Thursday, September 18, 2008

Government Policy Got Us Into the Subprime Mess

Don Boudreaux points to this letter in the WSJ:

We are all talking about subprime loans and the havoc they've wreaked on the economy, but no one is talking about why banks give out these loans -- they are required to by law. Since the Community Reinvestment Act of 1977, Congress requires banks to offer loans to minorities in low-income areas, even if the clients can't make down payments, don't have good credit histories, or even employment histories.

Since these clients are high-credit risks, the only loans lenders can offer are high-interest loans that don't require a down payment or good credit history. These loans frequently default.


In order to cut down on the number of subprime loans an institution must make, it must cut down on all loans, because its subprime business is a proportion of its overall business.

Are we willing to crash our economy over some misplaced idealism? Congress must rescind the CRA or this problem will continue beyond today's bailouts.

M. Franks, Little Rock, Ark.


See previous CD posts here, here and here on the CRA, and its contribution to the housing and credit problems.

16 Comments:

At 9/19/2008 9:23 AM, Anonymous Anonymous said...

Homeland security is the economy and the SEC was nice enough to provide a list today of the 799 most important companies in America. Buy up Comrades for all is well.

 
At 9/19/2008 9:24 AM, Blogger juandos said...

How about Democrat party policy getting us into this mess?

How about talking to Rep. Barney Frank?

 
At 9/19/2008 10:02 AM, Anonymous Anonymous said...

This is the most asinine explanation I've ever heard.

It's like calling the pimple on a cow's ass "the cow".

If you're looking for where the real blame lies, it's in the source of monetary expansion. Who held interest rates at 1% for a prolonged period of time?

We aren't we abolishing THEM?

 
At 9/19/2008 11:43 AM, Blogger bobble said...

that's total BS, and YOU KNOW IT, MP. have you no shame?

The CRA was enacted in 1977. By 1999 (the latest year i can find data for) " . . the proportion of CRA-related home purchase and refinance loan dollars that were extended under CRA special mortgage programs was only 4 percent for the median banking institution. . ." .
Federal Reserve Bulletin

please explain how the CRA was changed so that it suddenly accounted for a substantial percent of the loans (subprime or prime) originated from 2000 to 2008.

the way it actually happened is that wall street banks (commercial and investment) demanded more and more loans of any kind. prime, sub-prime, it didn't matter since they weren't assuming the risk, only packaging and reselling them for a fee. when they ran out of prime borrowers they took sub-prime.

at the end, banks didn't even ask for documentation. did the CRA require that?

 
At 9/19/2008 2:14 PM, Blogger OBloodyHell said...

> at the end, banks didn't even ask for documentation. did the CRA require that?

Are you under the impression that defaulted loans are likely to be coming from people with good documentation?

Are you under the impression that banks didn't get pressure to make loans under the CRA which weren't covered by good documentation? What purpose, then, did this law serve? "Oh, it just sat there looking good and burnishing the street cred of the politicians..."

Yeah, bobbie, right. What drugs are you on? Can I have some?

The CRA was almost certainly not the sole source of the problem, and both the GOP and the Dems have their part in the mess. But the Dems have one hell of a lot more to do with it than anything else. For one thing, they've been so busy on an anti-Bush witchhunt for the last two years since they got power to actually pay any attention to things they could have done to head this off and soften the blow. And there are lots of things they could have done, and were getting advised to do. "No, no, NO!! Don't bother me with that! We need to get more goods on Scooter Libby!"

>:-/

 
At 9/19/2008 2:57 PM, Anonymous Anonymous said...

obloodyhell,

"But the Dems have one hell of a lot more to do with it than anything else. For one thing, they've been so busy on an anti-Bush witchhunt for the last two years since they got power to actually pay any attention to things they could have done to head this off and soften the blow."

The worst performing loans of the housing/subprime/credit crisis were from the 2006 vintage, when the GOP was the party in power. This crisis was due in large part to the 30 year trend of deregulation (which undoubtedly has benefited the economy on the whole) having gone too far. Do you honestly believe that anyone elected in 2006 would have been able to stop the inertia of deregulation and easy lending in time to avoid this situation?

 
At 9/19/2008 4:10 PM, Blogger bobble said...

OBH:"The CRA was almost certainly not the sole source of the problem"

thanks for confirming that.

"Are you under the impression that banks didn't get pressure to make loans under the CRA which weren't covered by good documentation?"

yes.

in the future, please do all of us a favor and provide some shred of credible documentation to support whatever it is you are blathering about.

 
At 9/19/2008 7:03 PM, Anonymous QT said...

Unfortunately, gentlemen, it is a bit more complicated than the usual finger-pointing.

See Why the Credit Crunch will Go On by David Roche

 
At 9/19/2008 10:15 PM, Anonymous Anonymous said...

You should look at a better data, GSE and private market share, to make your own judgment. BTW, it wasn't low-income people asking for SISA/NINA/Jumbo subprime loans...(nor could the GSE's buy them)

 
At 9/19/2008 10:30 PM, Anonymous Anonymous said...

This is hardly a mess folks. Lets say the whole debacle costs $2,000,000,000,000.00. That is only around $6,000 to $7,000 per person in the U.S.

Financed at 8% it's less than $50 bucks a month to cover the interest payments to China and Saudi Arabia.

 
At 9/19/2008 10:32 PM, Anonymous Anonymous said...

All we need to do is lower taxes to increase tax revenues and we've got it covered!

 
At 9/20/2008 5:05 AM, Blogger juandos said...

"All we need to do is lower taxes to increase tax revenues and we've got it covered!"...

Dump ALL the entitlement programs and it all will be definitely covered...

Hey qt interesting commentary by Roche...

Just curious as to your opinion from WSJ's John Berlau: Maybe the Banks
Are Just Counting Wrong
?

 
At 9/20/2008 6:07 AM, Anonymous Anonymous said...

If we raise taxes, turn social security into a welfare program, and let government bureaucrats decide what everyone else in the country can do, all our problems will go away.

 
At 9/20/2008 10:53 AM, Anonymous qt said...

Juandos,

An extremely enlightening piece. It explains a lot. From my own experience, I can understand why the mark-to-market accounting rule could definitely be driving this. It demonstrates how difficult it is to anticipate the effects of public policy.

During the Great Depression, FDR separated investment banking from commercial banking. As a result, REITs are basically undercapitalized as Roche outlines. Funnily, the REITs are now being folded into commercial banks (ie. Merrill into Bank of America).

Shows how difficult it is to get it right particularly, when one is focused on blaming rather than trying to understand what factors are driving very complex problems.

Thanks for the article.

 
At 9/20/2008 2:14 PM, Blogger bobble said...

anon 10:15: thanks for the link to that article.

QT: Merrill is an REIT (real estate investment trust)? actually, its an investment bank/broker, isn't it?

Juandos: good article by mr berlau. i mostly don't agree with scrapping mark to market, but he does build a logical case for it.

 
At 9/20/2008 5:05 PM, Anonymous QT said...

Bobble,

Thanks for the correction. Should have said investment banks vs. commercial banks. Interesting panel discussion on this subject. See Wall St. Turmoil Marks Wholesale Banking Shift

 

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