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Originally Posted by trux:
Another angle on the CRA's influence on the current crisis:

http://www.prospect.org/cs/articles?...ubprime_crisis

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."

I don't know Ms. Yellen, so I'll make no assumptions about her intelligence. She has a pretty important job so she must be fairly smart. No assumption needs to be made about her politics. Ms. Yellen makes this perfectly clear. She would be well-advised to learn about the relationship between the GSE's and the lending institutions though, if she's going to be a "knowledgeable" source. If the GSE's weren't buying up every bit of subprime paper on the market, those independent banks wouldn't have had the free capital to keep making loans.

If I have a million dollars and I make ten loans, each for a hundred thousand dollars, I'm done loaning money for a while. Let's say that each of those ten loans has a face vale of $200,000 and a 50% down payment (not so risky, in other words). Once my million bucks is gone, it's gone. I have to sell the loans in order to get more money that I can loan to new borrowers. So I sell them to Fannie Mae or Freddie Mac, right? Sure. But then they (the GSE's) will have to buy a million dollars in low-income loan obligations to offset my million dollars in safe loan obligations. Otherwise they won't match Andrew Cuomo's 50% mandate.

It's true that the non-CRA banks could have stayed away from the subprime market if they chose to do so. Then they would have watched their business dwindle while others were diving right in and selling everything off to the GSE's. Given the benefit of hindsight, I would guess that some of them wish they had followed such a cautious course. To deny that the CRA rules prodded them into action is a crock though. The report commissioned by those wacky right-wingers known as the Clinton Administration (quoted a few pages back) found that the enhanced CRA regulations encouraged more subprime lending by non-CRA banks. In their conclusion, this was an achievement worthy of praise.

I don't know that anyone would argue that the banks and investment firms are innocent here. It's just a complete farce to pretend that it all happened as a matter of coincidence. The timeline is quite clear:

Tighter regulations (50% rule and securitization of subprime loans) --> More subprime lending --> High short-term profits --> Housing bubble begins --> Higher home prices force "creative" ways for people to qualify --> Everybody wants a piece of the action --> Major leverage issues --> Political cronies in charge of the GSE's --> Loan defaults start to hit the balance sheets --> Misstated earnings at the GSE's --> Housing bubble continues --> Calls for reform --> Big money contributed to the people who can block the reform and protect their buddies --> Roger Clemens' pharmacist and artificial-butter flavoring are more important issues on Capitol Hill --> Major MAJOR leverage issues --> Economy slows, defaults increase --> No more money to fuel the bubble --> Housing bubble pops --> Finger pointing begins.

Some may argue that banks, who had consistent lending standards since World War II, just decided one day to start lending money to risky borrowers. Some may also argue that this just happened to coincide with the new regulations. Some may also believe me when I say that I have a great bridge linking Brooklyn with Manhattan, going for a great price. Let me know if you would like to buy it.