CRA off the hook?

Interesting piece from the Austrians suggesting that the Community Reinvestment Act did not cause the housing crash. But Fannie and Freddy were deeply implicated. And the Fed.

Dwight Jaffee of the Berkeley Business School testified in front of a Congressional Commission on the crisis… Those remarks are one of the best overviews of the role of housing policy and the various agencies that I’ve read since the recession began.  I recommend it highly.  He puts the blame squarely on Fannie and Freddie and the way in which they combined private profits with a public mission and an implicit government guarantee. 

So folks, it’s time to stop blaming the crisis on the CRA and get the attention back where it belongs:  expansionary monetary policy combined with GSEs with a government guarantee.

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25 Responses to CRA off the hook?

  1. Butterfield, Bloomfiled & Bishop says:

    it never was on the hook.

    CRA loans were made by banks themselves and the products were completely different to sub-prime loans.

    moreover if you look at where the foreclosures have occurred for sub-prime loans they mostly are not in ‘poor’ neighbourhoods but in respectable middle class ones in Florida , California etc

  2. Sinclair Davidson says:

    Steve Horwitz is being slaughtered in his own comments thread. Lawrence Lindsey, former member of the Federal Board of Governors, confessed to Congress

    The regulatory community was placed under intense political pressure to come up with ways of providing access to credit for those populations, and did so, most notably with new rules under the Community Reinvestment Act. I was involved in that process and am proud of what was accomplished. In fact, most of those individuals could be and did turn out to be responsible borrowers and homeowners. But there can also be little doubt that in hindsight the new regulations did contribute to some of the excessive expansion in credit that has occurred. I note this mainly to provide a cautionary tale. Even very well intentioned and largely successful regulations can have unintended consequences. That does not mean that such actions were wrong, but that we should be very careful in how we use legislation and regulation in “solving” current problems.

    Lawrence Lindsey (2008) ‘Fixing the mortgage market’, Testimony to the Senate Finance Committee, 28 February 2008.

  3. Rafe says:

    As far as I am concerned they are all on the hook to a greater or lesser degree. Including the borrowers.

    Quite likely the most reckless borrowers were middle clas people, called “flippers” who decided to surf the wave with multiple investment properties so when the music stopped they had to foreclose on more than one mortgage.

    Don’t miss the contribution of the Australian school of economics to the debate on the European financial crisis.

    http://www.coordinationproblem.org/2010/05/the-european-debt-crisis-explained.html

  4. The CRA was a minor player but no doubt a cause.

    http://mises.org/daily/2963

    The CRA Scam and its Defenders

    Mises Daily: Wednesday, April 30, 2008 by Thomas J. DiLorenzo

    Read more: The CRA Scam and its Defenders – Thomas J. DiLorenzo – Mises Daily http://mises.org/daily/2963#ixzz0pB1C2hX6

    “Gordon cites Fed bureaucrat Janet Yellen as the source of a “killer statistic” that absolves the government of all guilt: “Independent mortgage companies” which are not covered by the CRA made many more “high-priced loans” to borrowers with bad credit than did CRA-regulated banks, she says. Well, so what? Even if Yellen is correct, that does not mean that CRA-regulated loans have not caused tens of billions of dollars in defaults.

    Moreover, Yellen and Gordon don’t seem to understand what an “independent mortgage company” is. Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers — including “subprime” borrowers — with banks, including CRA-regulated banks. Some killer statistic.

    By ignoring the role of the Fed in creating the whole housing-market mess, Gordon’s pronouncement that it is entirely a result of “market failure” is laughable on its face. He also flatly denies that CRA lending has had anything to do with why so many uncreditworthy borrowers have defaulted now that the Fed-generated housing bubble has burst. This, too, is an untenable position.”

  5. Butterfield, Bloomfiled & Bishop says:

    Mark has never understood the characteristics of CRA loans and sub-prime loans were completely different.

    there were very few CRA loans captured in sub-prime loans.

    for example the infamous ninja loans were not possible under CRA but were in sub-prime.

    the sub-prime debacle came about because greedy middle class people got underwater in investment loans predominantly and can unbelievably simply leave the loan.

    the ‘smart’ investment types who thought they would foreclose but it didn’t matter got caught out by not understanding their brilliant CDOS properly.

  6. “the characteristics of CRA loans and sub-prime loans were completely different.”

    Please explain what they were.

    “the sub-prime debacle came about because greedy middle class people got underwater in investment loans predominantly and can unbelievably simply leave the loan.”

    Yeha sure Homer, “greed”. Macro factors and market micro structure don’t matter – not:

    http://www.voxeu.org/index.php?q=node/3760

  7. Butterfield, Bloomfiled & Bishop says:

    we are talking about the sub-prime debacle here not the real economy’s reactions from it.

  8. Homer,

    If you’re right, you can answer the question. No deflections.

    The real economy was in a world of hurt for several years. You read a graph from 1997 to 2007 as being 2007 onwards.

    Are you illiterate, stupid or dishonest?

    No more deflections. Just answer the quiestions.

  9. C.L. says:

    Interestingly, Barack Obama was the third-largest recipient of Fanny/Freddy GSE bribes in Congress – despite being in Washington for only five minutes. The top four recipients were Chris Dodd, John Kerry, Barack Obama and Hillary Clinton. Obama was also the top recipient of BP bribes in the 2008 campaign and the largest single recipient from the oil company in the last 20 years.

  10. Butterfield, Bloomfiled & Bishop says:

    well no Mark the problem loans didn’t start in 2007 it is earlier

  11. The US economy had GDP shocks after energy prices finally disturbed the overextended and fragile US economy. This lead to a run of foreclosures, which lead to a run of solvency issues. This lead to the credit crunch. Which lead to a US recession and the GFC – which lead to global recession.

    Standard economics Homer. You’re going to blame “greed” again.

  12. Now Homer,

    Just. Answer. The. Questions.

  13. Butterfield, Bloomfiled & Bishop says:

    Marky yes greed can describe it. It describes people who took out most but not all sub-prime loans ( being hugely egged on by investment banks)and then reneged on repayment when they backed the wrong horse.
    It also explains the motivation behind the CDOs dreamt up by geniuses who then got bitten by them.

    Greed is never god for the Capitalist system

  14. “yes greed can describe it”

    Hand back your degree NOW.

    “Greed is never god for the Capitalist system”

    You don’t even know what you’re arguing against.

  15. Butterfield, Bloomfiled & Bishop says:

    wel you don’t even know period

  16. So Homer, do you think you’d be able to publish a peer reviewed article that blames “greed”?

    Greed is ever present you twit. It is how we manage it with institutions and incentives that count.

    Hand back your degree NOW.

  17. “wel you don’t even know period”

    You’ve hit the bottom of the barrel you shallow schill. You don’t even have an argument anymore.

  18. Butterfield, Bloomfiled & Bishop says:

    you never had an argument.
    Fancy trying to argue greed had nothing to do with it.

  19. You are an illiterate slob.

    “Greed is ever present you twit. It is how we manage it with institutions and incentives that count.”

    Hardly contends that greed has “nothing to do with it”.

  20. Butterfield, Bloomfiled & Bishop says:

    no it isn’t.

    It is easy to take out a home loan and repay it form within your means.

    Taking a punt on an investment loans that is much riskier which you know because it has gone from prime to sub-prime is simply being greedy.

    Let us not forget the investment banker who willingly gave out loans to people they knew couldn’t pay back because they thought their statistical abilities meant it wouldn’t affect their CDOs.

  21. “It is easy to take out a home loan and repay it form within your means.”

    Right Homer. Greedy banks issued loans they knew would ruin them?

    “Taking a punt on an investment loans that is much riskier which you know because it has gone from prime to sub-prime is simply being greedy”

    Amazingly you contend that there was a punt on GDP expectations which got rolled but you deny macro factors. You blame “greed”. That’s like blaming a housefire on chemistry.

  22. “Let us not forget the investment banker who willingly gave out loans to people they knew couldn’t pay back because they thought their statistical abilities meant it wouldn’t affect their CDOs.”

    NAME THEM

  23. Butterfield, Bloomfiled & Bishop says:

    no few banks granted the mortgages but you would know that if you knew about the subject.

    look up who issued the CDOs and look at which investment banks put them on their books!

  24. daddy dave says:

    SRL, I don’t know why you bother.

  25. “no few banks granted the mortgages but you would know that if you knew about the subject.”

    NAME THEM

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