The Public Policy
Financial Affirmative Action Returns
Rehabilitating the economy-wrecking Community Reinvestment Act.
We need more bureaucrats to strong-arm banks into doing the stupid things that got America and the rest of the world into this colossal financial mess in the first place, argues the Obama administration.
Well, the administration didn’t use those words exactly, but in the interests of greater governmental transparency maybe it should have.
That’s because there is no doubt that the Carter-era Community Reinvestment Act (CRA) and other boneheaded government policies helped to create the subprime mortgage bubble that violently burst and that continues to wreak havoc on the world’s financial markets. CRA allowed activists to blackmail lenders into handing out mortgages to people with little regard for their ability to keep up payments.
Yet the Obama administration is now demanding that the bank-killing CRA, which in practice has been used to emphasize a largely race-based version of financial so-called social justice at the expense of sound banking practices, be strengthened.
The administration laid out its counterintuitive position in the Treasury Department’s new white paper, “Financial Regulatory Reform: A New Foundation,” which calls for the creation of a new super-duper-regulator, the Consumer Financial Protection Agency (CFPA).
My American Spectator colleague Joseph Lawler, who has his own doubts about the destructive power of the CRA, has a delightfully simple way of summing up the problems with the law:
“[T]he CRA was either potentially harmful or useless. Does it make sense to include provisions for expanding a harmful or useless measure in a regulatory overhaul?”
When and if the proposal finds its way into draft legislation, its sponsors should consider naming the bill the No Banking Bureaucrat Left Behind Act. Such a title would make sense because apparently the armies of government employees at the Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), National Credit Union Administration (NCUA), Office of Thrift Supervision (OTS), along with state and local prosecutors and watchdog agencies and the U.S. Department of Justice aren’t sufficient to protect the nation’s consumers. We must need more pencil pushers.
Another possible name for the measure could be the ACORN Activist Full Employment Act. The name would make sense because such legislation would help to keep the venal poverty predators at ACORN and similar groups such as the Greenlining Institute, National Council of La Raza, Neighborhood Assistance Corporation of America (NACA), and the RainbowPUSH Coalition busy, busy, busy.
The name is also appropriate because activist groups were encouraged to agitate by the CRA, which enshrined in law a kind of lending protection racket. Banking regulators were given the power to make trouble for banks that failed to lend enough money to so-called underserved communities. Spurred on by community organizers, banks that paid enough –whatever that means— got left alone, but banks that didn’t, got their legs broken.
How much money is enough to satisfy the law? Even the Federal Reserve Board can’t say for sure. From the Fed’s online summary of the Act:
“The CRA requires that each depository institution’s record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution’s application for deposit facilities.
Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution’s individual circumstances.”
The Obama administration wants to take this federal law, which is the very definition of arbitrary and capricious, and push it even harder.
Not surprisingly, bureaucrats don’t want to believe that the programs and laws they enforce hurt society. The white paper asserts that “[r]igorous application of the Community Reinvestment Act (CRA) should be a core function of the CFPA” and dismisses critics who say the statute must be weakened to promote financial stability. Critics’ “claims and arguments are without any logical or evidentiary basis,” it says.
About the Author
Matthew Vadum is an award-winning investigative journalist at a conservative watchdog group in Washington, D.C. Vadum is also author of Subversion Inc: How Obama’s ACORN Red Shirts are Still Terrorizing and Ripping Off American Taxpayers.
Letter to the Editor View all comments (74) | Leave a comment
Related Articles
More Articles by Matthew Vadum
More Articles From The Public Policy
http://spectator.org/archives/2009/06/22/financial-affirmative-action-r
Follow us:
ADVERTISEMENT
Current Issue
- Of Wizards and Weapons
- Downton’s Class System — and Ours
- Eugenic Abortion 2.0
The Spectacle Blog
The #FreeKate Narrative Melts Down: Lies Exposed in Florida Teen Sex Case
Robert Stacy McCain | 11:44PM
SPONSORED LINKS
FLASHBACK TO: 1995
-
Pope Culture
A man of faith in a godless age is hitting Americans where it hurts.
-
Why the GOP Does Not, Like, Totally Suck
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
-
Dames at Sea
-
In the Absence of Guns
In Britain, defending your property can get you life.
-
The Metaphysical Martini
-
Counting the Costs of Clintonism
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
-
Chuck McHagel
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
-
The Legacy of Old John and Mother Fresh-Roasted
-
It’s the Best Time of the Year
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
-
The Bush Crack-Up
Was the President done in by the economy, or by the politics of the economy?
Clip of the Day
H/T to National Review Online
ADVERTISEMENT
Robert Rosencrans| 6.22.09 @ 6:17AM
Don't invest in banks. Don't invest in home builders. Stay tuned for Consumer TARP.
Marc Jeric| 6.22.09 @ 6:28AM
Anyone remembers Gorbacov's plan to save the Soviet Union? Perestroika and Glasnost - da? That translates as Reform and Transparency; any resonance there? That was Abu Hussein's campaign slogan. With his ACORN brownshirts he is marching us straight into the United Soviet States of America. The only thing still missing is the domestic Gulag with somebody suitable in charge of our re-education - say Pelosi, or Harman, or Boxer, maybe Frank od Dodd.
Bill| 6.22.09 @ 7:46AM
Good summary of what the impact of CRA was on the banking system. As a banker I can attest to the damaging effect this had on the banking system and as we see on our country and the economy. The old saying is that figures don't lie but liars figure. And so Freddie and Fanny are still there with no change and Dodd and Frank have the gull to say no foul. Some should be thrown out of congress and a investigation started to see if perhaps some should be thrown in jail.
Big J| 6.22.09 @ 7:53AM
I'm from the government, and I'm here to help.
I agree with Bill. Any regular citizen behaving like Bwaney Fwank and Chris Dodd would have been thrown in jail long ago.
But the same laws don't apply to the ruling elite class.
Bob| 6.22.09 @ 8:40AM
Vadum, I suggest you refrain from talking about things you do not understand. The CRA had a very minimal impact on the credit crisis. Here's a quote from YOUR article:
"University of Texas economist Stanley Liebowitz wrote that the current mortgage market debacle is "a direct result of an intentional loosening of underwriting standards – done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.""
What do you not understand about this? It might have been done "in the name of ending discrimination", but it DID NOT CAUSE the problem. The CRA was passed in 1977 and did not do a thing to cause the housing crisis until Gramm-Leach-Bliley was passed in the late 90's and Greenspan (who has since apologized for his action), artificially kept the fed funds rate low to stimulate housing. GLB alllowed the investment banks the "freedom" of creating the derivatives and swaps that caused the market bubble.
As I've said before, I worked in the industry and in our pricing meetings we did not even mention the CRA. The only thing we were concerned with is making money. We did that through securitization (i.e., CDO's/deriviatives) where we made our money up front and passed on the risk to investors. All we cared about was originating the mortgage. If it went under, it was not our problem. Therefore the separation of the origination from the risk was the major problem. We could do that before GLB, but nowhere near the extent it could be done after GLB when gullible investors wanted greater returns. The fact that you don't understand the financial dynamics here and think it is political, is naivete at its apex.
Again, if you'd like to go through the economic fundamentals of this process, I'd be happy to take you through it in detail. If you are too embarrassed to do that, then talk to Philip Klein -- he seems to have some handle on this.
Ryan| 6.22.09 @ 9:42AM
Bob,
Would GLB have happened without the CRA?
Would bad mortgage originators have been in their business without the CRA?
Robert Rosencrans| 6.22.09 @ 10:05AM
Another good read on the subject:
http://www.aynrand.org/site/News2?page=NewsArticle&id=22999&news_iv_ctrl=2401
For example, Obama’s core explanation of all the destructive behavior leading up to today’s crisis is that the market was too free. But the market that led to today’s crisis was systematically manipulated by government. Fact: this decade saw drastic attempts by the government to control the housing and financial markets--via a Federal Reserve that cut interest rates to all-time lows, and via a gigantic increase in Fannie Mae and Freddie Mac’s size and influence. Fact: through these entities, the government sought to “stimulate the economy” and promote homeownership (sound familiar?) by artificially extending cheap credit to home-buyers. Fact: most of the (very few) economists who actually predicted the financial crisis blame Fed policy or housing policy for inflating a bubble that was bound to collapse.
How does all this evidence factor into Obama’s understanding of “how we arrived at this moment”? It doesn’t. Not once, during the solemn 52 minutes and 5,902 words of his speech to Congress did he mention the Fed, Fannie, or Freddie. Not once did he suggest that government manipulation of markets could have any possible role in the present crisis. He just went full steam ahead and called for more spending, more intervention, and more government housing programs as the solution.
But a genuine explanation of the financial crisis must take into account all the facts. What role did the Fed play? What about Fannie and Freddie? To be sure, some companies and CEOs seem to have made irrational business decisions. Was the primary cause “greed,” as so many claim--and what does this even mean? Or was the primary cause government intervention like artificially low interest rates, which distorted economic decision-making and encouraged less competent and more reckless companies and CEOs while marginalizing and paralyzing the more competent ones?
Entertaining such questions would also mean considering the idea that the fundamental solution to our problems is to disentangle the government from the markets to prevent future manipulation. It would mean considering pro-free-market remedies such as letting banks foreclose, letting prices reach market levels, letting bad banks fail, dismantling Fannie and Freddie, ending bailout promises, and getting rid of the Fed’s power to manipulate interest rates.
But it is not genuine understanding the administration seeks. For them, the wisdom and necessity of previous government intervention is self-evident; no matter the contrary evidence, the crisis can only have been caused by insufficient government intervention. Besides, they are too busy following Obama’s chief of staff’s dictum, “Never let a serious crisis go to waste,” by proposing a virtual takeover of not only financial markets, but also the problem-riddled energy and health-care markets--which, they conveniently ignore, are also already among the most government-controlled in the economy.
While Obama has not sought a real explanation of today’s economic problems, Americans should. Otherwise, we will simply swallow “solutions” that dogmatically assume the free market got us here--namely, Obama’s plans to swamp this country in an ocean of government debt, government controls, and government make-work projects. But alternative, free-market explanations for the crisis do exist--ones that consider the inconvenient facts Washington ignores--and every American should seek to understand them.
Those who do will likely end up telling our leaders to stop saying “Yes, we can” to each new proposal for expanding government power, and start saying “Yes, you can” to Americans who seek to exercise their right to produce and trade on a free market.
Bob| 6.22.09 @ 10:05AM
Ryan, GLB was much, much broader than the very small CRA. GLB was a major deregulation of the financial services industry which reduced oversight of non-bank financial institutions. This still would have occurred without CRA. Let me explain...
The pricing on mortgages -- prime or subprime -- is made basis the spread -- i.e., the difference between what you charge and how much the capital costs. You calculate the profit from the spread by taking the total spread, subtracting the default rate for the specific tranch (prime/subprime/etc.), and then subtracting the cost of doing business. If you are not worried about the risk which is what occurs with securitization, then all you look for is a positive spread. The ratings agencies rated even subprime securitizations very high. They did this by saying that even if a mortgage holder defaults, you could still sell the home at or near the mortgage value and thus would not lose money. This is like a Ponzi scheme. As long as housing prices rise, you can sell this scheme works. Furthermore, given the high ratings of these securitizations, you didn't have to keep much in reserves to cover defaults. That's where you hear about "leverage". The investment banks were leveraged about 40 to 1 and AIG's swaps were leveraged above 80 to 1. Therefore, it only takes a slight increase in defaults or a slight drop in housing prices to cause a very large problem. When there is a rise in both, there is a disaster.
The Fed encouraged this activity by allowing cheap capital which enabled mortgage companies to increase their spread and also ratings agencies to raise ratings even further.
I worked for a subprime lender and we would have been in business with, or without the CRA. Our business was very stable but grew dramatically with GLB as there was a strong market demand for mortgage backed securities because these were highly rated and gave high returns. We were able to lower our lending standards because our spread grew. Very few of our subprime mortgages were CRA related. Furthermore, we sold on the basis of monthly payments, not total cost or future payments.
This is a relatively complicated financial dynamic and simplistic political answers are often wrong.
Matthew Vadum | 6.22.09 @ 10:16AM
Bob, your condescension is not winning you any fans here at AmSpec. In any event, I argued the evidence is clear that CRA played a role in the subprime mortgage bubble. A role, not the primary role. I have no interest in being lectured by an ignorant blowhard like you.
Bob| 6.22.09 @ 11:36AM
Vadum -- here is what you said:
"That's because there is no doubt that the Carter-era Community Reinvestment Act (CRA) and other boneheaded government policies helped to create the subprime mortgage bubble that violently burst and that continues to wreak havoc on the world's financial markets. CRA allowed activists to blackmail lenders into handing out mortgages to people with little regard for their ability to keep up payments."
You didn't talk about this as a MINOR factor, didn't mention GLB, the Fed, the housing bubble, etc. What grates me about this, Vadum, is that there are significant CONSERVATIVE principles that could be applied here, and you remain a hack rather than a principled fiscal conservative.
First of all, deregulation does work if you regulate the RIGHT things. Conservative principles talk to the idea individual responsibility. Regulation should insure CORPORATE responsibility. If a company takes a risk, they should either be rewarded or hurt by that risk. Mortgage originators know better than anyone about the quality of the mortgage customer. Ratings agencies do not know and certainly investors do not know. This market would have worked well if we required lenders to assume a portion of the risk whether the CRA was there or not. Furthermore, it is a conservative principle that companies should have the financial strength to withstand a market downturn. We do this for banks and insurance companies, and these industries work well. The only reason banks needed the bailouts was for the unregulated GLB portion.
We DON'T need regulation like the CRA, but this is part of a bigger CONSERVATIVE principle -- the market knows better than the politicians in Washington. The CRA is part of "incentive" legislation like tax exclusions, ethanol subsidies, etc. Our government needs to get out of the "incentive" business and just pass regulation that makes markets fair and individuals/corporations take responsibility for their actions.
That's why I am so condescending -- you take these fake political issues that "bomb" the Democrat enemy rather than taking knowledgeable, principled, fiscally conservative positions based on the truth.
You, more than others, throw these types of nonsensical bombs. This will continue to lead the Republican party to irrelevance. The truth is on the side of conservatism, why not search for it for a change?
By the way, calling be a "blowhard" is like throwing a stone in a glass house. As to the charge of "ignorant", it is more revealing of you than me.
P.S. I'll get a lot of grief here by being a social libertarian and being pro-choice, but I challenge you and others to be more fiscally conservative than me.
Robert Rosencrans| 6.22.09 @ 12:28PM
Another good read:
http://www.heritage.org/Press/Commentary/ed101508b.cfm
The CRA Cover-Up
by Ernest Istook
As always, it's the cover-up that sinks people. Liberals are working overtime to cover up their role in the mortgage meltdown. Not only did they block attempts to reform Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac before they could drag down our economy, but liberals also abused the Community Reinvestment Act (CRA), turning it into a vehicle for directing loans to unqualified homebuyers. The left knows that whoever shapes public understanding of what caused today's economic crisis can shape America's politics -- and its future -- for a great many years to come. Thus, they're pushing the notion that too little government regulation was at fault.
If the country buys this idea, liberals can enact a carbon-copy of FDR's response to the Great Depression, building a larger, more activist and ever-more-controlling federal government. They can exploit the mess by establishing a conventional wisdom that more government is the solution, rather than understanding how big government is a root cause of the current financial meltdown. Claiming it all sprung from a lack of regulation is a half-truth, and a Yiddish proverb says a half truth is a whole lie. Over-regulation opened the money spigot by requiring lenders to make poorly underwritten loans. Under-regulation then allowed politicians to exploit that. Although greed and dishonesty among both borrowers and lenders had major roles, the CRA and the GSEs were at the heart of what happened, setting up the now-toppled dominoes of Bear Stearns, Lehman Brothers, and others. Over-regulation through CRA, aided by HUD, became a huge problem and, alas, wasn't even addressed in the multi-billion dollar bailout. The Clinton Treasury Department's tough new regulations in 1995 compelled the banks to engage in far-riskier lending practices or receive a failing CRA grade.
To avoid an "F" from the CRA, which could jeopardize their viability, the banks were pressured to direct hundreds of billions of dollars in high-risk mortgages to inner-city and low-income neighborhoods. Moreover, under CRA pressure, banks would "hire" radical, non-profit groups like ACORN to find them customers. Once trillions of dollars began to flow, politicians and lobbyists tapped into this stream, and so did left-wing activist groups. According to George Mason University's Russell Roberts, the CRA was buttressed by other new regulations during the Clinton Administration. As Roberts writes, "For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42 percent of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50 percent in 2000 and 52 percent in 2005. For 1996, HUD required that 12 percent of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60 percent of their area's median income. That number was increased to 20 percent in 2000 and 22 percent in 2005. The 2008 goal was to be 28 percent." The banks were kept from rebelling by using Fannie Mae and Freddie Mac's deep pockets to buy these poor-quality loans and take them off the banks' books. Under-regulation of the GSEs -- Fannie Mae and Freddie Mac -- allowed the money stream to widen and keep flowing. There has always been an implicit understanding that taxpayers would cover GSE losses and this enabled them to attract money and pour it into the CRA-induced sub-prime market.
The Bush Administration had warned about this for years. Fannie and Freddie, however, could skim enough to pay for political protection, plus pay sky-high executive salaries and bonuses to well-connected political figures. Over the past decade, Fannie and Freddie combined to spend a reported $200 million on lobbying and campaign contributions. Now bailing them out may cost taxpayers $200 billion directly, and far more indirectly. The circle of political back-scratching centered around the theme of affordable housing, which the GSEs marketed heavily. Politicians wanted housing for low-income and poor credit risks, so they used Fannie and Freddie to further that objective, and the GSEs responded with campaign help for those politicians. In return, politicians resisted reforms. This was demonstrated at a 2004 House hearing, where Rep. Maxine Waters (D.-Calif.) denounced attempts to stiffen oversight and regulation of this duo "so as not to impede their affordable housing mission, a mission that has seen innovation flourish, from desktop underwriting to 100 percent loans." "Desktop underwriting" meant undocumented loans. No proof of income or credit history required. And zero down payment. Members of both parties were involved in protecting the system. But liberal Democrats were the dominant force. Recently, House Financial Services Chairman Barney Frank (D-Mass.) told The Boston Globe, "[Republicans'] failure to regulate sensibly ... endangered the economy and ... burdened it with bad stuff.... Their own philosophy blew up in their face. They were so extreme in their insistence that there be no government intervention that they have wound up provoking far more government intervention than the Democrats ever would have." But Frank is covering up his own role because he sang a far different tune in 2003, when the Bush Administration and many Republicans (including Sen. John McCain) tried to require Fannie and Freddie to comply with Securities and Exchange Commission regulations and other additional oversight requirements. Treasury Secretary John Snow, in fact, had specifically warned Congress that Fannie and Freddie needed a new supervisory structure so that both institutions would "maintain capital and reserves sufficient to support the risks that arise or exist in its business." Rep. Frank was unconcerned. He told a hearing, "Fannie Mae and Freddie Mac are not in a crisis." Rather, he said, they were "fundamentally sound," and criticisms of them were unjustified exaggerations and "disaster scenarios." Then he confirmed why: "The more pressure there is [to regulate] then the less I think we see in terms of affordable housing" He wanted to continue both the giveaway train supplying mortgages to those who couldn't afford them and the gravy train for politicians. This appealed to liberals and in particular to the Congressional Black Caucus, which received six-figure support from both Fannie and Freddie in 2007. The GSEs' major campaign largesse went to well-placed friends in key positions. The top six from 1998 thru 2008, according to the Center for Responsive Politics: Sen. Chris Dodd (D.-Conn.) $165,400 Sen. Barack Obama (D.-Ill.) $126,349 Sen. John Kerry (D.-Mass.) $111,000 Sen. Robert Bennett (R.-Utah) $107,999 Rep. Spencer Bachus (R.-Ala.) $103,300 Rep. Roy Blunt (R.-Mo.) $ 96,950 And almost everyone in Congress got something.
Mike| 6.22.09 @ 12:28PM
Whoever thought that originating mortgages with no money down and with short term teaser rates was a good idea? Answer that question and you identify the primary culprits of the housing bubble.
Yes Bob, you facilitated the process by writing crappy mortgages, pooling them, getting AAA ratings from the complicit rating agencies and selling them to regulated investors like insurance companies.
Yes, the Greenspan "put" let the party go on much too long.
But the ultimate cause of the subprime crisis bubble was poor underwriting to undeserving individual borrowers.
Pete| 6.22.09 @ 12:31PM
While I agree with much of what Bob says, I can't for the life of me understand the argument that the CRA had NO effect. I wholeheartedly agree with - "the market knows better than the politicians in Washington. The CRA is part of "incentive" legislation like tax exclusions, ethanol subsidies, etc. Our government needs to get out of the "incentive" business" but I can't reconcile that with the next part - "pass regulation that makes markets fair." Having said that, it is a waste of time to argue with Bob because a) You can't quite tell what he is arguing, except that there is no politcal point to be made here and b) apparently he was inside the minds of every executive in the industry for the last 25 years.
Getting pressured or forced to lend to people who cannot repay the loan is a BAD thing and is the beginning of a BAD chain reaction throughout the system. You can only offload this risk if there is someone willing to assume the risk. Why would anyone assume that kind of risk? Enter Fannie and Freddie to distort the risk profile and allow the initial risk to be offloaded, allowing the chain reaction to continue. CRA, F&F being political entities, there IS a political connection. Pretty simple. The fiscally conservative viewpoint says don't F with the market in the name of social engineering and vote buying. I think this point comes through in the article...keep up the good work, Mr. Vadum. That is all.
Matthew Vadum | 6.22.09 @ 12:48PM
Bob, I don't mind reasonable criticism but you seem incapable of it. Plus, you lack reading comprehension.
I wrote:
"That's because there is no doubt that the Carter-era Community Reinvestment Act (CRA) and other boneheaded government policies helped to create the subprime mortgage bubble that violently burst and that continues to wreak havoc on the world's financial markets."
The phrase "helped to create" is very broad and deliberately so. A number of measures including CRA played a role as Larry Lindsey and others have acknowledged. I didn't label the CRA "major" or "minor" and that's my prerogative. The CRA and other dumb policies laid the groundwork. I am not writing a dissertation on the housing bubble and do not have to mention every single contributing factor: I'll leave that to Thomas Sowell.
Are you really as stupid as you seem, Bob? I'd be surprised to learn that you can dress yourself.
What part of "helped to create" did you not understand?
Bob| 6.22.09 @ 1:39PM
Pete, for a guy having an MBA from a top notch school, it is surprising to find someone who doesn't understand the financial dynamics here. If you understood how the market works, you'd also understand why the CRA made very little difference. But since you don't understand the underlying economics, I can't help you. Furthermore, you don't need to understand the "minds of executives" here because the vast majority of subprime mortgages were given to non-CRA related customers. Besides, if it was the CRA that was responsible, given that it was passed in 1977 we would have seen results far sooner than the 2000's. Yours, and Vadum's argument makes little sense. By the way, Pete, were you inside the mortgage executive's minds to know that the CRA made a difference? I was far closer to these executives than you.
Furthermore, we know that only 30% of Fannie and Freddies loans were subprime. We also know that the default rate of the GRE's subprime loans was lower than the default rate of subprime loans in general. That's why the investment banks and AIG were hit harder than the GRE's.
Vadum, the fact that you continually harp on the CRA rather than the major causes, and that you have to take step back from a "major" or "minor" label, proves my point. It may be your "prerogative" to do that, but that doesn't make it reasonable.
Anyone who can't give appropriate perspective to their rants is the one lacking in IQ points. And yes, I can dress myself. Can you do the same?
Mike, you are absolutely correct in your statements. But here's the problem. If you are a mortgage originator and you can still make money by giving mortgages to unqualified people, do you stop doing it? If you do, can you be sued by shareholders who look at competitors who do better than you? Remember, until the housing bubble burst, defaults didn't matter that much as you could sell the property for the cost of the loan and not lose money. As we have seen throughout our history, business will do what they can within (and sometimes without) regulatory limits to maximize short term profits. You can put limits on that through regulation, but unregulated entities will always push that envelope.
Matthew Vadum | 6.22.09 @ 1:56PM
Bob, anyone who tells a journalist what "the real story" is, is just another obnoxious miscreant with an agenda. Journalists with integrity don't cave in that kind of intimidation. I choose to write about the CRA. If you don't like it, take a long walk off a short pier my trollish friend.
Bob| 6.22.09 @ 2:02PM
Mike, one more comment. When I was in the industry I tried to get our company to take a longer term perspective to tighten qualifications and was overruled. Executives did everything they could to maximize yearly bonuses -- and increasing originations grew bonuses more than anything else. You know, I was the kind of guy that volunteered to fight in the Army during Vietnam and believed it was more important to be right than be political. I hate to see where our country is going on both the right and the left. Both sides value ideology over reality and making mountains out of molehills rather than providing perspective. You can't do anything about the left because their perspective is based heavily on emotion. The ultra-right and social conservatives also base their positions on emotion and out of context remarks. But I have many kids and grandkids whose lives will be hurt by the intractable behavior on both extremes. I know it is a waste of time to battle the left. I hope, however, that there are some on the right that value truth, perspective, pragmatism, and the fiscal conservatism of those who understand what it means to be raised poor and follow the American dream.
Robert Rosencrans| 6.22.09 @ 2:05PM
Mr. Vadum, I thought your article was extremely accurate and to the point of brilliance. Anyway, that's just one opinion.
How much easier it is to be critical than to be correct.
Benjamin Disraeli (1804 - 1881), speech, January 24, 1860
Asking a working writer what he thinks about critics is like asking a lamppost how it feels about dogs.
Christopher Hampton
Any fool can criticize, condemn, and complain - and most fools do.
Dale Carnegie
If you are not criticized, you may not be doing much.
Donald H. Rumsfeld (1932 - ), Secretary of Defense
After all, one knows one's weak points so well, that it's rather bewildering to have the critics overlook them and invent others.
Edith Wharton (1862 - 1937)
To avoid criticism do nothing, say nothing, be nothing.
Elbert Hubbard (1856 - 1915)
Do what you feel in your heart to be right - for you'll be criticized anyway. You'll be damned if you do, and damned if you don't.
[info][add][mail]
Eleanor Roosevelt (1884 - 1962)
Bob| 6.22.09 @ 2:16PM
Matthew -- journalists with integrity don't try to distort the truth. Beck had an appropriate response to this. He said he is NOT a journalist, but a "commentator". I respect him for being honest.
So, Matthew, what is it about the CRA that makes you blow it out of proportion? You write so much about it that some deep seated emotion is driving it. Here's a suggestion, why don't you "comment" on why the CRA and what it does bothers you so much. It bothers me as well because of the whole idea of government incentives. I don't like it on the left, and I don't like it on the right. I don't like it when it's pork. I don't like social engineering. If you railed against the CRA for those reasons, I'd not only agree with you, but I'd applaud you. But saying it was a significant cause of the meltdown is just not true.
Bob| 6.22.09 @ 2:18PM
Rosencrans -- good point. Perhaps Vadum and others won't criticize the Democrats so much. Perhaps Vadum won't criticize the CRA so much. Thanks for the laugh....
Pingback| 6.22.09 @ 2:46PM
Interest Rates » The American Spectator : Financial Affirmative Action Returns links to this page. Here’s an excerpt:
gene hauber| 6.22.09 @ 2:56PM
Dear Editor,
Let me say from the beginning that anything that ACORN is involved SHOULD be considered ILLEGAL FROM THE START AND CORRUPTED BY THE INFLUENCES OF THEIR COMMANDER-IN-CHIEF, BARACK HUSSEIN OBAMA.....A NAME THAT SHOULD NEVER HAVE APPEARED AS OUR PRESIDENT , EIGHT YEARS AFTER 9/11/2001.......WHAT A DISGUSTING DISGRACE THAT WE FELT SO NEEDY TO HONOR A PERSON WITH SUCH A NAME AND WITHOUT A BIRTH CERTIFICATE OR RELIGIOUS AFFILIATION OTHER THAN MUSLIM.
HOW STUPID CAN WE BE????????????
I CAN ONLY HOPE THAT , THE NEXT TIME YOU VOTE, YOU USE YOUR BRAIN INSTEAD OF YOUR STUPID ASS TO VOTE.
VOTING IS AN IMPORTANT FREEDOM OF DEMOCRACY, NOT JUST SOME OPPORTUNITY TO "SETTLE SCORES"
GET A GRIP ON YOUR SENSES!!
THIS OBAMA CHARACTER WANTS TO ROB YOU OF ALL OF THE FREEDOMS THAT "AMERICA" HAS ALWAYS OFFFERED YOU.........THINK ABOUT IT!!!!!
ben| 6.22.09 @ 3:21PM
Bob,
GLB took down the false walls that corralled bank's and lender's investments into specific areas and allowed them to diversify. It's the "don't put all of you eggs in one basket" theory. If one part of the economy collapses then having a diverse portfolio allows one to weather the storm by relying on their other investments. The CRA as expanded under Clinton and written with guidance from ACORN, mandated that banks and lenders accept unemployment, welfare and child support as proof of income. It eliminated down payment requirements, graded banks and lenders by their adherence to CRA and mandated thae Fannie and Freddie hold half of all of their mortgage paper in Sub-Prime loans. To hedge against the inevitable crash, credit default swaps were created. George W Bush inherited a recession when he took office and was hit with 9/11 8 months later. interest rates were kept low to fight the recession and impacts of 9/11. Sarbanes Oxley was created after Enron to try to keep companies from breaking the law rather than just enforcing the laws we already had or doing the feds job of oversight. Too many people want to blame Bush for the bubble's collapse but they ignore the fact that every bubble collapses, thus the cause of the collapse was the creation of the bubble. Many mistakes were made that fueled the bubble's growth which led to the exceptional recession we now find ourselves in. The CRA caused this bubble and is in fact the primary cause of our current recession. Wisdom comes from learning from one's mistakes not simply by committing them. We have made the mistake of governmnet intervention over and over and over and over again, and clearly the Dems have not learned from them. To sum it up I will quote from one of the highest grossing, most loved movies of all time - "stupid is as stupid does".
Oldefarte| 6.22.09 @ 3:57PM
AFFORDABLE HOMES [ie CRA] is GOVERNMENTAL WELFARE!!!!
Jeff| 6.22.09 @ 4:32PM
Stop lieing. There is zero evidence that the Community Reinvestment Act had anything to do with the current real estate crash.
Bob| 6.22.09 @ 5:14PM
Ben -- you make a cogent argument and your logic is good. The only problem is that the facts are inconsistent with your argument. Your facts are certainly correct, however, the housing bubble had little to do with subprime loans. There was a huge rise in the value of ALL homes -- not just subprime. How did the CRA cause the rise in values of multi-million dollar homes? It didn't. Almost all of the subprime mortgages were in lower cost homes. There were a huge number of speculators with "zero down" and "125" plans. Shows like "flip that house" were popular. The bubble was due to this activity, not subprime. Over half of the defaults were not subprime. You could see the speculators getting hit in Florida, California, Nevada, and Arizona. The vast majority of defaults in California were NOT subprime.
You, Vadum and others conflate the housing bubble and the CRA -- it is a common mistake if you don't think about it.
That said, I agree with you that Bush was not at fault -- and I've never faulted him or his administration for this. As I've said before, the housing bubble was fueled by the Fed and securitization. You must remember that subprime loans were not bundled alone. The derivative tranches included both prime and subprime loans. The higher percentage of subprime loans the greater the returns.
As a side note, the greatest growth in housing came from upper middle income "mini-mansions" (by dollar value) and not subprime homes.
All of that said, I totally agree that government intervention only hurts when it comes to incentives, but you do need some regulation to keep businesses honest so they won't become robber barons.
I would also like to thank you for not throwing bombs and making a logical argument. If you ever would like a lot more details of this crisis, let me know.
Pete| 6.22.09 @ 5:28PM
That's odd, Bob, just last week (6/18) when you were peddling this same drivel you wrote: "And by the way, this whole effort was pushed much more by George Bush than Frank and Dodd. Bush believed in home ownership at any cost. " Maybe what people have been telling me (about you being a troll on the site) is true - and here I thought you were just misguided in your thinking.
Bob| 6.22.09 @ 5:36PM
Pete -- great catch!!! I've gained a whole new respect for you....
However, (and you knew there had to be a "however"), that statement is not inconsistent with the fact that George Bush should not be blamed for the housing bubble just as the CRA should not be blamed. Both the CRA and Bush took advantage of the housing bubble, but did not CAUSE it. I'm surprised an MBA from a top school doesn't understand the difference between cause and effect. Well, perhaps you can go back for an advanced management course.
Pete| 6.22.09 @ 7:01PM
Nice try, Bob. Taken in context, it was a direct contradiction. I now have no respect for you, as you have just confirmed your troll status. See you on the next string, Mr. Big Time Executive.
John| 6.22.09 @ 8:31PM
Bob--
You said, "As I've said before, I worked in the industry and in our pricing meetings we did not even mention the CRA. The only thing we were concerned with is making money. We did that through securitization (i.e., CDO's/deriviatives) where we made our money up front and passed on the risk to investors. All we cared about was originating the mortgage. If it went under, it was not our problem"
Wow Bob, the above statement sure does fit the stereotype of the greedy financial/Wall Street guy. That being said, your statement above shows that you were part of the problem Bob. You are one of the "greedy" people who profited off the backs of others. Why would you tell us this Bob? Do you feel guilty? Did you have a change of heart, Bob? Are you trying to make a point? If you took advantage of all these people, then perhaps you should pay them back?
bill| 6.22.09 @ 8:58PM
Bob,
Given you are an expert at financial issues and worked heavily in the financial space, I can only assume your spelling of derivatives was a typing error. I can see how someone who has worked presumably extensively in the financial field would accidently spell derivatives by ADDING an “i”.
Bob >> … We did that through securitization (i.e., CDO's/deriviatives) where we made our money up front and passed on the risk to investors…
Mike| 6.23.09 @ 1:02AM
I certainly don't blame you Bob or any of the other so-called predatory lenders for creating the sub-prime crisis.
I do, however, blame the predatory borrowers and their political enablers. Once you establish an industry around the CRA precedence that every deadbeat has a fundamental civil right to the American dream, then something like the sub-prime crisis becomes eventually inevitable.
Robert Rosencrans| 6.23.09 @ 6:46AM
I once knew a guy who worked at a carnival. It was rather interesting to listen to the guy describe how he fleeced the public on a regular basis and the tricks of the trade.
The mortgage industry is in the same boat, infested with scalawags, con artists and outright criminals.
When someone tells you proudly that's where they work, you should wonder how someone would survive in that type of industry.
Country Boy| 6.23.09 @ 7:10AM
Good read, but need to amplify. The sub-prime mortgage crisis was actually a two step government induced financial implosion. The first step was as described: encouraged virtually the entire residential mortgage market to become undercapitalized. The second step was the triggering of the Mark-to-Market rules of Sarbanes Oxley. When this regulation was enforced on the banks, they were forced to liquidate performing loans at firesale rates, bringing the industry to its knees.
Bob| 6.23.09 @ 7:59AM
So, Bill, you spell a word correctly 99% of the time and you misspell it once and someone complains? Please tell me you type perfectly.
Pete, if you cannot see the difference between countering one minor point with another and determining the major factors in an analysis, I have some sympathy for your superiors. We call that PERSPECTIVE.
Rosencrans -- when did you work at a carnival? And there were lots of good guys in the mortgage industry. However, when you have a bubble, the sharks will come out in force. The sharks were bigger and more voracious on Wall Street, however.
Country Boy -- I agree, mostly, with your statement. Mark to market enhanced the problem, but it was still there. Investment banks and AIG would still have gone under. The TARP would have been less.
I suggest you all read the book by David Faber which outlines this crisis from a financial analysis viewpoint. Like me, he blames Greenspan and Wall Street, not the CRA. Politicians got on the bandwagon, they didn't create it. Furthermore, his research indicates that many of the large bank CEO's and boards didn't fully understand derivatives. You guys need to get out into the real world and not think politics was the cause of everything out there.
Harvard Grad Student| 6.23.09 @ 10:52AM
Nonsense. The very institutions covered and regulated under CRA prevented the origination and promulgation of subprime/predatory mortgage products. In fact, only 6% of loans from lenders covered under CRA were subprime loans, compared to 40-50%.
The author of this article should be reprimanded for unsubstantiated claims and false representation of facts.
Pingback| 6.23.09 @ 12:01PM
Nationalization Review | America Watches Obama links to this page. Here’s an excerpt:
Bob| 6.23.09 @ 12:54PM
Harvard -- You are certainly correct, but the ideologues hear have a lot of wax in their ears and their gray matter is gummed up. It isn't that Vadum doesn't use facts -- it is that he neglects the overall truth and thus misrepresents the situation.
They don't even realize that conflating the CRA with the housing bubble makes absolutely no sense. If the CRA were the cause, we wouldn't see the huge rise in prices of non-CRA properties.
Bill Bailey| 6.23.09 @ 2:49PM
Bobby boy, I don't believe for a second you are who you claim to be. You are a naysaying a**hole who gets off on causing trouble. You are also a pseudo-intellectual faux conservative who is trying to express himself beyond his means.
Bob| 6.23.09 @ 3:16PM
Well, Bill, that is your problem. AmSpec knows who I am and can verify my claims. I don't mind causing trouble if it gets to the truth -- which is a rare commodity here. Here's a challenge... Name something you don't believe and I'll immediately give you some information you can't get from Google to prove my veracity.
By the way, it is usually someone who has no credentials that defames someone who does....
Roy| 6.23.09 @ 6:42PM
Addendum - the government has now decided to dispense with the middleman(Fannie/Freddie) and create the housing bubble themselves.
Due to a misspent "youth" I have a crappy credit rating. Nonetheless, I could make a fairly substantial downpayment and have pretty good ratio of income to the size of the loan I want. In the past the banks would have hassled me and maybe told me to come back in a year, but I could have gotten a loan eventually. Now they just point me straight to the FHA, which will assume 100% of the risk for a credit rating as low as 600 and a downpayment as low as 3%.
Get ready to bail them out! A trillion here and a trillion there, pretty soon you're talking about fake money.
Pingback| 6.24.09 @ 12:39PM
Capital Research Center: links to this page. Here’s an excerpt:
Pingback| 6.24.09 @ 11:50PM
Barney Frank Wants to Throw Gasoline on the Fire « NewsReal Blog links to this page. Here’s an excerpt:
Pingback| 6.26.09 @ 9:55AM
More of the same with a vengance! at Texas League of the South links to this page. Here’s an excerpt:
Trackback| 6.29.09 @ 4:19AM
עשרת הברזילאיות הכי חמות, on עשרת הברזילאיות הכי חמות, links to this page. Here’s an excerpt:
Trackback| 7.8.09 @ 6:36PM
Marking of Glass, on Marking of Glass, links to this page. Here’s an excerpt:
Pingback| 7.9.09 @ 8:22AM
Does Barney Frank Want a Second Housing Crisis? « NewsReal Blog links to this page. Here’s an excerpt:
Trackback| 7.13.09 @ 3:15AM
state and federal lemon laws, on state and federal lemon laws, links to this page. Here’s an excerpt:
swertui| 4.22.10 @ 12:32AM
ArenaBetting.com dukung fair play FIFA world cup AFSEL 2010Winning is without value if victory has been achieved ArenaBetting.com dukung fair play FIFA world cup AFSEL 2010 or dishonestly. Cheating is easy, but brings no pleasure. Playing ArenaBetting.com dukung fair play FIFA world cup AFSEL 2010 requires courage and character. It is also more satisfying. Fair Play always has its reward, even when the game is lost. Playing ArenaBetting.com dukung fair play FIFA world cup AFSEL 2010earns you respect, while cheats are detested. Remember: It's only a game. And games are pointless unless played ArenaBetting.com dukung fair play FIFA world cup AFSEL 2010
I’ll have a Poptropica full written walkthrough very soon, but in the meantime, here are some answers to some of the frequently asked questions about Mythology Island. Having trouble? Post a question in the comments and I’ll try to answer it!
Getting Hercules to Help You
Hercules won’t help you until you have all five items from Zeus’ quest. Once you have the five items, bring them to Athena. Zeus will appear and steal them. The big jerk! Once this happens, talk to Athena and she will tell you that Hercules will help you. You’ll need to have the magic mirror from Aphrodite because Hercules doesn’t want to have to walk. He’s so lazy!
Getting the Hydra Scale
You can see how to do this in the videos, but basically you need to jump up when the Hydra is about to strike. He will rear one of his heads back to attack and his eyes will bulge out. When this happens, jump up in the air and then try to land on top of his head. That head will get knocked out. When all five heads get knocked out, the Hydra will be asleep and you can click on him to get one of the scales.Poptropica I’ll have a Poptropica full written walkthrough very soon, but in the meantime, here are some answers to some of the frequently asked questions about Mythology Island. Having trouble? Post a question in the comments and I’ll try to answer it!
Getting Hercules to Help You
Hercules won’t help you until you have all five items from Zeus’ quest. Once you have the five items, bring them to Athena. Zeus will appear and steal them. The big jerk! Once this happens, talk to Athena and she will tell you that Hercules will help you. You’ll need to have the magic mirror from Aphrodite because Hercules doesn’t want to have to walk. He’s so lazy!
Getting the Hydra Scale
You can see how to do this in the videos, but basically you need to jump up when the Hydra is about to strike. He will rear one of his heads back to attack and his eyes will bulge out. When this happens, jump up in the air and then try to land on top of his head. That head will get knocked out. When all five heads get knocked out, the Hydra will be asleep and you can click on him to get one of the scales. Poptropica