On the Fannie/Freddie/CRA Myth
Slate has a good rundown of why Fannie and Freddie are symptoms of the current financial meltdown, not the cause.
To borrow from publius’ summation: essentially, “it’s not risky to lend to minority families, it’s risky to lend to rich white people.”
Taste the snark:
I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can’t find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?
Crossed everywhere.
October 10th, 2008 at 5:18 pm
The other point to be made is that if you look at the institutions that went under and those doing the rescuing, the CRA covered institutions are doing pretty good.
The investment banks, Fannie, Freddie, AIG, Countrywide and Ameriquest were not covered by CRA. Of the 3 big institutions that failed (WaMu, Wachovia and IndyMac), only IndyMac is costing the taxpayer anything. Both WaMu and Wachovia were bought by institutions willing to cover their losses.
On the other hand, the acquirers, Bank of America, Chase and Wells Fargo, are all covered by CRA.
October 10th, 2008 at 5:48 pm
Yes and a whole lot more. Blames needs to be laid on Christ Dodd,Harry Reid, Barny Franks and many more.
These yahoos, in typical liberal fashion, used political correct affirmative action to sub prime loans. Thus, telling the banks to give loans to minorities or low income whites,who could not afford the homes they were getting loans for. Sure, we could also blame the home buyers, but most of them were government cheese, thus few had the ability to think for themselves in the first place.
October 10th, 2008 at 10:46 pm
Hmmmmm.
“The investment banks, Fannie, Freddie, AIG, Countrywide and Ameriquest were not covered by CRA. Of the 3 big institutions that failed (WaMu, Wachovia and IndyMac), only IndyMac is costing the taxpayer anything. Both WaMu and Wachovia were bought by institutions willing to cover their losses.”
Disingenuous at best, and outright deception at worst.
The purpose Fannie/Freddie was to purchase the mortgages forced on banks by the -CRA-.
Get it now?
October 11th, 2008 at 12:57 am
Close. Most major lenders – Countrywide, for example – are not banks (Countrywide does own one, but most loans run through Countrywide Home Loans, Inc., not through Countrywide Bank). However, the loans mandated of banks forced everyone else to compete, and also helped to drive up property values in a way that encouraged all participants to loan money as though property values would always go up. And Freddie and Fannie didn’t just buy from banks subject to CRA, they bought from everyone in the business, and everyone structured their loans according to what Freddie and Fannie would buy from them. So there was little if any incentive for a lender not subject to CRA to eschew risky loans they knew they could sell anyway.
October 11th, 2008 at 4:23 am
Lot of lying going on in this thread.
First off, Freddie/Fannie weren’t “exempt from the CRA,” they were the instrument by which CRA was implemented. Without them buying up and bundling the risky mortgages, none of this would have been possible. They made it possible for banks to make loans that were simultaneously risky and low interest. Freddy and Fanny then then sold those mortgages for full price as if they were not risky. The entire market proceded as if this were true and the risk were virtually non-existant- this is how we ended up with stuff like CDSes with no money backing them.
The problem was that there was no way to “lend to minorities” without collapsing the standards for the entire industry. This happened and pretty much everyone piled on to get at the free money. 10 years later, here we were. Give the market shitty rules to follow and the market will produce shitty results.
October 11th, 2008 at 4:24 am
Also, why the hell is tgirsch posting on this blog. If I wanted to read his left wing puke, I’d hang out on his blog instead of this one.
October 11th, 2008 at 7:53 am
tgirsch, you lost me with the publius quote. There’s a whole lot of material on the web, I can’t read it all, so I have to chose a very little bit of what’s most likely to be true and useful. In non-medical contexts, as soon as I see race brought in, I tune out. It’s a tell that it’s less likely to be worth my time.
October 11th, 2008 at 11:33 am
Jim W:
Sorry to disturb your echo chamber. (Actually, I’m not.)
EC:
That’s the beauty of freedom, isn’t it? You’re free to not read. That said, if you read the linked Slate piece, race is really mentioned only in passing, and certainly with nothing like the snark that publius introduced (at least not on that subject).
October 11th, 2008 at 12:50 pm
Nothing to do with echo chamber. It’s just that I come here for relatively honest information. If I’m going to be fed stuff I can debunk off the top of my head within 30 seconds of reading it, I won’t bother coming here. I can get that sort of weak material off the average GOA newsletter thank you very much.
October 12th, 2008 at 7:57 pm
Aw, geesh, tgirsch, the risk of a loan has nothing to do with skin color, it have to do with the ability of the person you lend to to pay it back. If they’re not earnin’ enough to make the payments and odds don’t look good that’s gonna chnage, it’s a risky loan, no matter if it is $10K to an itinerant janitor or $10M to a shaky day-trader.
Institutions were encouraged to make risky loans by policies set by Congress and pushed especially by Barney Frank, Maxine Waters and other Democrats. Gresham’s Law ensued and bad loans pushed out good ones. Black? White? Don’t make me laugh. Foolishness hasn’t got a skin color, though I wonder if perhaps this flavor of it favors one particular political party.
Banks and other lenders were not previously failin’ to make risky loans ‘cos they were tryin’ to keep a brutha down (heck, when I was a bad risk, I could not even get a loan to get a better car, and I look as white as you), they were wantin’ to make sure they’d get their money back plus some profit for havin’ it tied up for several years. Worse risk were havin’ to pay more for the use of the money, if they could get loans at all, to help pad against the liklihood of default. The lender does not want your car or your house; they are in the money biz.
And Congress is in the unicorns that crap money biz. Turns out they were wrong and they’ll pick our pockets to try to correct it while they and their pals at Fannie mae and Freddie Mac go laughing off to the bank — probably in the Bahamas or Switzerland.
October 12th, 2008 at 9:10 pm
The purpose Fannie/Freddie was to purchase the mortgages forced on banks by the -CRA-.
Fannie was created by FDR and Freddie was created in the early 1970s. On the other hand, CRA wasn’t passed until the Carter Administration. Thats pretty amazing that FDR had the foresight to create an institution 40 years before the law was created.
So there was little if any incentive for a lender not subject to CRA to eschew risky loans they knew they could sell anyway.
The originating institution was still on the hook for losses on bad loans.
First off, Freddie/Fannie weren’t “exempt from the CRA,” they were the instrument by which CRA was implemented. Without them buying up and bundling the risky mortgages, none of this would have been possible.
not
October 12th, 2008 at 11:43 pm
Manish:
Curse you and your blasted facts! Can’t you tell they’re trying to spread a meme, here?!?
😉