If you want to know the real cause of the subprime mortgage mess...

Sure. The Community Reinvestment Act held a gun to Stanley O'Neal's head and forced him to traffic in opaque SIVs.

These are definitely not the 'reality-based' guys.

He's a little late, Michelle Bachmann (R) MN already blamed minorities.

But she meant it, rather than skewering the view with a rather amusing Flash animation. :-)

Add Ann Coulter and Rush Limbaugh to the chorus. McCain's handlers are getting desperate. Next Rev Wright will be resurrected.

He's a little late, Michelle Bachmann (R) MN already blamed minorities.

As a Minnesotan, may I apologize profusely on behalf of Michelle Bachmann? (I'm not in her district, but if I were, I would not have voted for her.) She is . . . shall we say, an interesting person. The only thing I've ever agreed with her about was the Profile of Learning -- a dumb piece of legislation that was disastrous for Minnesota education. Not much else. On some topics, she's downright scary.

I had an uber-conservative (calls himself a Libertarian, but whatever) friend tell me this just this past weekend. I kind of just stared at him for a while and finally said "Are you kidding me?"

Orac, you are so far behind the curve:

It's Teh Gaaaayzzzz!

http://www.boxturtlebulletin.com/2008/09/29/3159

The original post is here:

http://mikeheath.blogspot.com/2008/09/nation-will-right-itself-if-it-fi…

No, Orac, it's not the poor people's fault. It's the fault of stupid and greedy people who thought they could force reality to conform to their ideology. That's never worked before, and it didn't work this time either. You should get the facts before you indulge your penchant for sarcasm.

Here are the facts:

* The original Community Reinvestment Act was a good idea, because it was intended to end the discriminatory practice of "redlining." Many good, trustworthy people had been denied loans by redlining. The original CRA ended that.

* A series of changes in federal law (all passed largely with Democrat votes) and regulations (made by a Democrat president) between 1989 and 1995 made it a lot easier for various groups to accuse banks of lending discrimination under the CRA. The banks were caught between a rock and a hard place: they could either issue mortgages to borrowers who never had a prayer of paying them back, or they could get sued for discrimination, spend millions in legal fees and have to issue the mortgages anyway. So you saw banks issuing loans with increasingly ridiculous, nonsensical terms: no down payment, insufficient income, interest-only, adjustable-rate... And since you always get crooks wherever there's easy money to be had, you also had borrowers lying on their loan applications, and mortgage agencies falsifying applications without the borrower's knowledge.

* The next step was the creation of something called "mortgage backed securities." To get those risky mortgages off their books, the banks sold them to the Federal Home Loan Development Corporation (aka Freddie Mac) and the Federal National Mortgage Association (aka Fannie Mae). Freddie Mac and Fannie Mae then "packaged" the mortgages as mortgage-backed securities (MBS's) and sold them to investors all over the world. Now there's nothing intrinsically wrong with that, as long as the investors knew what they were getting into. But they didn't. Freddie and Fannie were playing games with their books to make themselves look more profitable, and those damned MBS's look less risky.

* The last step to the brink of disaster came with the law known as the Sarbanes-Oxley Act, passed in the aftermath of the Enron fiasco. Buried deep in that Act was a requirement that all investment holding companies (such as Enron was) had to do something called "mark to market." That is, at regular intervals they have to recalculate the value of all their current holdings at the current market value. Put the Sarbanes-Oxley Act together with those damned MBS's, and you have a giant boulder primed and ready to roll over anything in its path. All it needed was a trigger.

* Oh yeah, one more item: the accounting games at Freddie Mac and Fannie Mae started surfacing in 2003, at which point Republican senators, including a certain McCain, tried to get reform laws passed that would stop those two from doing what they were doing -- ie, buying these risky mortgages, issuing them as MBS's, and lying about the risk involved. They tried in 2003. They tried in 2004. They tried in 2005. Each time they were stopped by Democrat senators. Meanwhile, Freddie Mac and Fannie Mae were being run by Democrat CEO's, typically former Clintonites, who were collecting huge bonuses because the two corporations were showing huge profits -- on paper, at least.

So the situation as it stands now is:

* A lot of mortgages sold in the last dozen years are the base for mortgage-backed securities. Those MBS's are owned by thousands of investors all over the world.

* As of right now, nobody knows the value of those mortgages! Some of them will be paid off as every mortgage should, and those are worth quite a lot. But no one knows which ones or how many. Some of them will go to default and foreclosure, in which case they're worth only what the property can be resold for -- which is a lot less than the mortgage says it is, and may be nothing at all. But no one knows which ones or how many.

* Because no one knows what those mortgages are worth, no one wants to buy or sell them. In other words, there is no market for MBS's.

* Here's where Sarbanes-Oxley fits in. Since MBS's have NO market value, they must be marked as being worth $0. So many of these MBS owners (who tend to be large investors like investment banks) are seeing large fractions of their on-paper assets disappear like snow in July. This brings them much closer to insolvency. Freddie Mac, Fannie Mae, Bear Stearns, Lehman Brothers, and a couple of others all went bust primarily because they had to write-off so many assets under "mark to market" that they did become insolvent as defined by federal law.

* Being close to insolvency makes lenders more cautious about lending money. They pick their risks more carefully and demand higher rates of return -- ie, higher interest rates. In other words, borrowing money just got a lot harder and more expensive, a situation known as a "credit crunch."

* Companies need to be able to borrow money. Even highly profitable, stable, solvent companies with clean books and clean credit records. They get that money with short-term loans, long-term loans, and corporate bond sales. If they can't borrow that money when they need it, they can't keep operating. If the credit crunch continues at its present level for very long, a large percentage of American businesses will have to scale back operations or shut down completely.

To sum it all up: a good idea (the original Community Reinvestment Act) got carried to extreme lengths (which is always a bad idea) by left-wing activists and a left-wing president. Two Democrat-run companies fed this bad idea because the Democrats running them benefited financially. They then donated bunches of money to Democrat senators, who stopped all attempts to fix this ticking time bomb before it blew up. And two weeks ago, it blew up.

So the CRA isn't entirely responsible for this mess. The goddamned liberals who used the CRA as a tool for beating up on banks while abusing their own people (by getting them into mortgages they couldn't pay), and the double-damned ones who used their political influence to stop all attempts at reform, are.

A significant part of this mess is selling mortgages to underqualified buyers. There's plenty of blame to go around, but no one held a gun to the heads of the mortgage buyers or lenders.

The elephant in the room is that there is a lot of risk loaning money to people of questionable income. But you can't actually admit that.

you mean they haven't placed the blame directly on obama/biden yet? give it time.

how about blaming the people with the money... you know, the ones who decided to loan a lot of it to people who may or may not have had income at all, for all they knew.

even if it became possible to sue for such loose definitions of lending discrimination, then why did they ADVERTISE these loans? i got all kinds of flyers- look at these awesome huge new homes, hey, you can have one for no money down and no credit check!

responsibility is dead.

Wolfwalker:

-- The CRA covers only banks and thrifts. Most of the hinky loans made were not covered under the CRA.

-- Lending institutions covered by the CRA have a LOWER default rate than those that aren't.

-- The people spewing the lies blaming the CRA and Fannie/Freddie are trying to use race-baiting to hide the fact that massive deregulation is at the root of this mess.

-- Fannie and Freddie didn't issue bad mortgages, Fannie and Freddie didn't package bad mortgages into incomprehensible securities, and Fannie and Freddie were private companies that had shareholder-elected boards of directors.

Related:
Community Reinvestment Act had nothing to do with subprime crisis
Aaron Pressman
BusinessWeek, September 29
http://www.businessweek.com/investing/insights/blog/archives/2008/09/co…

Wolfwalker

Two simple questions:

1. What percentage of subprime loans were made through the CRA?

2. What percentage of CRA loans were subprime?

Then consider this:

http://www.businessweek.com/investing/insights/blog/archives/2008/09/co…

Bottom line, blaming the CRA for the subprime crisis is just silly.

This is the fifth time this week (third on Scienceblogs) that I've come across this garbage about the CRA somehow being responsible for the subprime crisis. Thanks for addressing this Orac.

As far as I've seen, the one piece of data anyone has brought to the argument demonstrates that the anti-CRA claim has things completely backwards. CRA-lending practices resulted in lower default rates, and a smaller proportion of CRA loans were sold by the issuing banks.

Wolfwalker's version of the story appears to be rather at odds with the available data.

The hypocrisy and irony, it burns too. They are saying how "Western medicine" is only doing it to gain money, and that they really don't work, when they are doing just that with their treatments, except that they don't work.

Uh oh, how did I comment in the wrong post?

"how about blaming the people with the money... you know, the ones who decided to loan a lot of it to people who may or may not have had income at all, for all they knew."

how about blaming also the people who took loans they could no afford?

Yes the people taking loans they could not afford have some blame.

But consider that while an individual taking out a shaky loan risks his own financial security, the company agreeing on giving that shaky loan risks the future of the entire company. Multiply that and you have the mess we are in.

Furthermore the individuals are not experts on economy. The public perception is that you have to be approved for a loan. You can only get a loan if you are considered economically sound enough to pay the mortgage. And how many of the people defaulting now were told that they qualified for a loan?

Of course they should have hired independent consultants to go over their personal finances, and accept their judgement.

In stead they saw an opportunity to finally get a back yard for the kids to play in, to move the family to a safer neighbourhood, to get that pool etc. So when they were told they qualified for a loan, they believed in it.

They loose all now, in part because they were stupid enough to believe the lies they were told, but the ones responsible for the downfall of the economy were the ones who on one hand told the individual lone taker, that they could safely take the loan, and on the other hand banded the same loans into cess pools, because they knew there was no chance in hell of them not defaulting.

"So when they were told they qualified for a loan, they believed in it."

You DON'T need a consultant to calculate your monthly budget. You don't need a consultant to figure in expenses and the chances that future employment might be a problem.

" So when they were told they qualified for a loan, they believed in it.'

Just because some salesman tells you you can afford something does not in the slightest absolve you of the need to make a determination of your circumstances.

You reflect an insulting belief that people should be treated like they are knee jerk unthinking responders. You seem to be demanding that people be in a rubber padded world where they have not consequences for their actions, and do not have the freedom to decide on certain risks.

"You reflect an insulting belief that people should be treated like they are knee jerk unthinking responders. You seem to be demanding that people be in a rubber padded world where they have not consequences for their actions, and do not have the freedom to decide on certain risks."

Er. The individuals who bought houses beyond their means - or, more often, houses which became beyond their means due to price inflation and wage stagnation, job loss, etc, etc - *have* suffered the consequences of their actions. Their houses have been foreclosed on and their credit ratings annihilated. So, yes, they've suffered the consequences for believing what the mortgage companies - who ultimately didn't care that individuals couldn't make payments, because mortgage-backed securities made that someone else's problem - told them.

So while I'm happy to pass *some* blame along to the people who can't/won't make their mortgage payments, they've already paid the price for their mistakes. The bailout, OTOH, is all about making sure the other party involved doesn't have to pay a price for theirs.

"The bailout, OTOH, is all about making sure the other party involved doesn't have to pay a price for theirs."

You and I agree here.

* Oh yeah, one more item: the accounting games at Freddie Mac and Fannie Mae started surfacing in 2003, at which point Republican senators, including a certain McCain, tried to get reform laws passed that would stop those two from doing what they were doing -- ie, buying these risky mortgages, issuing them as MBS's, and lying about the risk involved. They tried in 2003. They tried in 2004. They tried in 2005. Each time they were stopped by Democrat senators. Meanwhile, Freddie Mac and Fannie Mae were being run by Democrat CEO's, typically former Clintonites, who were collecting huge bonuses because the two corporations were showing huge profits -- on paper, at least.

2003, 2004, 2005 - the Republicans OWNED Congress. I doubt very much that a handful of Democrats stopped them from doing anything at all. One might also ask why, after 3,4 and 5 years of the Bush regime, Democratic CEO's were still in charge of Freddie Mac and Fannie Mae? Could it be because these were private corporations beyond the ability of Bush to appoint political agents? And, if they WERE private corporations, then how do you blame DEMOCRATS for controlling them?

An analysis of FM and FM lobbying contributions and efforts shows that they made donations across the political spectrum. Their main lobbying efforts was DEREGULATION. McCain is a main man when it comes to DEREGULATION. It has been said that Obama accepted over $100,000 in contributions for his campaign from FM and FM employees. But that is a tiny amount when compared to the $340,000,000++ he has collected. No one in their right mind would suggest that a few contributions from LOWER LEVEL FM and FM employees buys Obama. McSame, oth, has also accepted $60,000++ from FM and FM UPPER LEVEL EMPLOYEES. Does that imply that McCain was bought by the executives of FM and FM?

I think not.

Phoenix Woman: Which deregulation, exactly?

The only one I can think of that's plausibly related is the relaxation of leverage ratio requirements... which made our banks able to leverage just like those of Enlightened Europe (Deutsche Bank is leveraged at, what, 50:1?).

The "deregulation" of 1999 in the Gramm bill let banks diversify their holdings, and as far as I know, the diversified banks are the most stable ones.

Blaming "deregulation" is about as stupid as blaming "the poor" (except nobody actually blames "the poor"; even those that blame the Macs and CRA blame policies aimed at "helping" them, not the poor themselves).

(Your "deregulation" link, by the way, sure looks like it's just a defense of CRA, not an attack on actual "deregulation" or a list of specific regulation changes that caused a problem.

Economists don't seem to blame deregulation a lot - those that do, apparently for partisan reasons, seem to be very short on details as to which deregulation was the problem.

And given that Congress was, just a week or two ago, waving its hands and saying "we don't know how to regulate finance, don't ask us", it's ludicrous to blame "deregulation" - as if the original regulation was somehow God's Own and any better than what they admit they're lousy at today.

(Try here for why Glass-Steagal was not "what kept this from happening until GLB repealed it".

I know it's a lot easier to just blame "the other side" for causing a problem, but just maybe it's not a partisan issue, and for that matter entirely innocently motivated and rational action can cause problems later.

Crazy, I know.)

Er. The individuals who bought houses beyond their means - or, more often, houses which became beyond their means due to price inflation and wage stagnation, job loss, etc, etc - *have* suffered the consequences of their actions. Their houses have been foreclosed on and their credit ratings annihilated.

I have to object to that, in two distinct ways. First, the claim that the houses "became beyond their means" is totally meaningless, as the mortgage terms don't change because the house has appreciated in value since they bought it. Similarly for wage stagnation, and the chance of losing your job is a major part of what *defines* your means. The houses were most certainly beyond their means at the time of purchase.

More importantly, however, by and large the major focus of politicians' concern has been very explicitly with trying to ensure that said people DON'T get foreclosed upon and lose the houses or their credit ratings! A small fraction have so far, sure, but only a small fraction, and Washington's doing its level best to keep the number that do as small as possible.

It is a mistake to try to place the blame on any one group. It is a bigger mistake to think that government is the solution.

A bunch of politicians, largely inexperienced in business, are claiming that the cause of this crisis is that they did not have enough control over business.

These politicians have been responsible for creating punishments and rewards for the people who actually are in business. Where is the evidence that they improve financial safety?

The solution is not to give the politicians more control over businesses. The more the government tries to control the markets, the more influential politics will be in the markets. Hardly conducive to financial safety.

Private enterprises certainly do not have a record of good risk management. Neither Wall Street nor government does a good job of discriminating between lucky fools and competent executives. Both work too hard trying to be responsive to those even more gullible than themselves.

The government/private chimeras of Fannie Mae and Freddie Mac were pratfalls waiting to happen. The bail out will only encourage more recklessness, prolong the damage, and pass on more debt to our children.

Sigivald wrote: "Which deregulation, exactly?

The only one I can think of that's plausibly related is the relaxation of leverage ratio requirements.."

There's Gramm's 2000 addendum to an omnibus spending bill that barred regulation of Credit Default Swaps, which are a huge part of the current credit market freeze, are totally unregulated, and are badly lacking in transparency.

(Though technically I suppose that's not deregulation because they weren't already regulated. The bill just established the definitive answer to a debate that had been ongoing for a few years. Also, it was a bipartisan failure, as non-regulation was supported by the Clinton administration.)

The real problem was allowing banks, where you put your money to keep it SAFE, to hybridize with investment banks, where you put it to be AT RISK.

The Glass-Steagall Act prevented, or at least dissuaded, this for six decades and was a chief target of Reaganomics. It was repealed under a Democratic Congress and president, but it was a Republican goal.

CRA had nothing to do with it. Fannie Mac and Freddie Mae had nothing to do with it. Sarbanes-Oxley had nothing to do with it.

Unsupervised financial markets were the cause. Unsupervised financial markets crash every 6 to 20 years. They never crashed as long as New Deal interrupters were in force. Before and since, every 6 to 20 years.

Now the people who preached free markets are lining up for gummint handouts. Nobody likes free markets who has to live with one.

McCain's handlers are getting desperate. Next Rev Wright will be resurrected.

Done. And the attack is being lead by a woman who was blessed by a witch hunter.

Now the people who preached free markets are lining up for gummint handouts. Nobody likes free markets who has to live with one.

This is a very interesting topic. I appreciated the link to the business week opinion piece and I would encourage everyone to read the comments after the article for a more balanced view as well as some interesting links. It does appear that the modification of the CRA under president Clinton resulted in a large increase in the subprime morgages in the mid to late 1990s.