From this fact people automatically assume that brown people can’t pay the bills. I’m not saying YOU did this, but I can’t ignore the plain truth – to some people, any attempt to serve the needs of minorities = a guarantee that there will be a lot of bad loans made.

Joe, that’s just not true, there is no reason to pull the race card. People who can’t pay their bills can’t pay their bills, people who can’t get into college can’t get into college. Making laws forcing entities to loan money to people or let them into college despite their lack of qualification, necessarily lowers the standards. What the heck do you think “give priority” means??? If banks failed to maintain the required quotas they suffered serious consequences, this forces them to lower standards.

I have no objection to making sure race is not a negative discriminating factor in loans, but quotas is not the way to do so, it has serious negative results.

“IF that was true, the regulated lenders would not be being bailed out by the Federal government, would they?”

All the regulations went out the window when the Glass-Stegall Act was thrown out and the Gramm-Leach-Bliley bill introduced. Thank you Bill Clinton for that one!

hardly.

It doesn’t matter if you have government support if you still compete in the open market.

If you have government support you are not competing in the open market. Period.

It started at the ground level with people suckering people into bad loans

So it’s always the lender who is “suckering” people? It’s never to do with greed on the part of the person securing a mortgage? A person who fills out and sign a fraudulent loan application? Are you saying that people didn’t understand the meaning of “INTEREST ONLY”? You can’t exonerate the people who took out the loans knowing they were not being honest and could not pay them, both parties are to blame.

Those bad loans were only possible because of federally authorized lower lending standards – NO DOCUMENTATION, LOW DOWNPAYMENT, INTEREST ONLY.

“Wow, you have a lot of research to do. The sub-prime crisis was precisely allowed because of lower lending standards mandated by the CRA and other congressional action.”

There is no evidence that CRA ever mandated lower lending standards. Absolutely none. All it ever did was mandate that certain banks give priority to low-income and minority borrowers who had historically been red-lined out of lending.

From this fact people automatically assume that brown people can’t pay the bills. I’m not saying YOU did this, but I can’t ignore the plain truth – to some people, any attempt to serve the needs of minorities = a guarantee that there will be a lot of bad loans made.

“IF that was true, the regulated lenders would not be being bailed out by the Federal government, would they?”

All the regulations went out the window when the Glass-Stegall Act was thrown out and the Gramm-Leach-Bliley bill introduced. Thank you Bill Clinton for that one!

There were still plenty of banks that decided not to jump off the cliffs – especially local community banks and credit unions that – gasp! – continued to serve the needs of minorities and low-income customers by CRA standards in their areas, and didn’t have the means or, I imagine, the desire, to get in on the securities madness. As I said, where there were high concentrations of these banks, there were fewer foreclosures.

Fannie and Freddie, by contrast, were in competition with the big boys, the major lenders who, thanks to deregulation, COULD get involved in sub-prime and mortgage backed securities and begin taking dangerous risks with other people’s money. It doesn’t matter if you have government support if you still compete in the open market.

“many people at all levels took advantage of these standards to get loans they might not otherwise have qualified for”

This is true, but its important to remember where most of those loans came from. Not from regulated banks following CRA guidelines, but unscrupulous lenders (anyone can become a lender and many people did) who sought only to collect fees from selling their loans to another institution, where they would be repackaged as securities, then sold again, etc. It started at the ground level with people suckering people into bad loans, and then deregulated banks getting involved in selling them over and over again, not caring if they were bad or good, as long as someone bought them and they made a profit. Whoever was holding the hot potato when the game stopped would be the loser.

So when both regulators and lenders looked at the last 15 years, they were seeing a very low overall foreclosure rate (even for very marginal buyers) because if people ran into trouble they could always sell. This made it look like it was safer to lend than it was.

That’s absolutely correct, if lending standards had been maintained, there would still be some scenarios were nobody made any mistakes, but they ended up losing their house…. it would be a much smaller percentage. Keep in mind also, what caused the bubble in part was the reduction in lending standards, when the foreclosures caught up, the collapse began.

Matt –
I do think a 20% down payment threshold is a good thing as it forces people to work hard and save so that when they do buy a house they will not lose it… It is far better to stay in rented housing than to buy a house and lose it.

So I’m partly working from the knowledge of a situation in which a “sub prime” mortgage worked out just fine. Being a semi-libertarian sort, I’d tend to lean towards less rules and letting lenders and borrowers take risks knowingly, but the key word is “knowingly”.

Glad things worked out for you.

The 20% threshold would, in my mind be a requirement for Freddie Mac, so assuming you’re going for government aid in the first place, that there are limitations set is reasonable. I would also not suggest it’s againts the law for a bank to expose themselves to a 5% loan, but there would be commensurate reserve requirements to protect the people who would pay if the bank were to fail. If we could have system were the lenders and borrows are not able to so easily lay off the risks it would be a good free market. One proposal I heard was to not allow banks to sell off the mortgages, but allow them to sell bonds as a means to fund them. If the mortgages fail, the bank loses money, they are punished for their failure. This would force banks to be more realistic while still providing funding. I’m all in favor of any private enterprise havign the right to risking everything, but not at taxpayer expense.

why did they do this?

In a well intentioned regulatory attempt to require that banks hold “safer” investments.

So in response the investments where just declared “safer”? THat’s a riot.

Fannie and Freddie where substantially controlled by congress and were also motivated by pressure to allow risky loans in order to expand home ownership. Interesting side-note Rahm Emanual was on the board of Fannie Mae.

Their leadership was appointed by congress, but they were given a very long leash when times were good. (And no accountability when they went bad.) The old privatized profits, socialized losses game.

Precisely.

Well, it does and it doesn’t. If someone is more on the marginal side of being able to afford their payments, and then a personal catastrophe hits so they really can’t, in a growing market they can sell the house and walk away with money, covering the mortgage and avoiding foreclosure. In a down market (and keep in mind the vast majority of foreclosures have been in markets like California, Michigan, New York, Florida, etc. where the market has fallen 20-50%) people can’t sell to avoid foreclosure because they owe more than they can sell for.

So when both regulators and lenders looked at the last 15 years, they were seeing a very low overall foreclosure rate (even for very marginal buyers) because if people ran into trouble they could always sell. This made it look like it was safer to lend than it was.

I do think a 20% down payment threshold is a good thing as it forces people to work hard and save so that when they do buy a house they will not lose it… It is far better to stay in rented housing than to buy a house and lose it.

I should probably disclose here that I bought our house in Texas five years ago with only 5% down, and not having told the lending company (they didn’t ask) that I was about to leave the job I had at the time.

I had savings, but I wanted to hold onto them as we moved from CA to TX so I could make payments if it took me a couple months to find work. And I was pretty confident that I’d get a good job in time to cover it. (Ironically, land lords were much more inquisitive in regards to where I was going to make money in Texas than lenders were.)

So I’m partly working from the knowledge of a situation in which a “sub prime” mortgage worked out just fine. Being a semi-libertarian sort, I’d tend to lean towards less rules and letting lenders and borrowers take risks knowingly, but the key word is “knowingly”.

why did they do this?

In a well intentioned regulatory attempt to require that banks hold “safer” investments.

Fannie and Freddie where substantially controlled by congress and were also motivated by pressure to allow risky loans in order to expand home ownership. Interesting side-note Rahm Emanual was on the board of Fannie Mae.

Their leadership was appointed by congress, but they were given a very long leash when times were good. (And no accountability when they went bad.) The old privatized profits, socialized losses game.

While it’s correct that congress was cheerleading for loose lending (not just via CRA, but in general) and approved many of the types of loans and securities which turned south over the last year, I think the CRA was arguably not the main or even a main problem.

I agree, but most of the other problems are related to congress’ desire to allow everyone, qualified or not, to be house owners.

Big problems did include:
- Real estate values had gone up consistently for so long with no housing bubble so widespread as to bring down prices nationally that the data modelling of the lenders did not include any historical examples of a broad price decline. Some even argued that there couldn’t be a broad price decline. (As an analyst, this is the one I understand best, so I tend to give it the most credit, but that doesn’t necessarily mean it’s the main one.)

This alone does not cause foreclosures… if you can pay your mortgage it doesn’t matter what the market sets it’s value at. This would be further mitigated by 20% downpayments which would rarely have a mortgage going under-water.

- Government created incentive to list securities as AAA rated (many institutions are legally only allowed to hold AAA rated commoditized debt) created an incentive for ratings agencies to be overly lenient on rating securitized debt, thus making the securities seem safer and more profitable than they actually were.

why did they do this?

- Fannie and Freddie started buying up securitized debt for mortgages too risky for them to actually hold as loans, because their executives wanted their profits to “keep up” with free wheeling private companies such as CountryWide.

Fannie and Freddie where substantially controlled by congress and were also motivated by pressure to allow risky loans in order to expand home ownership. Interesting side-note Rahm Emanual was on the board of Fannie Mae.

I’m not sure, however, that we need to go back to the days of 20% downpayments. Lenders do, however, need to be more careful. As in all things, it’s a balance.

If being “careful” tends to deny “low-income and minorities” it will not be permitted by the federal government, that is a serious problem. Affirmative action DOES NOT WORK.

I do think a 20% down payment threshold is a good thing as it forces people to work hard and save so that when they do buy a house they will not lose it… It is far better to stay in rented housing than to buy a house and lose it. Doesn’t Habitat for Humanity require a down payment in “sweat equity”? The desire and ability of the federal government to bypass this logic is exactly how government usually screws things up.

I think your point about the market sorting things out is absolutely dead on, the thing that happens when government meddles in the marketplace is it loses it’s ability to sort itself out. This is my point from prior discussions that we really don’t have a free market economy because there is so much government interference above and beyond legitimate regulation to enforce ethical behavior.

I hope I don’t paint myself out of the good Catholic club by saying this, but there are parts of the Compendium of Social Teaching where I with the authors had stuck closer to speaking to questions of principle rather than discussing finding of fact — not because I don’t think Catholic teaching has very practical applications but because I think that in some cases the authors are making assumptions about the nature of things in the economy or in society which may or may not be true.

That said, I do agree that at times financial instruments simply become ends unto themselves and people are effectively trading Amway in a clearing in the forest without anyone actually doing anything. But I have the feeling that the stuff I would label as pointless or parasitic financial activity would be much narrower than what you would — and I’d have a fair amount of confidence that because it doesn’t achieve much it will burn itself out and go away pretty quickly. (Though invariably such things always spring up again in other forms so long as people are always looking for new ways to make a quick buck.)

Not that I’d hold we should have no regulation. But I have a fair degree of confidence that the market will sort out things which don’t work.