Submitted by Mike K (not verified) on October 1, 2008 - 3:03am.
Scroll down to the graph named "Primed for Disaster" and look what happens in the mid-90's. It was used in reference of bank deregulation, but it is very pertinent here because sub-prime lending began before the 1999 bank deregulation. Almost nobody gave sub-prime loans until shortly after Clinton's regulatory changes. You quote 65% for 1993, but 65% of nothing is still nothing. You'll notice too that the largest spikes percentage-wise were not after Bush announced the loosening of regulatory requirements in 2004 or Gramm's inclusion of protections in the 1999 deregulation which took effect in 2000. In fact the sub-prime lending rate leveled off or went down with the protections. http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x4485795#4486280. It's not like somebody just thought of the sub-prime idea in the mid-90's. It had been around for centuries. Nobody did it though, because nobody was effectively forced to until the mid-90's.
You (as well as Traiger Law) also seem to completely ignore the fact that while CRA-covered institutions were not making (originating) a high percentage of these loans by the late 2000's, they are effectively buying them from non-CRA-covered mortgage companies (or community groups like Acorn) to satisfy their requirement for CRA credits. This creates a market for the non-CRA-covered companies to sell sub-primes to the covered institutions and encourages more sub-prime loan origination. This is noted in Section II Sub-section B of the following: http://goliath.ecnext.com/coms2/gi_0199-1862983/The-CRA-implications-of-predatory.html. The idea that requiring lending institutions to lend responsibly, but they had better lend or else is like telling your 15 year old boy to go mow the lawn, but you had better not get dirty. It's a fallacious paradigm.
You also seem to completely downplay the regulatory changes in support of the CRA that allowed the securitization of loans. Institutions like Fannie Mae and Freddie Mac were directed by the Clinton administration to hold more and more loans with less requirement for capital reserves to back them up. As we all know, Fannie and Freddie were among the first to hit the bricks and they bought and owned much of the CRA debt.
I know you didn't address this, but the authors use of the Fed study on profitability, a nearly 10 year old study (using 1999 data) that was compiled barely after sub-primes really hit the market, much less had a chance to default, is questionable if not completely irrelevant in 2008. There had been no upward adjustment of interest rates, no time for bubble creating or bursting, nothing like that. I suspect that the same study done today would have vastly different results.
The article also fails to realize that many of these sub-prime loans were not just ARMS, but 5 to 10-year interest only loans. This type of loan was introduced in 2000 and by 2005 were close to 30% of the market. These loans would have started to mature to interest+ loans, let's see...right about a year or two ago. I've seen many say that the timing is off since the CRA took effect over 30 years ago. These people almost invariably gloss over the regulatory changes made in the 90's. Those changes are the crux of the matter.
Now, having said that, I think the CRA was noble and well-intentioned and does have a place in today's society. Not in it's current form though. It has to focus on incrementally building credit for those it serves to the point where they have sufficient credit worthiness to make large loans (like home loans) a viable option (in the prime market). After all of the sub-prime lending it has spawned and the pending financial catastrophe that it is causing the economy as a whole, it still has only raised black home ownership from 42% in 1970 to 47.2% more than 37 years later. Of course in 2009 and 2010 that might be lower due to all of the bad mortgages, foreclosures, and bankruptcies that are on the books. Due to the injection of stricter requirements by the Clinton administration and refusal of Congress in 2003 and 2005 to supervise Fannie and Freddie in more stringent fashion, the CRA is now hurting the people it was supposed to protect.
The 1970's CRA did not cause this. The 1990's CRA, while not responsible for the whole mess, is definitely a large part and the core of it.
Scroll down to the graph
Scroll down to the graph named "Primed for Disaster" and look what happens in the mid-90's. It was used in reference of bank deregulation, but it is very pertinent here because sub-prime lending began before the 1999 bank deregulation. Almost nobody gave sub-prime loans until shortly after Clinton's regulatory changes. You quote 65% for 1993, but 65% of nothing is still nothing. You'll notice too that the largest spikes percentage-wise were not after Bush announced the loosening of regulatory requirements in 2004 or Gramm's inclusion of protections in the 1999 deregulation which took effect in 2000. In fact the sub-prime lending rate leveled off or went down with the protections.
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x4485795#4486280. It's not like somebody just thought of the sub-prime idea in the mid-90's. It had been around for centuries. Nobody did it though, because nobody was effectively forced to until the mid-90's.
You (as well as Traiger Law) also seem to completely ignore the fact that while CRA-covered institutions were not making (originating) a high percentage of these loans by the late 2000's, they are effectively buying them from non-CRA-covered mortgage companies (or community groups like Acorn) to satisfy their requirement for CRA credits. This creates a market for the non-CRA-covered companies to sell sub-primes to the covered institutions and encourages more sub-prime loan origination. This is noted in Section II Sub-section B of the following: http://goliath.ecnext.com/coms2/gi_0199-1862983/The-CRA-implications-of-predatory.html. The idea that requiring lending institutions to lend responsibly, but they had better lend or else is like telling your 15 year old boy to go mow the lawn, but you had better not get dirty. It's a fallacious paradigm.
You also seem to completely downplay the regulatory changes in support of the CRA that allowed the securitization of loans. Institutions like Fannie Mae and Freddie Mac were directed by the Clinton administration to hold more and more loans with less requirement for capital reserves to back them up. As we all know, Fannie and Freddie were among the first to hit the bricks and they bought and owned much of the CRA debt.
I know you didn't address this, but the authors use of the Fed study on profitability, a nearly 10 year old study (using 1999 data) that was compiled barely after sub-primes really hit the market, much less had a chance to default, is questionable if not completely irrelevant in 2008. There had been no upward adjustment of interest rates, no time for bubble creating or bursting, nothing like that. I suspect that the same study done today would have vastly different results.
The article also fails to realize that many of these sub-prime loans were not just ARMS, but 5 to 10-year interest only loans. This type of loan was introduced in 2000 and by 2005 were close to 30% of the market. These loans would have started to mature to interest+ loans, let's see...right about a year or two ago. I've seen many say that the timing is off since the CRA took effect over 30 years ago. These people almost invariably gloss over the regulatory changes made in the 90's. Those changes are the crux of the matter.
Now, having said that, I think the CRA was noble and well-intentioned and does have a place in today's society. Not in it's current form though. It has to focus on incrementally building credit for those it serves to the point where they have sufficient credit worthiness to make large loans (like home loans) a viable option (in the prime market). After all of the sub-prime lending it has spawned and the pending financial catastrophe that it is causing the economy as a whole, it still has only raised black home ownership from 42% in 1970 to 47.2% more than 37 years later. Of course in 2009 and 2010 that might be lower due to all of the bad mortgages, foreclosures, and bankruptcies that are on the books. Due to the injection of stricter requirements by the Clinton administration and refusal of Congress in 2003 and 2005 to supervise Fannie and Freddie in more stringent fashion, the CRA is now hurting the people it was supposed to protect.
The 1970's CRA did not cause this. The 1990's CRA, while not responsible for the whole mess, is definitely a large part and the core of it.