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Bloomberg to OWS: Congress caused the mortgage crisis, not the banks
Topic Started: Nov 8 2011, 02:39 PM (393 Views)
Jim Miller
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Bloomberg to OWS: Congress caused the mortgage crisis, not the banks


By this time, everyone should be aware of the federal policies that precipitated the housing bubble and its collapse — the push by Congress and two administrations to push higher-risk lending in order to expand home ownership, as well as the effort by Congress to get Fannie Mae and Freddie Mac to spread that risk through mortgage-backed securities. While Wall Street made the situation worse by developing risky derivatives on those securities and failed to recognize the risk inherent in the securities themselves, the collapse wouldn’t have occurred at all had the federal government not intervened to distort lending for their own social-engineering goals.

Michael Bloomberg tried to explain that to Occupy Wall Street protesters this morning, and pointed out the contradiction between their protests and their demands:

“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t gave gotten them without that.

“But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for.”

Bloomberg went on to say it’s “cathartic” and “entertaining” to blame people, but the important thing now is to fix the problem.

It’s even more important to not make the same mistake again, which is exactly what the OWS crowd wants. They want Congress to intervene even more heavily to lower lending standards as a policy of “fairness,” which is exactly what Congress did in the late 1990s, and which started the housing bubble that nearly destroyed the financial sector in 2008. And Investors Business Daily claims that they have the “smoking gun” that shows exactly how the government created the bubble in the first place by intimidating banks into distorted lending practices — based on a flawed study:

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies. …

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower’s credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.

The study did not take into account a host of other relevant data factoring into denials, including applicants’ net worth, debt burden and employment record. Other variables, such as the size of down payments and the amount of the loans sought to the value of the property being bought, also were left out of the analysis. It also failed to consider whether the borrower submitted information that could not be verified, the presence of a cosigner and even the loan amount.

When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.

Lenders faced a nightmare regulatory threat and so began to “bend” their lending standards to demonstrate compliance. Congress helped by authorizing Fannie and Freddie to buy up subprime mortgages at a higher rate in order to incentivize compliance. That opened the floodgates, as Fannie and Freddie essentially ended any risk for lenders in the subprime market, and it also opened up a significant incentive for so-called “predatory lending.” After all, why not give consumers more credit than they could handle if the original lender didn’t have to bear the cost of failure?

As a result, demand accelerated, and so did prices. They got disconnected from their usual tie to the rate of inflation, soaring far above normal valuation. People believed they had acquired a windfall of real equity and began either trading up or opening up home-equity lines of credit to fuel consumer spending. In 2008 the bubble popped, and a lot of homeowners found themselves unable to make their payments as jobs disappeared and property values rapidly descended.

And that may not be over, either:

The besieged housing market has even further to fall before home prices really hit rock bottom.

According to Fiserv (FISV - News), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.

Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv’s chief economist.

Should home values meet Fiserv’s expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst.

In June I also made the same observation, based on projecting normal inflation without the bubble from 1998 onward. Rapid job growth could change that, but since we don’t see any indication of that on the horizon, CNN Money’s prediction is likely to come true.
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While all that is true, he neglected to mention packaging up of bad debt by Wall Street, & selling them as investment. That was the other MAJOR factor in the crash.

BTW, as a matter of interest, housing price increases in this country are averaging over 6% a year. 7.22 % so far this year.
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Chris
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While private banking participated in bundling bad debt, it was government that created the incentives and institutions that made it possible, and then bailed them out.
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tomdrobin
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No matter how many times this crappola from the right wing spin machine gets debunked. It keeps right on being resurrected and rolled out for the loonies daily fix of bias confirmation. Facts just don't seems to matter when your looking for the "evidence" to support your beliefs instead of searching for the truth.

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Fannie, Freddie, and the CRA are Not Responsible for the Financial Crisis

(MoneyWatch) If we want to minimize the chance of another financial crisis, it's important for us to understand how it happened. If we get the causes wrong, our attempts to fix the problems in the financial sector are unlikely to be successful.

That's why I was so disappointed to see the new book by Gretchen Morgenson and Josh Rosner, Reckless Endangerment, blaming the financial crisis on Fannie, Freddie, and Democrats. The book has been highlighted recently by George Will and David Brooks, and it joins a chorus of conservative voices promoting the idea that government policies to encourage home ownership among middle and low income households is at the heart of the financial crisis.

The dispute over the cause of the financial crisis breaks down along standard ideological lines. Democrats generally argue that the crisis can be traced to misplaced faith in the ability of markets to self-regulate. According to this view, economists, regulators, and politicians on both sides of the aisle came to believe that large, economy wrecking financial meltdowns were a thing of the past. This misplaced faith in markets led to deregulation of the financial sector, less enthusiastic enforcement of the rules that remained on the books, and government inattention to important market failures in the financial industry.

The second explanation, one pushed by free market advocates, is that government involvement in housing markets to encourage home ownership caused the financial market problems. In this story of the crisis, the Community Reinvestment Act, Fannie and Freddie, Democrats promoting home ownership, and the middle and low income households that received home loans they couldn't afford are cast as the villains. Had government stepped out of the way and pursued laissez-faire policies, the crisis would not have happened.

However, the evidence does not support the second explanation. First, with respect to the CRA, the main culprits in the crisis were private sector financial institutions that were not subject to the requirements of the CRA. In the story being pushed by free market advocates, the CRA forced banks to make loans to unqualified, low-income households. When those loans blew up, it caused the financial crisis. But the largest players in the subprime market were private sector firms that were not subject to the CRA's rules and regulations. For example, "Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics." The largest losses had nothing to do with banks covered by the CRA.

Second, even if the banks themselves were subject to the CRA, not all loans that they made were covered by these rules. Even in banks where the CRA applied, most of the problems were in loans that did not fall under the CRA's jurisdiction.

Third, the CRA has been in existence since 1977. If the CRA was responsible, why didn't the crisis occur sooner? The timing simply doesn't match up.

Fourth, the CRA only applies to domestic firms, but the crisis occurred in many countries. If the CRA is the problem, why did countries that had nothing like the CRA experience similar problems?

Fifth, even if this story had any validity, both parties promoted an "ownership society," so blaming Democrats alone is about politics, not reality.

Thus, the evidence against the claim that the CRA was an important factor in the financial crisis is quite strong and, turning next to Fannie and Freddie, the evidence here is also compelling. First, during the important years in the build up to the crisis, from 2002 until late in 2006, Fannie and Freddie were losing subprime market share to private sector firms. For example, as noted by McClatchy News, "More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions," and "Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year." The loss of market share ended in late 2006, but by then the crisis was already set in motion.

Second, one of the reasons that Fannie and Freddie lost market share is that they faced more restrictions on their activities than firms in the unregulated shadow banking sector. Fannie and Freddie eventually found ways around these restrictions as they moved aggressively to prevent further loss of market share in late 2006, but prior to that time the restrictions were effective. If firms in the shadow banking sector had been subject to similar rules and regulations, and had the rules and regulations been enforced aggressively, things might have turned out very differently.

Third, the targets for home ownership that supposedly led to Fannie and Freddie's aggressive entry into subprime markets were set in 1992. If these targets were the problem, why didn't the crisis occur sooner?

Fourth, if Fannie and Freddie had never existed, securitization would have likely happened anyway. As Barry Ritholtz notes, "securitized credit card receivables, auto loans, small biz loans, etc. took place without GSEs. I assume there would likely have been a private sector version for conforming loans, the way there was a private sector securitizing response to the demand for non-conforming (sub-prime) loans."

The bottom line is that the case that the CRA, Fannie, and Freddie ?€" and by implication Democrats supporting these institutions ?€" were key players in the crisis is at odds with the evidence. Don't get me wrong, there are lots for reasons to be concerned about Fannie and Freddie, and I'm not trying to defend them or their choices, but the idea that support of these institutions caused the financial crisis is wrong.
© 2011 CBS Interactive Inc.. All Rights Reserved.

Mark Thoma


http://www.cbsnews.com/8301-505123_162-39741513/fannie-freddie-and-the-cra-are-not-responsible-for-the-financial-crisis/?tag=mwuser
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Jim Miller
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Braha,ha,ha,ha,ha,ha. Only the left deals in facts?
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tomdrobin
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If you care to investigate and read the facts, you will find the CRA, Freddie & Fanny (aka government mandates) were minor players in the subprime crisis. It wasn't poor folk who were buying all those expensive homes, in Ca., Fl and Nev. that they couldn't afford. Of course you will believe what you want anyway.
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Jim Miller
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Your "facts" are the only true facts. Typical liberal.
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Chris
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"No matter how many times this crappola from the right wing spin machine gets debunked. It keeps right on being resurrected and rolled out for the loonies daily fix of bias confirmation. Facts just don't seems to matter when your looking for the "evidence" to support your beliefs instead of searching for the truth."

Interesting that your next statement contradicts your first.

"If you care to investigate and read the facts, you will find the CRA, Freddie & Fanny (aka government mandates) were minor players in the subprime crisis."

So they did play a part.


The article you post argues two straw men.

First: "Democrats generally argue that the crisis can be traced to misplaced faith in the ability of markets to self-regulate." While the implication is this is ideological nonsense, the author fails to know the straw out of it.

Second: "...that government involvement in housing markets to encourage home ownership caused the financial market problems." This one he proceeds to knock the straw out of.

The irony is he, like you, contradicts himself in stating what people like Gretchen Morgenson and Josh Rosner, and Will and Brooks actually argue: "...the idea that government policies to encourage home ownership among middle and low income households is at the heart of the financial crisis." Encourage is the key word. I use the word incentivize. None of them either dismiss the greed of the financial industry taking advantage of the political means of enrichment the government created.


Here's an interesting follow up in which the author you cite, Tom, prints an email rebuttal by one of the authors of Reckless Endangerment, before he lies through his teeth: Reckless Endangerment Author: We Do Not Blame the CRA.

Josh Rosner's rebuttal:
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I was a little disappointed to read your blog. Having been a housing and mortgage finance analyst since the early 1990's I have lived through build-up and crisis, having made warnings all along the way.

If you read my book with Gretchen you will realize we do not blame CRA. Also, if you read the book you might have a different view than you would by reading partisan reviews of it.

It is not a partisan book, rather the Dems want to pretend the GSE's had no part of it just as Repubs want to say it was all the GSE's. We don't take either stance.


Mark Thoma's lie: "First, I didn't mention the CRA when I was talking about the book -- I was careful not to." Go back to your citation of Thoma, Tom, he mentions CRS 15 times. Think his credibility just took a nosedive.
Edited by Chris, Nov 9 2011, 12:41 PM.
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tomdrobin
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Chris

You can play all the manipulation games you want. Fact is.

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"More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions," and "Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year."


Fannie and Freddie jumped in late because they were loosing market share. It was government policy that created the financial meltdown. But, it wasn't requiring banks to make loans in poor communities, it was lack of oversight of the banks. Greenspan himself has even said, he got it wrong, and thought they could self regulate.

Now in true fashion we have the right wing spinmasters trying to rewrite history.
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It wasn't poor folk who were buying all those expensive homes, in Ca., Fl and Nev. that they couldn't afford. Of course you will believe what you want anyway.


I've always wondered about that. Most of the pictures of rows of foreclosures I have seen have been high end homes that I somehow doubt anyone classified as poor could have qualified for under any circumstance. I suspect most of it was middle class people overextending themselves on the hope that inflation & appreciation would take care of them.
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