The government FORCED banks to give terrible loans to people? Oh bother....

tellarion, it did happen, now am I going to sit here and tell you banks didn't take it too far? No, they went too far, but the fact remains that the government did force banks into their behavior. The sub-prime market didn't really exist prior to the 95 version of the CRA bill.

The government meddled in the financial market for social progress reasons instead of logic and that's how we ended up here. One could also argue the second half of this problem, the housing price bubble, was created by the governments attempt to artificially get everyone into a house. By rewarding banks for approving people for homes when they otherwise wouldn't have been approved, it raised the demand for housing artificially, thereby causing a bubble in the housing market.

Either way, government meddling created a bubble in the market which eventually must pop. If I was to recommend a read, 'Road to Serfdom' by FA Hayek. It is why command economies do not work and industries where the government has a large impact typically do not perform well.

The government has been involved inflating the housing market via the tax write offs for a few Decades, the whole housing industry is over inflated for more reasons then banking. The real estate mentality was over kill, how many bedrooms do we need in the country for each person? Yet, up to the day of market collapse there was still a profound idea that buying more houses to rent was a good investment, the market was already over saturated for at least 10 years.

CK:

1) Your understanding of subprime loans is deeply flawed. I recommend you spend time reading Tanta's posts on Calculated Risk -- she was in charge of loan risk control at a regional bank, and her posts were quoted in papers by the Fed.

A) Subprime loans ALWAYS existed. However, subprime loans were only there to be used by people who had originated at prime and had a life event [medical emergency/job loss] that meant they needed a refi at a higher rate.
B) CRA has zero to do with subprime. CRA loans are 100% prime.
Also, the subprime market barely existed because.. the purpose of it was to be there as a protection for the things that happen in life, not a place to start.

Look on Barry Ritholz' site The Big Picture for his many posts destroying the flat-out lie that the CRA had anything to do with the housing crisis.


2) "The government meddled in the financial market for social progress reasons instead of logic" : This statement is 100% wrong. The private market failed. The private market gave money to people who couldn't pay it back, and then begged the governmet to prevent them from failing.

Nobody forced Countrywide to give $800k loans to immigrant day laborers. Seriously, what about the following scenario is difficult to understand: Countrywide gave the loan to that day laborer because they had the law changed so they were no longer liable.. the Countrywide loan officers paid themselves a ridiculous bonus because they booked it as profit and sold the note within 30 days, before it was in default.. this was the definition of the private market scam, and had ZERO to do with the government.

CRA loans are better quality than everything given by the private market -- always have been, always will be. Median income combined with low home value is a good loan, not a bad loan. Seriously, you're simply objectively wrong on this. The point is that before the CRA, the people who receive CRA loans couldn't get loans because bank officers were racially discriminating against them. Look up red-lining as well before commenting on the CRA again, because the entire point of the CRA was to define how red-lining was no longer acceptable. Red-lining is deliberately, explicitly racist.

If you actually think "government intervened" in the market, do some research for yourself. Compare the numerical total of private market loan origination total dollar values between 2003 - 2007 to total CRA loans in the same time period - which, by the way, are 100% prime loans.

Incidentally, even CRA loans are formally originated by banks, not government.. because banks still receive the profits from those loans. To qualify for a CRA loan, a recipient must be a prime-rated credit in an area that the bank is taking deposits from. The only reason banks "complained" about the CRA is because they didn't want to do business with blackety-blacks. Unless, of course, using your original words: Is doing business with a black family with a prime credit rating "not using logic?" Despite what you hear on Fox, that's exactly the situation.

The government does not "inflate" the housing market -- Wall Street does that all by themselves because they skim profits from each sale.

And just to pre-empt one initial thought: Fannie and Freddie were under severe constraints at that time and could not be the customer for those loan originations from 02 onward.

I don't understand why people aren't more angry at the private market housing loan originators, because where do you think those notes ended up? Your pension fund, your 401k, your parents' trust fund, your teachers' retirement fund, etc. The vast majority of all non-prime paper from 03 on is worth zero because that $800k note from Countrywide didn't get paid off, it got defaulted and the money vanished because nobody could buy the house, it's sitting vacant in Arizona. Your payouts from your fund will suffer if your fund bought the note which included that house. Here's how: Funds report to you that they have a million bucks in "assets" -- but what if those assets are only actually worth $750k? That means when it comes time to sell that note with the Arizona house to get the cash for your next fund dispersement... it comes back no-bid, $0, and you get $0 instead of the money you paid into that fund.

But wall street is doing just fine -- they already paid themselves giant bonuses for scamming you, even if you don't know it yet.

An unlitigated disaster. Title of a book that needs to be written.

Unsympathetic, I am unsympathetic to your points. At Nascar's restrictor plate races, commentators frequently point to small incidents that seem innocent as being the cause of the "Big One". Basically it goes like this: when your racing very closely together and one driver at the front of the pack makes a small mistake, they can frequently recover from it, but then everyone else has to adjust to this small mistake. A lot of times this is okay because all the people behind them just adjust and go on, but the big one occurs when a driver runs out of room to "check up". When someone runs out of room to check up, contact gets made and a lot of cars crash. Statistics will show the the cars at the front of the restrictor plate races frequently avoid the "Big One" (these are the CRA loans); they'll also show that the cars in the back frequently make it through alright (these are the institutions too small to be concerned with CRA issues yet); then they'll show the the cars in the middle tend to be involved in the "Big One" more frequently (these are the bank loans two-steps away from the CRA).

The CRA lead the banks to certain actions and when times were good, the banks got information that indicated that some maybe the old standards of credit worthiness were too conservative (these indicators were redherrings). Because of this, CRA lax standards were allowed to spread into other lending. The CRA rewarded companies for creating environments of greater and greated CRA compliance. Double standards don't work well in any situation, so the banks naturally adopted CRA standards more broadly.

But for the CRA, the environment in which the bad loans were made would not have been created. As for why someone smart didn't say anything to object to the CRA, because they were smart and new that objecting to what was seen as Civil Rights legislation was career suicide.

Diplomats play this game of taking an action to effect a situation two-steps away from them frequently. Even if you get their indirectly, you're still responsible for getting there.

CRA standards aren't lax. CRA loans are prime. If CRA loans are "bad" then every other loan originated by the private market is at best "very bad."

CRA loans are by the definition of credit better quality than every other type of loan. This isn't politics, this is an objective fact. Again, for every year since the inception of the CRA, default rates for all pools of CRA loans are LOWER than every private market origination pool of the same year.

Even with a median salary for the US [$44,389 in 2004] you can still be rated prime for a house appraised under $100k by the definition of credit. This isn't about "giving" money to black people -- median salary combines with low house price to be a prime loan. If the CRA actually was a money gift, those CRA loan pools would have a higher default rate -- but they don't.

Link #1: http://www.ritholtz.com/...a-bair-on-cra-not-guilty/

Link #2: http://www.ritholtz.com/...ses-blaming-the-cra-gses/

wow, Government non- involved for real? I would say there has been government involvement in the housing market every year since WWII. and that it has steadily grown. and yes we have market over shoots and pull backs as we do in each cycle and here it was the Housing/construction sector, it was over inflated in the 90's and just kept running, cause it was the safe place to be. just buy a second home, and buy a Vacation condo, and buy a home for rental property for the long term tax advantage, Wow we have 3 beds for every person, guess what is going to collapse in a recession.
from the 40's-80's your home had tax advantage helping to boost the market. then in the 80's we extended it to a 2nd home, in the 90's we added in easier ways to view home improvement loans (as in anything backed by the equity qualified, so that 100% hock was the smart play...lol right up till any drop in value and we all are screwed.. As you seem to understand banking you know dam well how money is made and how it contracts and we clearly had the market where any contraction was a disaster, didn't matter how good the loans were, smart money says why keep paying on a second and third home that is worth 30% below what is owed give it back to the bank and walk away. But that means contraction of money also. so banks/market is screwed.
All simple first 2 year econ. not that hard, I know everyone teaches the simple way money supply expands, it really not that hard to reverse the process... which probably every professor forgets to bother teaching.

CRA loans had and have a low default rate for two reasons: when times were good and home values rising, that market of people would simply sell their homes if they got behind. Loan gets paid off and no default. Now more wealthier individuals when faced with a trying to pay a loan worth considerably more than the loan simply walk away and take a lower hit than trying to stay and fight to keep the property. Numbers lie and the numbers that you're citing are lying quite voraciously.

Angel: Prove it.

So what you're saying is that the government (Clinton ofc, need a democrat to blame) caused the financial crisis by forcing banks to make loans that are less likely to fall into default?

Sure many folks qualified who should not have qualified for loans, but the bigger problem was on the backend of the deal where those loans were packaged into tranches with AAA ratings and then insurance was sold against said tranches. The guys buying at the top of the tranches figured they were covered because they were last on the pecking order if a tranch went bad and the prevailing belief was they couldn't all go bad as previous more mild recessions had only created regional real estate issues, not nationwide (also the rating scorer's prevailing logic). Anyway, point being that the qualifications only cause problems in so much that they're packaged into large groupings that can be sold as safe investments and then insured--the latter leading to the whole derivatives market of placing bets on the insurance.

Trumper: Incorrect. The initial rationale for CRA is that the people DESERVED to receive the loans [they did qualify] based on credit analysis, but they were not getting loans --even though their deposits were in the same bank-- simply because they were black. Again: look up the definition of red-lining. The CRA was absolutely not getting people loans who didn't deserve them.. it was a case of eliminating the explicit racism of bank officials.

That's very astute reasoning Sam. I Like You.

[quote poster=Unsympathetic; 20077; 376144]Trumper: Incorrect. The initial rationale for CRA is that the people DESERVED to receive the loans [they did qualify] based on credit analysis, but they were not getting loans --even though their deposits were in the same bank-- simply because they were black. Again: look up the definition of red-lining. The CRA was absolutely not getting people loans who didn't deserve them.. it was a case of eliminating the explicit racism of bank officials. [/quote]

I wasn't actually talking about the CRA, although I do think they have a role in responsibility. I was more posting a semi-sensical rant about derivatives and whatnot.

have a good day !

http://www.youtube.com/watch?v=px2CvPySHSs

I agree with most if not all of what you pointed out. However, there would be at least one quote that I would add which has proven itself to be prophetic and a "mirror" of what's happening today:

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property-until their children wake up homeless in the continent their fathers conquered."

Thomas Jefferson

democracy

http://www.youtube.com/watch?v=BAvEiLpboqk

http://imageshack.us/...nnyphotosmcdonaldsadv.jpg

http://www.youtube.com/watch?v=_xBUXTVVDDw

have a good day .