ArchPundit

Scary brown people caused the economic crisis! Why? Because economics is complicated and we don’t understand the first thing about the housing market, we are going to make up a bunch of shit about it to blame some subgroup.

The truth about the mortgage meltdown is oozing out slowly, but surely.  Early adopters are connecting Jimmy Carter’s Community Reinvestment Act which Bill Clinton expanded to extort banks into making bad loans and they are beginning to understand CEO Franklin Raines’ reprise of Enronomics at Fannie Mae.  They are starting to see the connections and to recognize this was no random economic development, rather, it was a conspiracy to gain control Fannie and Freddie to loot it.  The motive was to gain anc consolidate political power, disguised as “affordable housing” programs.

This afternoon, others, including visitors to The Illinois Review, are becoming aware of an internet video viraling its way into the public’s awareness.  It shows clips of a 2004 hearing where Democrats are praising the management of Fannie and Freddie while at the same hearing , an official of the Office of Federal Housing Enterprise Oversight is testifying that Fannie was falsifying its books and thereby creating doubt about its capital adequacy.  As much as the Democrats seemed to ignore those warnings, the Republicans seemed to “get it” as the video plainly shows.

One particularly disappointing clip is of Maxine Waters praising Franklin Raines even as she chooses to ignore testimony that he’s a looter via an ongoing accounting fraud.  What’s particularly telling is Congresswoman Waters’ observation that the GSE’s had met their quotas and her regard for their innovations.  This included “desktop underwriting”, a process by which “community organizers” could become existential loan officers.  It is how Fannie and Freddie could loosen credit standards it required of borrowers at the “point of sale”.  Banks using desktop underwriting could thereby be assured that any loan they originated through the system would be acceptable—and purchased—by the government.  As the banks were paid fees to originate these loans, they could care less whether the loans made any economic sense.

The financial treachery continued as Fannie and Freddie polluted the markets when they offered investors packages of these sub-prime mortgages to get them off their own balance sheet. These are the instruments which the legislation which failed today officially describes as “toxic”.  With the government’s guarantee, they soon found their way to Wall Street.

There are many problems, but the most basic is that Seiffe fails to understand the housing market and CRA in particular.  CRA was designed to fight redlining or the discrimination of businesses and individuals based on their zip code, not their creditworthiness.  It’s largely successful, and CRA loans have very low rates of default. One big reason is that most CRA activity happens in the core bank business not in affiliates that face…wait for it…less regulation.

In fact, the CRA is the model for what that bastion of crazy liberalism used in expanding it’s insurance business to intercity neighborhoods. Yes, that’s right, State Farm insurance is part of the dastardly plot to serve people in poor areas.  Bring out your Masonic conspiracy theories, Ralf.

The idea isn’t hard to understand. The markets are often irrational about whether something is good business and so you provide carrots and sticks to get them to invest in areas underserved by banks.  Banks aren’t familiar with the areas often times and so are averse to making decisions regarding loans for businesses or other investments in such areas.  The CRA provides a framework for banks to better engage the community and provide loans to customers who are credit worthy, but live in underserved areas.

For anyone who has worked with HMDA data that largely deals only with banks regulated under the federal oversight and CRA, the default rates in areas that are poor don’t show significant differences in defaults from other areas.

However, we do observe higher overall defaults in those areas overall.  What does that mean? CRA isn’t creating the problem because CRA covered institutions don’t see much higher than average default rates on home loans.  The problem are largely unregulated entities making bad loans.  Go figure.

Robert Gordon provides some of the basic empirical evidence that Ralf is allergic to:

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.”

Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, “banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business.”

It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.

And that is not political correctness. It is correctness.

The fundamental problem is that in a zeal to deregulate everything possible, the Republican congress with some Democratic accomplices passed bills to allow the connection between lender and long term health of a loan to be completely separated encouraging loan originators to make bad loans and sell them off. CRA does the opposite by tying business to the local community’s health.  It’s largely successful and a strategy very similiar to such tactics has led to State Farm increasing it’s profits by insuring lown income zip codes that many competitors will not insure.

But Ralf’s ignorance goes even further in ascribing the problem with Fannie and Freddie for offering toxic Mortgage Backed Securities. The problem is that the collapse wasn’t caused by Fannie and Freddie that have very low rates of default on those loans initiated under Fannie and Freddie, but because Fannie and Freddie bought market created mortgage based securities that collapsed and sapped their already taxed reserves.
It’s absolutely true that Fannie and Freddie had lax oversight and should have been forced to have greater reserves and been watched more closely, but their loans originated under their guidelines weren’t the problem. The problem is they played in the securities market trying to boost investor return beyond their basic mission and bought a whole hell of a lot stupid paper.  But Ralf completely misdiagnoses where the problem lies. It wasn’t in Fannie and Freddie originate loans, it was in private market initiated sub-prime loans. But screw it–who needs details and facts!

Blaming that lax oversight on Democrats alone is a bit hysterical though. The original sin was Lyndon Johnson’s fault since Fannie and Freddie should have been kept as government institutions and not quasi-governmental institutions with perverse incentives such as investing in private market created MBSs.  But more to the point, as the mortgage crisis deepened over the last couple of years, the Bush Administration pushed to have them refinance subprime loans in danger of default–to a target of $40 billion and it included jumbo loans as some to buy securities for–significantly increasing their exposure.

A private GSE structure is untenable as it promotes risky behavior with an implicit taxpayer backing and it creates super coalitions in Congress to push against serious oversight.  Keeping Fannie and Freddie as public entities would reduce the pressure to provide the profit and instead focus on what should be the mission of the two entities–providing guarantees for safe loans that are affordable to middle class families.

What’s stunning about these attacks on the CRA and the fundamental misunderstandings of the housing market is that the garbage comes from people who claim to be from the party of markets.  Unfortunately, those people don’t have the first clue about the housing market and seem content to just make shit up.

Some people might show some shame for such ignorance.  Apparently dishonesty or ignorance cause no shame for Illinois Review writers.