Free Markets, Free People

Study: Government policy primarily the reason for sub-prime mortgage meltdown

Despite the attempt by government and particularly Democrats, to blame the financial meltdown we’ve endured on banks and unscrupulous investment companies, the buck stops with them according to a new study just released:

Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.

But a new study by the respected National Bureau of Economic Research finds, “Yes, it did. We find that adherence to that act led to riskier lending by banks.”

Added NBER: “There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts,” or predominantly low-income and minority areas.

As we’ve mentioned previously any number of times, government policies can set and enforce preverse incentives.  And that has nothing to do with a free market.  That’s at best a mixed market.  So no, the problem wasn’t a “market failure”, it was the usual result of government intruding and setting preverse incentives that are contrary to good business practices and would likely not survive or succeed in an actual free market.

Here’d the bottom line:

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that’s what they did.

Not only that, they guaranteed the bad loans with your money.  Why do you think so much money has had to be pumped into those two institutions?

You see the market had determined that certain standards protected their investments.  The government decided to ignore reality and push a social agenda using “race” as the basis for throwing out those standards and using their coercive power to implement the social agenda they preferred.

The result was predictable.

And the coverup as well.


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40 Responses to Study: Government policy primarily the reason for sub-prime mortgage meltdown

  • AND they’re doing it again…still…
    This is not from stupidity.  This is by design.

    • It’s really important not to become too parochial with this view of sub-prime loans.
      There was a report, out of one of the big Wall Street firms, that put this altogether in an international setting.
      The bottom line, neither George Bush or Congress caused this all by themselves, it took a revision of international banking rules to bring in Europe and beyond.  Not all the damage was done on Wall Street.
      That’s not to say that CRA, Freddie Mac and Fannie Mae with the implied US federal guarantee didn’t set the stage, it did, but there were many willing players around the globe that made this thing get this big.

      • Too make matters worse, you’ve got to see this chart

        In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children’s generation. Unfortunately, that doesn’t work so well when there start to be more pensioners than workers.

        It looks like the real estate market will never be the same, no matter.

      • But let’s face it, if there wasn’t a great deal of risk, which implies investors who couldn’t afford the house in the first place, you wouldn’t have many defaults to recover from.
        Allowing, nay, ENCOURAGING… many high risk mortgages is what made this snowball turn into an avalanche.

      • I fail to see your point WRT “international banking”.  Having foreign capital drawn to the US has always been a good thing.  Our railroads were built largely with British money.
        Of course, the problem was bigger by virtue of the number of players and the volume of their investments, but that would have happened whether it came as a bank investment or through a lot of smaller investments from foreign sources.
        I draw was a vastly distorted market, which was TOTALLY caused by government (including the hint that government would cover higher risks), plus an intentional bubble of cheap money which was also created by BIG GOVERNMENT.  When you understand those predicates, people acted rationally all up and down the line.

        • Rags, Basel 3 banking accords ranks assets by their riskiness, and advises banks how much each asset “weighs” towards their capital requirements.
          Cash, gold, and government securities are at 100%
          Mortgages are like at 80%
          Regular old business loans are lower.
          Thus banks have an incentive to buy a lot of mortgages and government securities to meet the regulators desires.
          Also, it should be noted that the EU told banks to weigh Greek debt as just as safe as German bonds.
          This played a huge role in insurance and bankers choice of assets. Low interest rates meant huge demand for mortgage assets from the USA to overseas banks. They ate all the “steak” then they wanted “hamburger” and they even came back for “mystery meat.” All rated AAA to help with capital requirements.

        • Also, CRA doesn’t explain why there was so much over-development in places like Spain.

          • Foolish unbridled optimism?    The rich getting richer?
            The first thing that comes to mind is “because they could”.

    • The Cloward – Piven Strategy, to be precise.
      It just occurred to me what was in those college papers Barry spent in excess of $1,000,000 to hide in the 2008 (S)election.

  • You can release all the reports you want confirming what we already knew about who was to blame, these will be buried, the narrative has been set, and it will forever be the fault of Bush/GOP/Banks/Wall Street regardless.

  • Here’s what happend, in sports terms:

    the government built the stadium, lined the field and set the goals;
    the private sector happily played, collected the gate, hired the refs/players and sold the tv contracts to investors.
    individuals bought the tickets

    Without the participation of any of the the consitutencies the ‘sport’ would fail; ultimately the investors realized that they had no real collateral due to all the derivatives created (read that tv contracts in the above example) could not be tied by to a home loan/specific loan due to all the slicing/dicing of individual home loans, and then the system collapsed upon itself.

    • “…the derivatives created…could not be tied by to a home loan/specific loan…”

      • See Landmark National Bank v. Boyd A. Kesler and there were a host of others.
        Title to the collateral was the issue for investors; once the underlying collateral couldn’t be tied to a bank, for example, the derivative was worthless. And this above and other rules basically said for a large and statistically significant number of mortgages, ‘who’ owned the loan and hance the property couldn’t be established.

        And since the banks bought insurance from companies like AIG who used the underlying collateral (the note on the loan) as the basis for recovering insured losses, once that tie was severed, boom.

        • Bollocks!  Landmark was a VERY tangled mess where people slept their rights through bankruptcy AND failed to follow other procedure in the jurisdiction.
          WTF do you think people buy as a “derivative” BUT a bundle of rights to several secured loans?!?!?  Do you imagine they buy NOTHING?
          Sure, they can screw things up to the point they lose those rights.  But that is NOT the rule in these derivatives.

  • Could it happen again? I can’t see where Fannie Mae or Freddie Mac have changed much.

  • Subprime lending didn’t cause the crisis.  If it was just that, it would have been easily handled by the economy (and in fact, many dismissed concerns because they thought it was subprime lending).  The crisis was caused when big banks started to turn mortgages into bonds, and then by passed Freddie and Fannie (whose standards were too strict) to try to buy as many mortgages as they could and turn them into AAA rated bonds.  The banks bought any mortgage, they did not care about standards so standards went out the window by 2005 due to banks and mortgage brokers trying to get rich quick.   There is blame for everyone, but beware of cherry picking studies that don’t take into account what really caused the meltdown.  Instead, read some thorough analyses, like MacLean and Nocera’s work, which is harsh on BOTH Democrats and Republicans.  A crisis like this requires a bipartisan effort!   Alas, most people just defend their side and attack the other side.

    • What is the basis for the problem?  Eh?  Bad mortgages?  Money lent to people on property they couldn’t afford?   Pushing the mortgages on them, like used car salesmen on a 17 year old?
      The REST of the problem flows from there because government agreed appeared to back the damn things, and even threatened banks that didn’t make loans.
      Yeah, but of course the people who knew, or should have known, full well, they would be eating peanut butter and jelly and ramen noodles  for the next 30 years, they’re NOT responsible one bit.
      Just children, they didn’t know any better when they were told what their monthly payment would be in mortgage, home insurance, mortgage insurance and taxes…..signed the bottom line anyway……!!!!!
      No no, it was all big banks, well, and the Democrats and Republicans…..not the borrowers….
      If I offer to sell you a bridge in New York across the Hudson for $20,000 and it’s admittedly a swindle, if YOU buy it, I’M NOT totally to blame.

      • Don’t forget the role of ACORN and like outfits in pushing people into the mortgage lenders AND collaborating in fraudulent applications.

    • Subprime lending didn’t cause the crisis. It didn’t, it didn’t, it didn’t. I decree it. And this isn’t either just a cut and paste from what I’ve been saying ever since the whole thing blew up. Stop saying that.

      If it was just that, it would have been easily handled by the economy. Yes, the economy can adjust to any amount of distortion introduced by government. I decree that too. And that’s not either just another convenient bit of legerdemain to let me espouse ridiculous excuses for stupid government actions. Stop saying that too.

      The crisis was caused when big banks started to turn mortgages into bonds, and then by passed Freddie and Fannie (whose standards were too strict) to try to buy as many mortgages as they could and turn them into AAA rated bonds. It can’t be Freddie and Fannie’s fault because they are quasi-governmental, and they have good intentions, so by post-modern axiomatic logic, they can’t possibly be at fault. Suck on it.

      There is blame for everyone, but beware of cherry picking studies that don’t take into account what really caused the meltdown. Because I don’t do that. I read thorough analyses, which just happen by random chance to all be leftist partisans, which are harsh on both Democrats and Republicans. Harsh on Democrats because they didn’t follow through on their wonderful intentions to pass magical regulations that would have prevented this, and harsh on Republicans because they’re mean people who only care about money and want to screw everybody.

      A crisis like this requires a bipartisan effort! Just like everything else in politics. Yes, a bipartisan effort, which means that the Republicans, in a bipartisan spirit, give in to whatever wise, moderate leftists think should be done, and in exchange get a pat on the head and a few cosmetic changes to the resulting regulations and laws. Otherwise the Republicans are being vicious, unreasonable partisans. Like the inbred, sterile, ex-military basket cases who are the front page posters on this site.

      Alas, most people just defend their side and attack the other side. Which I again never, ever do. And the fact that I’ve been coming here constantly attacking the other side for years doesn’t count. From my perch in lofty academia, I see all sides, and balance everything out, and you people should listen to me instead of insulting or ignoring me. Not because I’m a narcissist who comes here out of a desperate need for attention and just can’t stop coming back no matter how many times I say I’m going to stop. I’m not either a mediocre thinker desperate for people to talk down to. You really ought to stop saying that.

      • Where are the magenta caterpillars and ample heaving bosoms? I suppose the busts will have to suffice for now.

    • The banks bought any mortgage, they did not care about standards so standards went out the window by 2005…

      As always, you are full of crap, Erp.
      The standards went out the window under the gun of the Federal government, particularly the one held by Janet “Big Foot” Reno who DIRECTLY and EXPLICITLY threatened American lenders with illegal federal action if they did not toe the line.

      • Nope, the standards went out the window due to the big banks desire for profits.  Educate yourself – no wait, you won’t because then you’d have to jettison your comfortable ideology.  Oh well, your loss.

        • Did Fannie and Freddie make any money? Why yes they did!
          And they also went bust, which is funny because you claim they had high standards.

        • You make yourself so easy to punk, Erp.

          I remember her doing just what I said at the time it happened, liar.

        • It has been my experience in these five years in office that most bankers want to be good and responsible corporate citizens, or they’re willing to be if they’re nudged in the right direction by vocal, knowledgeable, constructive groups such as the NCRC members and by Justice Department lawyers who care and want to do the right thing.
          I have found, and I think and I hope that you have found, that lenders have listened and learned. Bank commitments, as we have noted, have increased within the last four years. The figures are staggering: an 86 percent increase of all bank commitments under the Act since it went into effect more than 20 years ago.
          You can take so much credit for this. I’m pleased to say that I think we’ve done something, too. Too often —
          Well, wait.
          Jim Turner came to see me shortly after I became Attorney General. He introduced me to Paul Hancock and to the other people in the housing section, and one of the first things that I did was to face up to this issue. It has been one of my priorities ever since.
          A critical first step, however, I determined in the enforcement process is education. There are so many people that don’t know what title this is and what this act is and what this does, and they just don’t understand, or they don’t understand what’s happening in their business, because they’re trying to do so much.
          I am convinced that education can go such a long way in making a difference. And I discovered it in talking to bankers, that it is better to educate first and then litigate later only if necessary. But you got to be prepared to litigate, and I am prepared to litigate when it’s going to be necessary.
          We’ve built great strides — made great strides in building good working relationships with the industry and encouraging voluntary compliance. In these efforts we continually stress that fair lending laws do not require lenders to make bad loans. They require simply that people be treated equally.
          And when people start listening and you talk about how their processes work and they could improve their processes and they could not make a bad loan, but get a good loan and they could increase their business, they begin to understand. Then when they see what happens to their communities through home ownership, they begin to understand even better. Every example that we can develop of success, of good proven success, I think just helps us in the education process.
          We want to see equal credit being offered by banks because it is the right thing to do, because the law requires it, because it is good business, because people accept it.
          You’ve noted that since the inception of our fair lending initiative in 1992 the Department has filed and settled 13 major fair lending lawsuits. We are going to continue these efforts under the Acting Assistant Attorney General Bill Lann Lee in every way that we possibly can. We will continue to focus on discrimination in underwriting, the process of evaluating the qualifications of credit applicants. This was the issue in our suits against Shawmut in Boston, Northern Trust Company in Chicago, and First National Bank of Donna Anna in New Mexico.
          We have also focused on the problem of redlining by lenders and insurance companies. This past August we reached an agreement with Allbank of New York. We alleged that the bank had carved out and refused to make loans in urban minority enclaves within the bank’s lending areas in Connecticut and Westchester County, New York. The settlement with Allbank requires it to make $55 million in loans at below-market rate in the areas previously redlined.


          Westend Ballroom
          Washington Marriott Hotel
          1221 22nd Street, N.W.
          Washington, D.C.
          Friday, March 20, 1998

          She told the banks in no uncertain terms that the full regulatory crap of the US Federal government would be arrayed against them whenever they took a breath if they didn’t play ball.  Whether it was legal or not.

          • below-market rate in the areas previously redlined”
            Oh damn those evil greedy bankers! Isn’t there a  Republican in here somewhere?  There has to be, there is ALWAYS a Republican behind these get rich quick schemes.

          • 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.

            Gun.  Smoking.
            Erp is dished.  Again.

        • Bank profits? Take a look at the executive team at Fannie Mae during the late 90s, mid-00s. See any familiar names? Some very large sums were taken by these politically-connected people.

          • Ohhhhhh….  NOOOOSSSS…
            THEY were public servants…  Or was it serpents
            The whole thing…top to bottom…on the Federal level was a scam and a Cloward-Piven dream.

    • Well it wasn’t just he mortgages themselves, but the bullshit credit essentially invented to support those mortgages.

      • AND the explosive inflation of housing prices, brought on by cheap money and distorted demand as unqualified people suddenly were able to borrow for mortgage.

        • Yeah, who’d have thunk!   People started digging up the streets when they were (momentarily) paved with gold!
          Imagine – cause, effect!  What a unique concept.   Well, to some of people it is.

  • Wanna bet that a large block of the minority mortgages were illegal aliens who basically, when the market started to sour, just up and walked creating a foreclosure glut that bottomed home prices over night.

    • OH, hell, NOT just illegals…!!!  I mean, with the very best intentions, many thousands of people had to walk away from mortgages when BOTH their too-thin earnings AND the grossly inflated value of their property went in the crapper.

      • Often mortgage fraud was conducted on both sides of the table…i.e. salesman coaches them to inflate income.
        I heard from a n ex-mortgage guy they could even include section 8 housing benefits as “income.”
        I assume that you lose section 8 if you actually buy a house, right?

  • Anyway we could have cleared out the mess years ago by simply allowing the foreclosure process to move along unhindered. By now people foreclosed in 2008 would be two years away from having that foreclosure removed from their credit record. Instead they got strung along by a myriad of stupid (I know, redundant) political plans to “help”. Just get out of the way!

  • Government possibly encourages borrowers to miss payments?
    Yep, the law of unintended consequences and government finger poking, AGAIN.
    I’m SURE no one would consider missing their payments so as to reduce them….oh no, no, no….that would Neeeeeeeveerrrrr happen, ever.  No.
    And of course they’ll use clever methods to screen out the strategic defaulters, just like they used clever methods to screen out people who shouldn’t have ever gotten mortgages…..