The Right is Never Wrong, Part 6,000: The Housing Meltdown is Clinton's Fault?
By Lee Russ
Wednesday, September 24, 2008 at 07:47 PM
I've mentioned before that the political right seems to have a pathological inability to ever admit being wrong, and now we get yet another example: conservatives are determined to pin the housing debacle on Clinton's amendments to the Community Reinvestment Act.
The blame Clinton theme has been building for some time. As chronicled by Robert Gordon in American Spectator way back in April of this year:The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve. The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."And, of course, since the never-wrong right is, in fact, almost always wrong, this blame Clinton gambit is based on.....nothing, really.The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."
The Community Reinvestment Act (CRA) does, in fact, encourage banks to lend to people in the local areas they serve, having originally been prompted by the bank practice of "redlining"--simply declining to make loans in low income neighborhoods, without any regard to whether a specific applicant was a good credit risk. And yes, in 1995 I believe, Clinton's administration did strengthen the CRA. But.....
The CRA basically did not mandate that banks do anything. There were no serious punishments for noncompliance. Noncompliance could be the basis for rejecting a bank's application for expanding its business, and could get the bank examined more often for future compliance, but it could not cause the loss of a license, it could not result in fines or the like, or anything else that would really cause a supposedly prudent bank to suddenly start making imprudent loans to people who were bad risks for repayment. If you don't believe me, check out this article: "Enforcing the Community Reinvestment Act: An Advocate's Guide to Making the CRA Work for Communities," by Richard D. Marsico of the New York Law School, in the Journal of Human Rights, Vol. 27, No. 1, p. 129, 2001. (the link takes you to a page where you can access the full article). You can read this plain English description of the law's requirements and enforcement mechanisms.
Not only is the CRA very unlikely to have spurred tons of imprudent lending, but we have no less a source than Ben Bernanke frankly telling Community Affairs Research Conference in March of 2007 that (emphasis added):
..changes in the structure of the financial industry have resulted in many financial transactions that fell under the CRA umbrella in 1977 having become increasingly the province of nondepositories not subject to CRA, including companies owned by banks or bank holding companies. Holding companies' nonbank affiliates, for instance, can be included in the CRA assessment of the banking institution at the discretion of the bank but need not be. Most mortgages are now packaged by brokers, and nearly two in three mortgages are originated by nondepositories not covered by the CRA.Personally, I'm pretty sure that if Bernanke thought he had a shot at blaming this nightmare on Clinton, he'd have done it in a minute.
Not only are most mortgages issued by entities that are outside the CRA, but there's plenty of evidence on what actually did cause the dammed meltdown. For example, we have a very detailed study conducted by two authors from the University of Chicago Graduate School of Business titled "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis." Their conclusion (emphasis added):
Our central finding is that a rapid expansion in the supply of credit to zip codes with high latent demand for mortgages is a main cause of both house price appreciation from 2001 to 2005 and the subsequent sharp increase in defaults from 2005 to 2007. The expansion in credit supply was driven by a shift in the mortgage industry towards “disintermediation”, which we define as the process in which originators sell mortgages in the secondary market shortly after origination.What a surprise. The mortgage industry discovered they could lend to damn near anybody, generating tons of up front fees, then sell the risks off to third parties before any of the debtors could default. The third parties and/or the originating banks could "securitize" (I hate that word and that concept) the risks in a way that concealed what loans were really behind the security, allowing investors of all kinds to buy these packaged loans in the blissfully ignorant state of expectation that housing prices would only go up, up, and away from any real danger of financial loss.
"Clinton did it" my butt. The mortgage industry did it. The states which allowed any old Tom Sleazo, Dick DeFraud, or Harry Felon to become mortgage brokers did it. The willfully ignorant investors did it. All aided and abetted by Bush's subsurface recession and war on wages.
The right is never wrong. In a way, that's true, because "wrong" really doesn't come close to describing how far off they are, how deluded they are, and how dangerous their "ideas" are to the well being of every person in the country. Not to mention how conscienceless they are when it comes to conning the populace about happened.
Comments
It appears that the intent of the Community Reinvestment Act will now be fully realized via the bail-out.
"It appears that the intent of the Community Reinvestment Act will now be fully realized via the bail-out."
I don't understand your comment. The CRA sought to expand lending to creditworthy people in poorer neighborhoods--essentially it asked banks to look at the characteristics of individual aplicants for credit, rather than drawing a "red line" around an entire neighborhood and refusing to do business within the area that was "redlined."
The explosion of mortgage approvals for lower income people may have helped spread credit in those neighborhoods, but the CRA never sought to have unqualified borrowers approved. Never.
In any case, how could the bailout itself, as opposed to the crazy lending that precipitated the need for a bailout, have any relationship to the CRA's purpose?
Your comment,"The CRA basically did not mandate that banks do anything. There were no serious punishments for noncompliance. Noncompliance could be the basis for rejecting a bank's application for expanding its business, and could get the bank examined more often for future compliance, but it could not cause the loss of a license, it could not result in fines or the like, or anything else that would really cause a supposedly prudent bank to suddenly start making imprudent loans to people who were bad risks for repayment."
This comment above shows no research and much bias, you're either misleading on purpose or ignorant to the reality of running a bank. Rejecting a bank's application for expansion is a huge penalty. Being subject to additional examination or the threat of added scrutiny is again a serious concern to any bank. And the idea a bank wouldn't be fined, research the amount of money coerced from some leading mortgage lenders in the 90's by special interest groups, especially in areas of the country where aggressive growth was occurring such as Atlanta, GA. The CRA is the sole reason for this and bankers were forced by threat to make these loans and some how take these loans and create a profitable portfolio, which ultimately Fanny and Freddie had to eat. Get a clue. Research some of the lending guidelines for these mortgages, especially in the area of questions a mortgage lender may and may not ask a potential borrower. These loan products were designed to give away money and have Fanny and Freddie deal with them.
Our central finding is that a rapid expansion in the supply of credit to zip codes with high latent demand for mortgages is a main cause of both house price appreciation from 2001 to 2005 and the subsequent sharp increase in defaults from 2005 to 2007. The expansion in credit supply was driven by a shift in the mortgage industry towards "disintermediation", which we define as the process in which originators sell mortgages in the secondary market shortly after origination.
This quote from your study makes the exact point of why it wasn't prudent for the Clinton administration to force the lenders hand into making these loans. Big bank money backed the mortgage broker world. Both your big commercial/retail based banks and your wholesale lenders were offering these types of products because they had to and yes, there was money to be made (Oh how shocking). The idea that some kept the servicing and some sold the portfolio quickly has to do with a CFO's appetite for certain risk at the time. Again, you need a better understanding of how a bank weighs its assets for risk and reward (profit). Without the proper knowledge and understanding you should keep your liberal / Clinton bias out of the discussion.
I guess we should all simply defer to your superior knowledge, Tortass?
Typical critical comment from someone on your side of the aisle. I put my sources up on the site for you and everyone else to see. You respond with....insults, unsupported claims made with incredible certainty, and unsupported claims of great specialized knowledge.
Try supporting any of your assertions:
1. "Both your big commercial/retail based banks and your wholesale lenders were offering these types of products because they had to"
Tell me what products your talking about and support your claim of coercion
2. "This quote from your study makes the exact point of why it wasn't prudent for the Clinton administration to force the lenders hand into making these loans."
Makes that exact point, how? It isn't obvious to me. And support your claim they were "forced"
3. "research the amount of money coerced from some leading mortgage lenders in the 90's by special interest groups, especially in areas of the country where aggressive growth was occurring such as Atlanta, GA"
No, YOU fresearch it and tell all of us what you found, with cites to where you found it.
4. "Research some of the lending guidelines for these mortgages, especially in the area of questions a mortgage lender may and may not ask a potential borrower"
No, YOU research it and tell all of us what you think the answer is.
Where in the Hell did conservatives get the notion that all their ideas are facts, that they need make no effort to support any statement, and that it's just Jim Dandy to be insulting as hell at the same time?