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Dave

Dave is a part-time blogger that writes about whatever suits him at the time.

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41 Responses

  1. Per Tyler Cowen as many as 70% of the initial loan defaults were due to fraudulent loan applications. The CRA had something to do with that.Report

    • Avatar Jon H in reply to Mike at The Big Stick
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      says:

      “Per Tyler Cowen as many as 70% of the initial loan defaults were due to fraudulent loan applications. The CRA had something to do with that.”

      No, CRA had *nothing* to do with that. Cowen certainly doesn’t provide any evidence of that. You’re just asserting a CRA connection.

      The early defaults (ie, within the first year or two after getting the loan) likely originated with mortgage brokers, who weren’t under CRA, and who were totally off the hook as long as the borrower managed to make payments for 90 days or sometimes six months, and thus had incentives to offer short-term low payments to get people into houses and collect the fees, regardless of whether they went into foreclosure afterward.Report

  2. Avatar greginak
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    says:

    Exactly how? How did CRA lead to NINJA loans? How did CRA lead to mortgage leanders pushing and bending every sensible practice just to get more loans?

    Answer: CRA had nothing to do with it.Report

  3. Avatar Dave
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    says:

    How did the CRA force people to lie on their loan applications? The CRA applied to depository institutions and hardly encouraged the proliferation of mortgage fraud.

    Pushing and bending? Try abandoning. 🙂Report

  4. The CRA lead the horses to the water.

    From Ben Bernanke: “…the CRA has served as a catalyst, inducing banks to enter under-served markets that they might otherwise have ignored”.Report

  5. Avatar Chad
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    says:

    The CRA lead the horses to the water.

    And apparently no one bothered to tell the CRA that the horses had Prader-Willi.Report

  6. Avatar Dave
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    says:

    Please provide the full link. I have posted links above that have people saying that the CRA is not responsible. We can compare links and quotes all we want and agree or disagree on who’s right. Unless Bernanke provides some evidence as others did, I think it’s an uphill battle.

    Also, you do realize that most of the lending that ultimately led to this fiasco was done by nondepository lending institutions that were not subject to the full panopoly of CRA requirements.

    There was also the whole issue with Alt-A loans and the fact that the defaults mostly took place not in CRA markets but in the “Sand States”.

    As far as leading the horses to water, I recommend you re-read what I wrote about that. As I argued, compliments of Mike Rorty, subprime lenders were not modeling their businesses off of credit card companies given the fee driven nature of the business. Furthermore, the idea that subprime lenders had to follow the CRA out of fear that the regulators would turn their sights on them is a stretch given the regulatory capture these firms enjoyed courtesy of a friendly OTS.

    The facts don’t stack up.Report

    • Avatar Mike at The Big Stick in reply to Dave
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      says:

      The Bernanke quote is public record.

      As for the CRA, it was a foot in the door. I’m certainly not blaming it for the entire mess. This was a Perfect Storm of greed at every level of the process, from borrower all the way up the chain. And where there wasn’t greed, there was near-willful ignorance.

      But it’s also important to point out that the CRA did play a role by encouraging risky lending. The fact remains that renting is the best option for low-income folks most of the time. And owning a home is a relatively addition to the American Dream. So federal ‘encouragement’ of homeownership is both unnecessary and ultimately dangerous.Report

  7. Avatar AMac
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    says:

    “Nonbank lenders and mortgage brokers generated their revenues based on the volume of loans they originated. They took little to no risk that the underlying loans would default (I think the window was 90 days tops). Once they were sold off to Wall Street or to investors, the risk was someone else’s problem. ”
    Alas, this variant of greed-in-action probably accounts for a fair slice of the distortion of the real estate market during the Happy Time. Steve Sailer coined the term predatory securitizing to describe it.Report

    • Avatar Dave in reply to AMac
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      says:

      That’s an interesting concept. I don’t think there’s much doubt that Wall Street sold a bunch of crap to people who thought they were getting quality AAA-rated securities that offered higher yields than other asset classes.

      The Wall Street banks typically bought the loans in very large quantities but had a third-party due diligence firm review a sample of the loans (not all and not even close to a substantial portion). The emphasis was to get as many of the loans approved as possible as more loans means more volume and more fees. No one seemed concerned about quality and that ultimately showed.

      As much as I think the use of the term “predatory” has some merit, I think from a legal standpoint, it would be very difficult to prove that sort of wrongdoing on behalf of the Wall Street firms. First, they went through third-party due diligence firms who were supposed to properly determine the quality of the underlying collateral. Second, the gatekeepers that could have put the kibosh on these loan pools going out to market, the ratings agencies, failed in their role to properly rate these securities. Why those companies are still in business is beyond me.Report

  8. Avatar greginak
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    says:

    When humans stopped being nomads and settled down to live in agricultural settlements that led to the development of permanent houses. So the bronze age led to the mortgage crisis.Report

  9. Avatar greginak
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    says:

    The nomads wouldn’t stay off the lawns of the agriculturalists. They just wanted to stay up late and play drums. damn kids.Report

  10. Avatar Jaybird
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    says:

    A story from my experience. 2002ish, 2003ish, my wife and I said that we were sick of the apartment and needed to get into a home of our own. I had a stablish job, she had a stablish job… it was time. One of our friends knew a guy who knew a guy in the mortgage-finding business.

    We sat down and discussed our options and he told us about this great loan with a great rate and this rate would be good for ONE WHOLE YEAR!!! I asked how much it might go up at the end of the year. He told me five points.

    I told him to try again. He argued with me. I told him to try again.

    Anyway, we finally ended up with a 3.25% rate that would not go up more than 1 point in any given year and could never, ever, go up more than 5 points total. I am old enough to remember when 8.25% was unthinkably low… and then the guy told us something to the effect of “but wait there’s more” and that our rate would be pegged to prime or something so that our rate would *ALWAYS* be lower than what we could refinance to fixed. We couldn’t lose!

    Anyway, our rate hit 4.25%, then 5.25%, and then 6.25% and I hit the roof and we refied for less than our variable rate at a lovely low fixed rate.

    The whole “lenders might have been a hair unethical” thing resonates with me. I mean, sure. If my bride and I had been stupid and signed whatever was put in front of us (we were pre-approved for 2.5x what our eventual house actually cost us) we would have screwed ourselves… but our loan folks were doing whatever they could to facilitate that.Report

  11. Avatar cb
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    says:

    “From Ben Bernanke: “…the CRA has served as a catalyst, inducing banks to enter under-served markets that they might otherwise have ignored”.”

    What, exactly, does this demonstrate? It doesn’t say anything about fraudulent loan applications, or low documentation programs, etc. In fact, the entire content of that quote is on the surface–markets which were previously ignored were servedReport

  12. Avatar greginak
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    says:

    Just to be clear

    Markets that were ignored= neighborhoods with minorities

    CRA was aimed ending the practice of red liningReport

  13. Avatar Rortybomb
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    says:

    Hey thanks for the link – finally, an OG feature!

    Mike at The Big Stick,

    Carney’s argument, that Horse to Water meme, is best understood as a Tragedy of the Commons type event. One sheep grazing = ok, all sheeps grazing = terrible. Seeing the one sheep grazing makes all the other farmers want to run in. That’s how I read it.

    I think that’s problematic because (a) subprime had a different business model all together more akin to cc – different fields (b) the idea that commerical banks in general (much less the CRA divisions!) “went first into” the subprime market, and went in deeper, is factually incorrect, c) the story about underwriting and loosening standards is more complicated than most let on (d) it rests on an assumption that subprime lenders were stupid in a very particularly and narrow way, rather than caught off guard in general by how quick the collapse happened (or incredibly clever in grabbing fees and passing the risk along).

    I’d really like to read that Cowen link re: 70% defaults via fraud in loan applications if you can find it.Report

  14. Avatar Rortybomb
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    says:

    “The problem is that those markets never should have been opened up to begin with.”

    Why? The CRA has done very well. Carney admits this.

    I think the problem is the way they were opened – they were opened in this very cynical financial way of betting that housing would rise for 2 years, and that the bank and the person could split the equity on this gamble. (This is de facto how the loans look, even if neither person consciously was aware of it.) 2 years of high fees and then a forced prepayment.

    This is not a 30-year prime mortgage that the CRA was looking to give. At all.Report

  15. Avatar Rortybomb
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    says:

    “As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study…Applications with misrepresentations were also five times as likely to go into default.”

    That’s not the same as 70% of defaults were caused by a fraudulent misrepresentation. And it isn’t at all exogenous. There’s no reason to believe that the subprime lender didn’t encourage this fraud if he thought the person would pay fees and survive mostly 2 years to grab the equity from rising home prices.Report

  16. Avatar Dave
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    says:

    Rortybomb,

    I think your analysis of the difference between the underlying business models that drove CRA lending (which to me, was not much different than traditional balance sheet lending where interest income and principal repayment matter) and the mortgage brokerage/nonbank lender business (fee driven) is perhaps one of the most insightful ways of looking at this issue that I have seen.

    In this light, it’s not a “lead a horse to water” argument as much as it the rest of the horses went to a different lake.

    Subprime lenders knew what they were doing and so long as they were able to sell off the loans and not have them default within the window that the loans could be put back to them (a typical feature when selling the loans to Wall Street), they were in the clear. They were also getting more and more aggressive as time went on, due largely in part to huge demand for the underlying securities. Originate at all costs was the order of the day.

    It was the pace of the collapse that nailed them. Not only were house prices dropping, but the pace of defaults spiked and many new homeowners were defaulting within the first 90 days of the loans. The buyers of these loans demanded that the originators buy them back, and the loan originators lacked the capital to do so. As they started taking losses, the Street started pulling their lines of credit. Without capital, these companies shut down. At least that’s the version of events as I understand them.Report

  17. Avatar Rortybomb
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    says:

    Mike I don’t mean to jump at you. I’m just trying to seriously think through all the counternarratives. I think Americans are over-invested in housing, (though I think there are very specific rational reasons for this other than just patriotic duty).

    “They were also getting more and more aggressive as time went on, due largely in part to huge demand for the underlying securities. ”

    And see here is where a “tragedy of the commons” can easily kick in when it comes to lending standards. Did you hear This American Life’s episode on the Giant Pool Of Money? They have subprime lenders talk about how the place across town started no-income, so they had to to keep up. Other place had no-doc loans later, and can sell at that volume to the asset market. When the asset market calls them, they don’t have that volume, so they lose out. Bad equilibrium.

    It may be making excuses after the fact, but I do think this (ramping up the risk of a ‘riskless’ position) has serious economic problems.Report

    • Avatar Dave in reply to Rortybomb
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      says:

      “It may be making excuses after the fact, but I do think this (ramping up the risk of a ‘riskless’ position) has serious economic problems.”

      Especially when you experience a serious information disconnect like we did during the Garbage In-Garbage Out days of securitization. If investors really had an idea of what kind of crap was being sold to them (rather than simply deferring to Wall Street and the ratings agencies which (it seems) most buyers did, I have a hard time believing that they would have bought them at the yields they did.

      I’m still amazed at how collateralized debt obligations with the interest payments being funded by the credit default swaps sold by the i-banks on those underlying securities got AAA-rated. If there’s a market for them at all, they can’t be worth more than pennies on the dollar. Unbelievable.Report

  18. Avatar greginak
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    says:

    The CRA did not say banks had to lend to people who worked part time at sprawl mart. It said banks ( who had a charter with the feds so they could be eligible for FDIC) had to have the same set of standards for all people they served. That does not mean they had to lend, just that the rules for the white folk and black folk had to be the same. It was the Countrywide’s, who were not affected by the CRA, that gave out loans to anyone not yet in rigor mortis.Report

  19. Avatar Michael
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    says:

    Dave,

    Your Jason/Friday the 13th analogy may be even better than you think. The primary reason for “Part X” was the successful melding of money and genre, as long as people kept paying for it (because it addressed a deep-felt need/desire), they continued to make those Friday the 13th movies.

    Something similar is happening with the “CRA made them do it” arguements. In this case the genre is: “government/regulation bad,” “poor people stupid/malicious/different,” plus an occational “it’s everyone’s fault/the democrats made us do it.” The money side should be obvious: political contributions, media/NGO support, fellowship dollars, paid research, networked relationships, etc. The banks have been trying to kill CRA ever since Clinton reinvigorated it in the 1990’s, and have resources to support the effort. You can be sure that the CRA arguement is not going away anytime soon – and that’s what makes contributions like Dave’s so particularly valuable.

    It would be interesting to compare downpayment %’s and debt service coverage ratios of people in CRA loans vs. subprime loans. If you look at the borrower characteristics of subprime loan portfolios in general (particularly Alt-A/liar loans), this whole “poor people” arguement falls apart on its face.

    Mike at the Big Stick: With all due respect, assertions or quoted assertions from others, do not substitute for evidence and facts. Just ’cause you say it loud, or repeatedly, doesn’t make it true.Report

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