposing restraints on the greedy.
The rest is a matter of degree. With a small, top-heavy structure, like aristocratic forms (feudalism, etc.), the balance of restraints is in the hands of the few at the top. If they have a long enough vision, they will refrain from taking as much as they can knowing that they must leave enough for the masses, if only to avoid the creation of angry mobs which will overwhelm their capacity for violent self-defense. With a more bell-curve like structure, with more wealth spread across the middle, the few at the top don't need so much violent capabilities, because mood and opinion control is more cost effective, and the numbers who will supply the angry mobs are fewer and further away from the top (the middle being a closer and handier target).
All the philosophical and theoretical BS aside, one need look no further than the screwing of the middle as the key to the current crisis. The top has lost its easy control of their (our!) mood and opinions. They've used up their control credits by spoiling us (well, rather, making us feel spoiled) because like any spoiled child, the moment the rewards are taken away, the temper tantrums kick in. 0-60 in a heartbeat, as it were.
Personal aside: those lending institutions who were "forced" to make "bad" loans did so gladly, willingly, because they were more than rewarded with promises to save their asses when the risks turned bad. The WaMus and others that have gone under were just examples of asses that were lied to, or, perhaps, the sacrificial lambs for the feasting tables of those that will get their bailouts.
Baldy, I'm very grateful that someone besides me is willing to acknowledge that a law, CRA in this case, was implemented contrary to its intended purpose. I just want to add that no one really forced banks to pad their CRA scores, if you consider that they were denying otherwise qualified applicants routinely and with deliberate intent solely on the race or place of residence of those people. Yes, they also loaned money to people who should not have gotten those loans. But the CRA is not 100% those people, or even 50%, overall. The "forcing" was in denying racists their control over the loans.
Well if there is one good thing that may come out of the Bush administration it may be that now we, as a nation ,see the danger of this unregulated, robber-barron version of capitalism.
http://www.associatedcontent.com/article/1300166/modern_society_threatens_the_american.html
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