Between the candidates’ debates and my conversations with the Occupy Wall Street protesters, it seems to me that there is a persistent, dangerous disconnect between our political conversation and reality. On the right, we’re still too focused on taxes, rather than on the spending that drives taxes. On the left, they’re . . . the Left, still, unfortunately for them.
With an eye on 2012, here are ten important but sometimes counterintuitive facts to keep in mind:
1. There is no austerity.
2. There was no deregulation.
3. You can’t trust Republicans on spending.
4. Wall Street loves Democrats.
5. People who voted for Barack Obama on civil-liberties grounds are fools.
6. If you aren’t for massive entitlement reform, you’re for massive tax hikes.
7. But taxing the rich won’t close the deficit.
8. The housing bubble was largely a political creation.
9. Well-meaning politicians are just as dangerous as self-serving ones.
10. There’s no way out of this jam without big cuts to popular programs.
The real debate isn’t whether to cut, only what and how much and when. (My preferred answers: almost everything, a lot, now.)
With all due respect. Fact #8 is False. You are conflating correlation with causation.
After reading Daniel J. Mitchell's article it is obvious he has never set foot inside a mortgage lending operation, nor reviewed any loan files that went into default.
Here's a question for Mr. Mitchell, or anyone else who continues to spread the CRA meme: What percentage of all loans made between 2000 and 2008 were classified as CRA loans?
Fact: If you don't know what SISA stands for or what an "Early Payment Default" is, you do not know the cause of the bubble or why it collapsed.
Question 2 for Mr. Mitchell: As you must know, CRA only applies to depository institutions and if that is true, why is it that New Century Financial, an non-depository institution was one of the first high profile mortgage lenders to go under? (Hint: SISA and early payment default)
Question 3 for Mr. Mitchell: If government pressure to make loans to borrowers with impaired (bad is not good verbiage in lending)credit, why is it that the vast majority of loans that went into default in the early stages of the bust (before the loss of employment became a factor) had been made to borrowers with good credit? (At the time the low end of good credit was a credit score above 620 and no 30 day late payments on their mortgage in the previous 24 months).
This could easily become a 20 question pop quiz, but I will leave it here for now. And, I don't grade on a curve.
Reply to this commentLinkReport AbuseThe key indicia for whether a mortgage will go into default or not is not the credit of the borrower but the size of the down payment. The bubble can be traced directly to the decisions of Fannie, Freddie and FHMA to abandon traditional underwriting standards requiring substantial down payments. Without the GSEs buying no (or almost no) money down mortgages by the trillion, the mortgage bankers would not have been able to finance their operations.
Reply to this commentLinkReport AbuseTrue that the early default (home flippers) and SISA (no doc) loans were huge contributors to the bubble, especially near California where the property tax laws encouraged staying in your home and using its equity to speculate on home value rising in Utah or Nevada. My nephew in Utah would require signatures by buyers from California that they were going to live in the homes his company built and the "flippers" just lied.
But that was only possible in the environment set by the push for a home for everyone and CRA. It also could not have happened without the pipeline to the Frannies and the BASEL rules on risk weighted capital. It required the governing class setting the table.
Reply to this commentLinkReport AbuseOne cannot refute the CRA's effect on the current recession via the percentage of CRA loans. It may sound nice to say that there had to be a large percentage of CRA loans before they had any effect on the market or the mortgage industry, especially if you are trying to defend dirtbags like Franks or Schumer. But it is simply not true that a large percentage of CRA loans was required to completely screw up the mortgage industry. It might be easier to understand the influence even a small number of CRA loans could have on the whole mortgage market if you think of it this way. If only 10% of people insured by State Farm suffered a complete loss of home, car, and life, and State Farm had to pay out to the beneficiaries, the company would be bankrupt, and the other 90% of State Farm customers would be SOL. There are acceptable percentages for almost anything in business; acceptable percentage of damage in shipment, shoplifting, repair work, etc. And State Farm knows that the chance of having to pay out full benefits to 10% of the millions of people they insure is not going to happen short of an asteroid hit on the Earth. Same for mortgages. Acceptable amounts of repossessions. But when the government states what the acceptable percentage of anything is in business, it is almost always wrong. In this case, the CRA set a base limit of acceptable high-risk mortgages that was not realistic. It doesn't matter if that base limit was 5% or 50% or 75%. If it wasn't supported by real-world knowledge of the market, it was responsible for the market collapse.
Reply to this commentLinkReport AbuseThe market collapse caused by CRA would eventually apply to almost all loans (answering #2 and #3 above) because a collapse of any part of the a financial market will affect the rest of the financial market. This is a daily occurrence in the stock market where one company's poor quarterly earnings will bring down the entire Dow.
My sister, a big SFO lib and a former bank employee, always wondered why she was asked to LOWER her reported income when she refinanced though Wells Fargo back in 2000.. When the "it" hit the fan over mortgages, she figured out that her bank wanted to get her loan included in the QUOTAs established by the CRA and enforced by the Clinton administration.
Janet Reno, as you apparently do not recall, sent letters to banks informing them they would be audited and made to feel pain if they didn't comply with CRA. And, as you conveniently overlook, it was Jizzy Jackson and other agitators who whined about "redlining" that push pressure on Congress to force banks to change their mortgage criteria.
Don't be telling us that banks sought to make bad loans.
Reply to this commentLinkReport AbuseWhat percentage of loans were bought by GSEs? What percentage of loans were made with money that originated with low-interest cash dished out by the Fed?
Reply to this commentLinkReport AbuseWrong question. If GSEs set the market price, above which other mortgage bundlers cannot go without diminishing market share to an unprofitable level, then that establishes the GSE influence, not the percentage. (At any rate, it was a large fraction.)
Reply to this commentLinkReport AbuseThe CRA was only one of multiple serious distortions on the market that were entirely or almost entirely political in nature.
The single biggest, as others have pointed out, was Fannie and Freddie - that is, the government put in place a system of public risk, private reward.
OF COURSE the private actors cranked out as much risk as they could - they benefited at no risk to themselves (Fannie and Freddie bought the mortgages).
The CRA was one of the lesser problems, actually.
Reply to this commentLinkReport Abuse"We conclude that these two entities [Fannie and Freddie] contributed to the crisis, but were not a primary
Reply to this commentLinkReport Abusecause. Importantly, GSE mortgage securities essentially maintained their value
throughout the crisis and did not contribute to the significant financial firm losses
that were central to the financial crisis.
The GSEs participated in the expansion of subprime and other risky mortgages,
but they followed rather than led Wall Street and other lenders in the rush for fool’s
gold. They purchased the highest rated non-GSE mortgage-backed securities and
their participation in this market added helium to the housing balloon, but their purchases
never represented a majority of the market."
sorry, here's the cite for that (The Financial Crisis Inquiry Commission official report):
External Link
Reply to this commentLinkReport AbuseThe commission has little credibility. They were convened for the purpose of providing cover for the government.
Reply to this commentLinkReport AbuseFrom where I sit, here's the CRA connection:
The CRA's requirements were why banks started turning, increasingly after 1997, to a securitization model.
They then discovered that there was a huge market for these securities. This was largely because the Fed (and other central banks) were pursuing a low-interest-rate policy, which -- combined with a large demographic cohort of older people nearing retirement -- resulted in a huge market of securities buyers starved for yields.
When banks found willing buyers for pretty much anything they could originate (or buy) and package, they ran with it. That was foolish -- but I wonder if bankers really understood just how thoroughly dishonest borrowers had gotten once the "flipping" phenomenon got in gear. *Everybody* was lying on his mortgage application. This was unprecedented. Banks didn't adjust to this new reality close to fast enough.
In short, the CRA planted the seed. Banks took what sprouted and ran with it, running up the bubble. Just when it was about to burst, the GSEs joined the game and gave it another four or so years of unsustainable growth, turning what probably would have ultimately been a middling correction into a full-blown financial crisis.
Private-sector irrational exuberance gives you bubbles and busts. To comprehensively wreck and economy, it takes a government.
Reply to this commentLinkReport AbuseThank you for getting an argument I've made a couple of times.
The CRA was a necessary but not sufficient part of the financial collapse.
Someone on another thread call CDS simply gambling but they aren't JUST that (where they are in a minute). They were created as a form of insurance, a way to transfer risk (for a cost). Had they remained that we wouldn't have had the collapse either. So CDS were another necessary but not sufficient part. Their popularity with banks to cover mortgages is a by-product of the CRA and it's contribution.
The discovery of a secondary market in CDS, which is pretty close to gambling (why only pretty close in a second) is the critical juncture. Once you start trading in them you risk a concentration of transfered risk in a party who can't afford it, like someone betting the rent money in Vegas.
But the CRA existed since the 70s and CDS from the early 90s on. Why did the market explode after 2003?
Computers...the reason secondary CDS trading is only pretty close to gambling then gambling outright is the ability to manage that risk with computer models. Still, you can only manage so far and the models can only tell you so much.
Not, the increased power of companies to do modeling overnight that as recently as 1990 took a week on a super computer has wormed its way into huge parts of the market including traditional insurance, stocks (see the early 90s and later hedge fund failures), and lots of others.
Reply to this commentLinkReport AbuseIt's always helpful to read what was said before it all went pear-shaped:
NY Times: 30 September 1999: External Link
"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. …
"In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
"''From the perspective of many people, including me, this is another thrift industry growing up around us,' said Peter Wallison a resident fellow at the American Enterprise Institute. 'If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'"
Reply to this commentLinkReport Abuse"What percentage of all loans made between 2000 and 2008 were classified as CRA loans?"
Here is a counter question: if the market normally sustains X buyers and I create, by government fiat, N additional buyers how much will prices go up before the market stabilizes.
Here's a second question: if X buyers were qualified for loans at the old prices but by introducing N new buyers I drove prices up how many of the original X buyers are now marginal borrowers.
Just because the number of loans defaulting is greater than the CRA numbers does not mean CRA didn't contribute. By artificially inflating prices it helped drive previously sound borrowers into becoming marginal borrowers at the prevailing price level.
In the end, once you create a bubble all leveraged purchases become risky.
Reply to this commentLinkReport AbuseChuck:
I agree with you that the role of the CRA is exaggerated. I have in mind more the tax incentives, interest rates, and other incentives toward overinvestment in residential real estate.
Reply to this commentLinkReport AbuseKevin:
Once again this is correlation not causation.
All of these incentives have been in existence for decades.
Granted lower interest rates put upward pressure on housing prices (monthly payment drives prices up and down), but it is usually short lived because prices, and monthly payments, rise faster than income.
You have to look for what changed. And lender guidelines for credit and income is not it. No lenders made loans to borrowers who did not qualify for the loan - at least not on paper.
Lenders are using these same guidelines today - maybe a little higher credit score and a little lower debt as a percentage of income - but not that different.
And it was not high loan to value either. The FHA has been insuring high LTV loans from its inception. The Veterans Administration has been insuring 100% LTV loans for decades. Private mortgage insurance companies have also been insuring 90% and 95% LTV loans. No bubbles, no busts.
125% LTV loans were very popular in the late 90's and enjoyed a very healthy securitization market (it was actually the sub-prime auto loan collapse that ended their run). These loans performed comparable to all loans made during this period.
Housing busts have always been triggered by external events - until now. Think of this past bubble like a Ponzi scheme, once it was started, you couldn't stop it, even if you want to, even if you knew what the ultimate outcome was going to be, because if you stop doing what you're doing, it all collapses. And it did.
Someone saw the truth and said we can't do this anymore and the dominoes started to fall and there was no stopping it - the bubble burst, the mortgage market collapsed, and here we are.
The truth about the cause of the bubble and bust is too ugly for anyone to admit. So the politicians and the media will continue to point fingers at the dry brush and claim that it was the cause of the wild fire, all the while hiding the spark that ignited it.
Reply to this commentLinkReport Abuse"No lenders made loans to borrowers who did not qualify for the loan - *at least not on paper.*"
That's the key.
What made this bubble different from all other bubbles?
The sharper of the tools who blame "deregulation" for this point, not to Gramm-Leach-Bliley, which had no significant effect, but all the way back to Garn-St. Germain in 1982, which permitted adjustable-rate loans. That raises the question, though: Why did it take three decades for the supposed time bomb in GSG to go off?
Because adjustable-rate loans, by themselves, weren't the problem. The problem was (1) "radically adjustable-rate" loans (where the initial payments due didn't even cover all the interest accruing), coupled with (2) the no-doc "liar loan."
In the past, if you lied about your income on a mortgage application, the truth came out right fast: You couldn't make the payments, and the bank took the house back right away.
This time, though, the reckoning was delayed by the teaser-rate period, where the bank could pretend that everything was fine, and count the interest accruing on paper as income. The borrower's lie didn't manifest until the fully-amortizing payments kicked in, typically scheduled to happen years later -- by which time the investor-borrower would have sold his flip house at a bubble-driven profit, or the owner-borrower would have refinanced. ("You can always refinance!" is "I swear I'll pull out" in Realtorese.)
That dynamic was the heart of the bubble, and the reason it got big enough to pop so destructively. And unfortunately, you can't exonerate the private sector entirely from this. Its foolishness was monumental.
Reply to this commentLinkReport AbuseKevin, unfortunately there is no constitutional requirement that all candidates for office must use common sense. Given that they don't and will, in all likelihood not for the foreseeable future have to rely on the old standby of electoral pain. When its too painful for officeholders to continue to spend us into oblivion then and only then will the spending course change. The sad fact is that most folks have the common sense and will be subject to the painful parade of economic stupidity for some time to come.
Reply to this commentLinkReport AbuseI'll challenge #9 Kevin, well meaning politicians are TWICE as dangerous as self serving ones. The self serving are typically responding to rational self interest, the well meaning are just as typically enraptured by messianic fantasies of saving the world from itself.
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