roundup

[scarfman]

qtrhorserider told me Tuesday she actually heard the word depression used.

I see that the subprime loan situation is in some quarters being blamed on a regulation passed in 1977 disallowing the declining of loans on the basis of, if I understood the discussion, which side of the track the borrower lives. Where this argument falls down is that most of the subprime lending that brought about the current crisis would not have been prevented by the absence of that regulation.

Whenever I start thinking that no ticket with Sarah Palin on it could possibly win, I remember Dan Quayle.

Is it just me, or is Stephen Colbert having unusual trouble keeping a straight face lately?

Comments

[redneckgaijin.livejournal.com]

As I understood it, regulations actually required lending institutions to grant mortgages to historically disadvantaged races... regardless of whether or not they could actually afford the loans.

This doesn't excuse the subprime and adjustable-mortgage (and, down the road, reverse-mortgage) scams, but it contributed to the problem- that is, if my understanding is correct. It may not be. I am no expert.

[billroper]

Having done a little research and talked to my wife, the former banker, the picture is just a bit more complex than that.

The original version of the Community Reinvestment Act had very few teeth. It was revised in the mid-1990s and teeth were put into it. If your bank wanted to expand or merge with another bank, it had to have a good CRA record. One of Gretchen's good friends was the compliance officer for the bank that she worked for, so she heard a good bit about the difficulty of complying and the amount of paperwork required.

The problem was that the banks were trying really hard to stay in compliance with the CRA, but finding borrowers who actually qualified for the kind of mortgage loans that Fannie Mae and Freddie Mac were allowed to buy was difficult and sometimes impossible. This meant that if the banks made mortgage loans to less-creditworthy customers in order to stay in compliance with the CRA, they were stuck with them.

The banks, quite understandably, didn't want all of this potentially bad paper on their books. Thus Congress loosened up the regulations on Fannie Mae and Freddie Mac and told them they could buy this sort of crappy loan, because Congress wanted the banks to make the crappy loans to people in the CRA areas.

What they didn't say to Fannie and Freddie was that the only crappy loans you can buy are ones that are made for the sake of CRA compliance. That's not too much of a surprise, I suppose, since doing anything else would have appeared to be blatantly discriminatory.

Well, once Fannie and Freddie stood ready to buy crappy mortgage loans, there was a sudden boom of people who were ready to originate crappy mortgage loans, because they had a place to get rid of them to. They could get the profits from originating the loan without having to carry the long-term risk.

As usual, you get the behavior that you create the incentives for.

So the story starts with the CRA, but doesn't end there.

Fair enough?

[scarfman]

The discussion I saw before (I don't now remember where, unfortunately) stated that only a small fraction of the loans that have led to the crisis were CRA loans. Is that accurate?

[billroper]

As far as I can tell, yes, that's true. The problem was that the machine that was set up to process the crappy CRA loans was open to all comers. And all comers proceeded to make a lot of money off of crappy loans.

It's a classic problem of unintended consequences, as nearly as I can tell.

[scarfman]

The theme of the essay where I first saw the subject brought up was that the deregulation school of thought is holding the CRA up as proof that regulation is bad, mmmkay when what ought to have been done was not to get rid of the CRA but to monitor and regulate its use better. Thoughts?

[janusfiles.livejournal.com]

Okay, I am guessing that this is not in reference to a Cymbalta commercial.