Building Flawed American Dreams

While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.”

They were lured by “unscrupulous participants ”” bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.”

The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats.

Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes ”” part of a broad national trend with dire economic consequences.

He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too.

Read it all.

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Posted in * Economics, Politics, Economy, Housing/Real Estate Market, Politics in General, The Credit Freeze Crisis of Fall 2008/The Recession of 2007--

41 comments on “Building Flawed American Dreams

  1. chips says:

    Sledgehammer and an ax – perhaps he is talking about leaning on lenders as I have been stating. The Government wanted to turn the renting class into homeowners. They have sown the wend – and now we shall reap the whirlwind.

  2. Sidney says:

    This is the money line for me:

    [i]It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly.[/i]

    No, sir, only socialists didn’t know. Artificial inflation of demand by government actually has obvious consequences to anybody who knows anything about markets.

  3. Bob Maxwell+ says:

    Henry Cisneros, when we arrived in TX in ’83 was mayor of San Antonio, a former President of the Aggies Corps of Cadets, a Harvard Law School graduate. We had very high hopes for him.

    He has reasons to worry.

    He was not only sexually seduced but he proved open to political seduction and as HUD secretary bears great responsibility. So he has both God and man, like each of us, still to face.

  4. phil swain says:

    Henry can hardly be blamed for this disaster. All his efforts were put into stonewalling FBI investigations.

  5. Irenaeus says:

    Cisneros did a good job as HUD secretary. He left office at the beginning of 1997, long before the suprime lending boom. In any event, it’s hardly fair to hold him responsible for the private-sector excesses of the past 6 years.

  6. Br. Michael says:

    5, it started before then.

  7. Bob Maxwell+ says:

    The seeds were sown in Clinton’s first term when the requirements were changed under Cisneros and ASORNS encouragement to allow sub prime. Many could meet the terms of the loan. It’s the defaults of the many that wrecked havoc. The far fewer at prime or abover would have been managable as it had been before.

  8. Irenaeus says:

    “It started before then” —#6

    But it was during this decade that subprime lending went over the top.

    Over the past 150 years, financial institutions have found many ways to make sound loans they would formerly have spurned. A century ago, bankers would have regarded our standard 30-year self-amortizing mortgage as preposterously unsound. (Indeed, the original National Bank Act allowed mortgage loans to last no longer than 5 years.) Yet the 30-year mortgage has, on balance, proved a great success.
    _ _ _ _ _ _ _ _ _ _ _

    HUD has more influence over FHA lending than any other type, as HUD its runs the FHA.

    Most FHA loans originated under Cisneros have already been repaid. Until this year, the FHA funded itself entirely through user fees, without any taxpayer subsidy.

  9. chips says:

    Irenaeus-
    Didnt the article say he was working with/for Countrywide?
    They were probably the most irresponsible major player. It is a bad idea to give low income people homes over say $70,000.00 because – they have low incomes. It is a bad idea to give people with bad credit homes at any pricepoint because they have shown themselves to be irresponsible. It was government policy to “encourage” (used euphemistically) lenders to make risky loans in order to advance social policy. It got started in the ’70s (Carter era) and started gaining momentum in the ’90s (Clinton era). The Bush administration did not rein it in to their discredit – instead some clever and not so clever financial types figured out a way to make big money giving loans to risky folk – and selling the loans to investors. People buying homes need 1) a significant downpayment so that they are equity holders; 2) an income big enough to make the payments; and 3) They also need either savings to tide them over through adversity – loss of job, divorce, illness – or at least good lines of credit or family money (or enough brains to sell while they still have equity and/or savings). The renting class usually has none of the three which is why they are the renting class. The government experiment has failed miserablly and there is enough blame – the government (both parties), the sub prime homebuyer, the real estate and mortgage broker, the builders, the lender, and the investment firms to go around.

  10. Ken Peck says:

    [blockquote]It was government policy to “encourage” (used euphemistically) lenders to make risky loans in order to advance social policy.[/blockquote]

    It would be interesting for someone to detail precisely how the government “encouraged” (used euphemistically) lenders to make risky loans.

    As far as I can tell, lenders of their own free will and greed made the risky loans in order to make a quick buck and to pass the risk on to others. Perhaps the “encouragement” (used euphemistically) was that there were no bank examiners, federal regulators looking over their shoulders telling them, “No!” when the loans were being made or the risks rolled into deceptive and unregulated derivities and hedge funds.

    And, yes, I do know that the government was attempting to end discrimination in the housing markets which “red-lined” minorities when they were as credit worthy as their White fellow citizens, resulting the minorities either being charged a higher interest rate or refused a mortgage altogether. But those statutes all made the loans subject to sound lending practices.

  11. Jeffersonian says:

    Gee, why did all those naughty businessmen start doling out risky mortgages all of a sudden? A conspiracy? Mass dementia? Or was there maybe something else at work?

  12. Ken Peck says:

    [blockquote]Gee, why did all those naughty businessmen start doling out risky mortgages all of a sudden? A conspiracy? Mass dementia? Or was there maybe something else at work?[/blockquote]

    How about greed?

    And it didn’t happen “all of a sudden.” The whole scheme of derivatives, hedge funds, swaps and the like developed over a long period of time.

    It is noted that you offered nothing in the way of an precise detail of ‘how the government “encouraged” (used euphemistically) lenders to make risky loans’ — only a vague innuendo with less value than a share of Lehman Brothers stock these days.

    As far as I have been able to determine, the government “encouragement” (used euphenistically) consisted of non-regulation, lax regulation and perhaps some legislation intended to stop red-lining of credit worthy minorities — although it should be noted that a great many of the risky mortgages (probably most) went to middle class whites, not to mention middle class whites trying to make a few million flipping houses.

  13. chips says:

    Mr. Peck
    The goverrnment was pushing equality of results not equality. The burden was put on the lender to explain the discrepancy between lending rates. it is an expensive undertaking – much easier to just lend to everyone and let the devil take the hindmost.

  14. Ken Peck says:

    [blockquote]The goverrnment was pushing equality of results not equality.[/blockquote]

    It is not entirely clear what this might mean. If a black family with an income, credit history and down payment that is similar to a white family attempting to purchase similar houses in the same neighborhood is denied a mortgage or charged a higher rate of interest than the white family, how is there “equality”?

    [blockquote]The burden was put on the lender to explain the discrepancy between lending rates.[/blockquote]

    It would seem to me that a lender should always be able to explain the “discrepancy” between lending rates. How the devil is the lender able to say borrower X gets one rate and another gets Y? These guys don’t sit in their offices throwing darts at a dart board to set interest rates.

    And the truth of the matter is that these subprime mortgages were not lending institutions giving questionable mortgages to minorities. A lot of the risky mortgages were being given to white, middle and upper class professional families. Others were being given to people who were in the business of flipping real estate to make a quick buck — it worked as long as real estate prices were rising, but when people started being foreclosed because they were laid off or suffered catastrophic illness and the supply of houses exceeded the demand then the bubble burst. None of this had any connection with the government “encouraging” (used euphemistically) risky mortgages to minorities.

    It did, however, have a lot to do with greed, gluttony and corruption.

  15. chips says:

    Mr. Peck –
    I was refering to descrepancies between white and non-white approval rates – not interest rate. I agree wholeheartedly that apples to apples ought to be treated the same. The descrepancy was in the aggregate – the burden was put on the lender to show that there was not a discriminatory reason in the aggregate.

  16. Ken Peck says:

    Chips–

    All that the lender would have to show is that the “descrepancy” existed in the qualified applicants rather than than in the applicants approved. If 99% of the white applicants qualified and only 1% of the black applicants qualified using the same criteria, then the discrepancy in mortgages granted has been demonstrated. Presumably the sensible lender had documentation on file showing the qualifications of borrowers who got a mortgage and the would be borrowers who were denied a mortgage. Actually, the law was quite clear that lending institutions did not have to give mortgages to unqualified applicants.

    Of course, what we also know, that the lending institutions weren’t requiring any evidence of credit worthiness — sometimes even falsifying applications in order to make mortgages the lending institution knew the borrower could not pay off. And this had absolutely nothing whatever to do with minority status. It was being done for white professionals, probably with even more abandon than for minority poor.

    And what the lending institutions knew was that, because of the lack of government regulation, they could bundle the debts and sell the paper to hedge funds, commerical banks, Freddie Mac and Fannie Mae and all “insured” by AIG. And the resulting derivities were being rated AAA by the bond rating companies and were being leveraged $33 on the dollar. And the guys who initially issued the mortgage had their money and profit — and could turn around and do it again.

    The government wasn’t forcing anyone to do any of this. But the government did stand by and let it happen.

  17. Jeffersonian says:

    [blockquote]How about greed? [/blockquote]

    How about it? Were these Wall Street pirates in neckties simple docile, altruistic saints before this? What made them turn into rapacious reptiles, red in tooth and claw?

    [blockquote]It is noted that you offered nothing in the way of an precise detail of ‘how the government “encouraged” (used euphemistically) lenders to make risky loans’—only a vague innuendo with less value than a share of Lehman Brothers stock these days. [/blockquote]

    I’ve done so copiously elsewhere in this blog’s comments, but it really isn’t necessary in this thread given the article linked. Risky loans were made because it was policy to encourage them, using both the carrot of big profits via Fannie and Freddie, and the stick using the CRA and other government sanction.

  18. Chris says:

    #10 asks:
    It would be interesting for someone to detail precisely how the government “encouraged” (used euphemistically) lenders to make risky loans.

    Well, here you go:
    “Using provisions of a 1977 law called the Community Reinvestment Act (CRA), Chicago ACORN was able to delay and halt the efforts of banks to merge or expand until they had agreed to lower their credit standards — and to fill ACORN’s coffers to finance “counseling” operations like the one touted in that Sun-Times article. This much we’ve known. Yet these local, CRA-based pressure-campaigns fit into a broader, more disturbing, and still under-appreciated national picture. Far more than we’ve recognized, ACORN’s local, CRA-enabled pressure tactics served to entangle the financial system as a whole in the subprime mess. ACORN was no side-show. On the contrary, using CRA and ties to sympathetic congressional Democrats, ACORN succeeded in drawing Fannie Mae and Freddie Mac into the very policies that led to the current disaster.”

    “Critics of the notion that CRA had a major impact on the subprime crisis ask how a law passed in 1977 could have caused a crisis in 2008? The answer has a lot to do with ACORN — and the critical years of 1990-1995. While the 1977 Community Reinvestment Act did call on banks to increase lending in poor and minority neighborhoods, its exact requirements were vague, and therefore open to a good deal of regulatory interpretation. Banks merger or expansion plans were rarely held up under CRA until the late 1980s, when ACORN perfected its technique of filing CRA complaints in tandem with the sort of intimidation tactics perfected by that original “community organizer” (and Obama idol), Saul Alinsky.”

    http://article.nationalreview.com/?q=ZjRjYzE0YmQxNzU4MDJjYWE5MjIzMTMxMmNhZWQ1MTA=

  19. Ken Peck says:

    Jeffersonian asks

    [blockquote]Were these Wall Street pirates in neckties simple docile, altruistic saints before this? What made them turn into rapacious reptiles, red in tooth and claw?[/blockquote]

    No. Greed and corruption have been rampant on Wall Street for well over a century. They didn’t suddenly turn into rapacious reptiles. From time to time government has stepped in to protect the American people from greed and corruption. And the financial lobbies have consistently resisted any attempt of the government to do so.

    Chris opines,

    [blockquote]Using provisions of a 1977 law called the Community
    Reinvestment Act (CRA), Chicago ACORN was able to delay and halt the efforts of banks to merge or expand until they had agreed to lower their credit standards…[/blockquote]

    The Community Reinvestment Act, in part:

    [blockquote]SEC. 804. (a) IN GENERAL.–In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall–
    (1) assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution…[/blockquote]

    The Act does not require institutions to lower their credit standards. Perhaps ACORN did so in some places, but then ACORN isn’t “the government” and the Act does not require institutions to lower their credit standards.

    And the evidence is that the lobbyists targeted both Republicans and Democrats in Congress. And, as is well known, many of them are in high positions in both the McCain and the Obama campaigns.

  20. Chris says:

    #19, it was the government too (your Dems of course):

    “In 1995, as Howard Husock pointed out eight years ago in City Journal, “the Clinton Treasury Department’s 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance.”

    Creditworthiness and due diligence no longer mattered. As a 1999 New York Times editorial observed: “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Bill Clinton administration to expand mortgage loans among low- and moderate-income people and felt pressure to maintain its phenomenal growth in profits.”

    “On Frank’s and Clinton’s watch, the Community Reinvestment Act was changed to force the issuance of bad loans. Banks would be rated on the number of loans, not on their soundness. Fannie Mae and Freddie Mac were then encouraged to buy them up. It was all about affordable housing, even if the housing was unaffordable.

    “From the perspective of many people, including me, this is another thrift industry growing up around us,” Peter Wallison, a resident fellow at the American Enterprise Institute, said back in 1999. “If they fail, the government will have to step in and bail them out the way it stepped up and bailed out the thrift industry.”

    That prediction came true, but it didn’t have to.

    On Sept. 11, 2003, the Bush administration proposed to Congress a new agency under the Treasury Department to assume supervision of Fannie and Freddie. The new agency would have had the authority to set capital-reserve requirements, veto new lines of business and determine whether the two quasi-government lenders were adequately managing the risk of their ballooning portfolios.

    When former Treasury Secretary John Snow pleaded for Frank to support Fannie and Freddie reform, Frank responded: “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

    http://www.ibdeditorials.com/IBDArticles.aspx?id=308185654524278

  21. Little Cabbage says:

    Chris, from which GOP website do you derive your talking points? Ken Peck’s analysis is much more balanced — thanks, Ken! This debacle had many roots, and MANY players made a LOT of money. Greed is indeed the root cause, as it usually is. The elephant in the room remains the global credit swap markets. They are not only totally unregulated, no one even knows how many TRILLIONS are involved! That was the reason AIG could NOT be allowed to fall: they were so heavily part of this sophisticated derivatives scheme that if it had failed, NO ONE could predict how many parts of the entire global financial system would go under. We’re only at the BEGINNING of hearing the bad news, my friends.

    And, as usual, the little guys will have their pockets picked while those who profited most will again profit. One example: of the $125 billion taxpayer ‘investment’ in US banks announced last week, over $25 billion will go to DIVIDENDS to those holding bank stock. This even though with the rotten economy, only 20% of US firms are issuing dividends at all! Those banks should NOT be issuing dividends when they are propped up with OUR money! This $25 billion could certainly help the struggling middle class. (It would go a long way in a jobs program, rebuilding our rotting infrastructure, for one). The Wall St cronies now running Treasury are sweetening the pot for their already very wealthy buddies, my friends! Watch out!

  22. chips says:

    “Safe and Sound business practices” are sufficiently vague to create a real business opportunity for lawyers – in fact I believe OBama was an ACORN lawyer. Safe and sound means wholly different things to left wing activists, democrat congressman, and bankers. Regretably as Mr. Peck notes greed did come into play.

  23. Ken Peck says:

    Obama wasn’t “an ACORN lawyer.” He was an attorney of a law firm for a law suit in a case along with the U.S. Justice Department in which ACORN was the plantiff. The suit had nothing to do with housing, but the enforcement of the federal voter registration law in Illinois. Other parties in the suit against the State of Illinois were the League of Women Voters, LULAC, MALDEF and the Puerto Rican Legal Defence and Education Fund. Incidentally, the courts held for the plantiffs.

    Another player in the development of the crisis was none other than Alan Greenspan and the Federal Reserve, which lowered the discount rate as part of the fiscal policy to ease the recession of 2001-3. That made it very cheap for banks to borrow and leverage the derivities and swaps, and also resulted in low mortgage rates. A major factor in the credit crisis was when the discount rate was subsequently raised, ARM interest rates (and many credit card interest rates) jumped significantly, which caused folks (some of whom had refinanced their home equity with ARMs to raise cash for luxury items) not to be able to make payments — especially with stagnant wages and crises such as layoffs, illness and the death of a wage earner in the family. Again, none of this had anything whatever to do with the Community Reinvestment Act or low income housing.

  24. Irenaeus says:

    “Another player in the development of the crisis was none other than Alan Greenspan and the Federal Reserve” —Ken Peck [#23]

    Greenspan also blocked most efforts to tighten safeguards against predatory lending. These safeguards apply to certain types of high-rate or high-fee loans often originated by predatory lenders.

    In addition, the Fed blocked the other three federal bank regulatory agencies from enforcing the Federal Trade Commission Act’s prohibition against “unfair or deceptive acts or practices.”

  25. Irenaeus says:

    [deleted at commenter’s request. Comment 26 is the correct version of the comment]

  26. Irenaeus says:

    [My apologies for the repetitive language in #25. The comment window is small and I was in a hurry. Here’s a CORRECTED version. If the Elves have a chance to delete #25, that would be appreciated.]
    ————————————————————-

    Undaunted by facts or reason, Chris [#18] recirculates the same old right-wing falsehoods about the Community Reinvestment Act.

    Neither in principle nor in practice did the Community Reinvestment Act (CRA) force lenders to make bad loans.
    http://new.kendallharmon.net/wp-content/uploads/index.php/t19/article/16653/#285444
    http://new.kendallharmon.net/wp-content/uploads/index.php/t19/print_w_comments/16417/#282378

    CRA lending has had “about the same” or “somewhat higher” profitability than banks’ other lending.
    http://www.federalreserve.gov/boarddocs/surveys/craloansurvey/cratables.pdf (tables 3a, 4a & 5a)

    Who generated most subprime loans? Not banks but mortgage companies and other firms to which the CRA does not apply. http://www.mcclatchydc.com/251/story/53802.html
    The CRA applied to only one of the top 25 subprime lenders.

    Those nonbank lenders made subprime loans in the expectation of profit—not because the CRA or any other government regulation made them do it.

  27. Clueless says:

    #26 Again, it is all about how one measures things.
    Yes, CRA lending was equally profitable”. That was not based on folks paying the loans back (which obviously they did not). It was based on current income streams, which were indeed profitable until they went kaput.

    However Chris is correct. “Banks were rated on the number of loans, not on their soundness.” An army of ACORN lawyers sprang up to measure numbers. The lenders were forced to justify their “deviations” between neighborhood. Deviations were publicized and punished.

    In medicine we are used to this tactic. All the MRIs I order, the lab tests I order, and my billing charges go into a database. If I charge more than somebody else, then I am gouging, and somebody is certain to come over from Medicaid to look over my charts and then demand that I repay everything they gave me for the past 7 years. The fact that I spend twice as much time with my Medicaid and Medicare patients is not counted. Time is not measured. Billing is not measured. Therefore, since I do not wish to be an outlier, I bill what others bill for a good deal more work.

    Similarly, there is a new rule out. Medicare will no longer pay for hospital related complications such as ulcers after surgery. Since decubitus ulcers after surgery are by no means uncommon in cachetic elderly people with hip fractures, what this will mean is that fewer people will get their hips fixed. Then the ulcer is not due to the surgery. It is just due to the original illness. The numbers look better, only the patient can’t walk. The statisticians are happy because not only have decubitus ulcer rates after surgery dropped but mortality after surgery has dropped. Costs have dropped. Nobody measures how many elderly people are still walking six months after a hip fracture, (which is the only way the surgeon can prove that it was worth it) so this is considered a “success”.

    The trouble with the Carter/Clinton reforms is that it put the onus on banks to prove that somebody was a poor credit risk with promised retribution if “discrepancies” were found. Previously, somebody who wanted credit was expected to prove he was a good credit risk. That is the way it should be.

  28. Chris says:

    Iraneus, you have such little ground to stand on here that even Bill Clinton, recognizing the colossal screw up up by his own party, has basically thrown them under the bus in an effort to distance his own role in this fiasco. Even the Saturday Night Live people realized it in their skit!

    The CRA was passed in 1977 by a Democractic Congress and President. The Democrats resisted Republican efforts (by that dummy Shrub and McCain, among others), to reel FM/FM in. Those are facts and no amount of reciting arguments elsewhere is going to change that.

    You need to get of denial and just admit that the Democrats, regardless of how well intentioned they were, made a HUGE error in judgement by haranguing banks into taking these loans and instructing FM/FM to guarantee them.

    You can’t rewrite history.

  29. Bob Lee says:

    They say…” The Truth will set you Free”.

    It will. I argue that people know what they can and can’t afford. They chose to believe the lie that they could afford…the house, the car, the boat. But they knew they couldn’t. In their hearts, they knew.

    This is not unlike the little secret sins we all have. We know such and such is sinful, but….we believe the lie Satan gives us to Justify the lie. The seven deadly sins…..we know, but we choose the lie.

    WE have NO ONE to blame but ourselves for the banking mess. If we were all in touch with God daily, listening to Him daily, Obeying Him daily, we would not have these problems of greed and pride, and things.

    bl

  30. Ken Peck says:

    Chris, there are at least two major problems with your argument.

    First *most* of the subprime mortgages were issued by institutions which did not come under the Community Refiance Act. For example, Countrywide isn’t “an insured depository institution”. (See SEC. 803 of the Act: HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1977—TITLE VIII (COMMUNITY REINVESTMENT)])

    Second *most* of the mortgages were not issued to low income minority families. Many of the mortgages were issued to white middle and upper income families and individuals flipping real estate.

  31. Irenaeus says:

    Chris [#28]: Instead of responding to my comment #26, you offer another smug, snide partisan rant. You evidently don’t care about the facts.

    1. THE COMMUNITY REINVESTMENT ACT DOES NOT COERCE BAD LENDING: The CRA contains essentially two basic rules. First, regulators must periodically “assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.” 12 U.S. Code § 2903(a)(1). This evaluation occurs annually for large banks and every four or five years for small banks.

    Second, regulators must take account of that record—along with all other relevant factors—if the bank seeks certain kinds of regulatory approval: e.g., to acquire another bank or to establish a branch. §§ 2902(3), 2903(a)(2). Even when a bank has a problematic CRA record, the other factors usually prevail. On only a few occasions, during the entire 31-year history of the CRA, have regulators denied an application on CRA grounds.

    Most banks receive satisfactory CRA ratings. Using the following link, you can see every CRA rating assigned to every national bank during the past 14 years: http://www.occ.treas.gov/cra/electric.htm The ratings are overwhelmingly positive (i.e., “satisfactory” or outstanding”). “Needs improvement” ratings are relatively rare and “substantial noncompliance” is rarer still. So much for banks having to make bad loans to get good ratings.

    The CRA has neither the substance nor the teeth nor the coercive results you attribute to it. It certainly does not, as you assert, “force the issuance of bad loans.”

    I’m familiar with the 1994 CRA rules. I know their substance and rationale and the process by which they were developed. They were designed to dispense with much of the paperwork generated under the previous rules. Contrary to what you contend in #20, they do not establish “strictly numerical measures.” They call for examiners to make overall, qualitative judgments about banks loan performance. You misrepresent the substance of both the statute and the implementing rules.

    2. CRA LENDING IS PROFITABLE: Bankers, surveyed in 2000 after 23 years of experience with the Community Reinvestment Act and five years of experience with the 1994 reforms, reported that their CRA lending was about as profitable or somewhat more profitable than their other lending. http://www.federalreserve.gov/boarddocs/surveys/craloansurvey/cratables.pdf (tables 3a, 4a & 5a).
    This is what bankers themselves reported. And they said it without the manipulative accounting confabulated by Clueless [#27]. If banks have found CRA lending profitable, how can it be the disaster you assert?

    Don’t let your secular animosities blind you. It’s a bad witness.

  32. Clueless says:

    Obviously CRA lending is profitable as long as nobody is defaulting. You can charge higher interest rates, and as long as folks can flip they don’t default. In good times all business is profitable. Surveying folks at the height of the biggest stock bubble in the history of Wall Street will obviously result in the report of profits. Everybody is a genius in a bull market.

    However the point of not lending to poor credit risks is that when times are NOT good, then the bank doesn’t go out of business.

    CRA lending (not to mention lending to dead goldfish) is always going to be profitable in a flippers market. In high tide, everyone is fully covered. It is when the tide goes out that you can see whose swimming without their shorts. The Democrats encouraged folks to go skinny dipping. (In many ways).

  33. Irenaeus says:

    Clueless [#32]: If over time CRA lending is as profitable as other lending, then it doesn’t make banks worse off.
    _ _ _ _ _ _ _ _ _

    In 2000 we had a bubble in tech stocks, not real estate. The real estate bubble started after the tech bubble burst.

  34. Ken Peck says:

    Clueless (somehow the moniker does seem to fit) opined:

    [blockquote]CRA lending (not to mention lending to dead goldfish) is always going to be profitable in a flippers market. In high tide, everyone is fully covered. It is when the tide goes out that you can see whose swimming without their shorts. The Democrats encouraged folks to go skinny dipping. (In many ways). [/blockquote]

    The Community Reinvestment Act has nothing whatever to do with flippers. People who flip real estate are essentially speculators who manage to speculate using other people’s money. Yes, flipping real estate (or for that matter stocks and commercial paper) is profitable as long as the markets are rising; it’s a good way to lose a bundle when the markets decline. Some flippers were Democrats; some were Republicans; some were apolitical. What they typically were not were low-income families such as were targeted by the Community Reinvestment Act.

  35. Clueless says:

    The tech bubble was in full swing in 2000. This made banks feel wealthy as banks get a large part of their revenues in investments. A few thousand in mortgage interest invested in the tech boom, makes up for a few defaulters. But there are fewer defaulters in a bull market, because those people who would otherwise default (i.e. the poor) have JOBS. In a bull market employers are hiring. So yes, those loans would have been profitable.

    Once the tech boom died, the real estate bubble emerged thanks to the stupid inflationary policies of Greenspan, which made it impossible for normal people to save money in CDs or treasuries.

  36. Bill Matz says:

    Clueless correctly notes that analyzing default rates during a long (94-06) real estate boom is meaningless. The statistics in #26 are from 1999. The complete lack of usefulness of mid-boom numbers has been repeatedly pointed out to Irenaeus, but he continues to offer them without any updating that could actually help us decide.

    However, the bigger point is that the CRA discussion has devolved into a red herring. As previously pointed out to Irenaeus (e.g. in the thread referenced in #26), the problem is not JUST C.R.A. there were a large number of Federal, state, and local laws and regulations that all pushed riskier lending, in practice if not in the letter. And quite true, greed was a factor; while values were rising, lenders were quite eager to make those riskier loans at high profits. The point is that there were many factors. Just analyzing CRA, pro or con in isolation, is pointless.

    To actually return to the thread, it is quite refreshing to see any former government official accept responsibility in this mess. It is also very significant to understanding the crisis that Cisneros reveals more of the incestuous relationship among Fannie Mae, Countrywide, and Kauffman and Broad.

  37. Irenaeus says:

    “The tech bubble was in full swing in 2000. This made banks feel wealthy as banks get a large part of their revenues in investments” —Clueless [#35]

    NONSENSE! The law prohibits FDIC-insured banks from owning corporate stock, with exceptions not relevant here. 12 U.S.C. §§ 24(7), 1831o(c).

    PS: What would you think about people who pontificated about medicine based on their own preconceptions plus some trolling around alternative-medicine web sites?

  38. Irenaeus says:

    Bill [#36]: The Federal Reserve survey about CRA profitability did not prod or confine bankers to answer based only on recent experience. They could draw on all relevant experience, including that during the property booms and busts of the late 1980s and early 1990s.

    You’ve never substantiated your assertion that “there were a large number of Federal, state, and local laws and regulations that all pushed riskier lending.”

  39. Irenaeus says:

    In #37, make that § 1831a(c).

  40. Clueless says:

    “PS: What would you think about people who pontificated about medicine based on their own preconceptions plus some trolling around alternative-medicine web sites? ”

    It would depend on whether those in traditional medicine had made a gigantic Wall Street type screw up, and whether those on the alternative medicine web site were right.

    In point of fact, I strongly believe that Medicine has made a gigantic Wall Street type screw up, when we permitted the Psychiatrists (whom we should have expelled from Medicine decades ago) to set up the DSM diagnostic criteria where pathology is dreamed into existence by voice vote by a bunch of academic shrinks, rather than using the scientific method that has serve medicine well before.

    Frankly I consider much of psychiatry “alternative medicine” and I think chiropractitioners do more good.

    If you go “trolling” the internet you will find other voices in the wilderness who agree with that. They do not get an innings in traditional media or in academic journals. However they are by no means which doctors, one of them was the former head of the American Psychiatric Association.

    So I think it is appropriate that folks make up their own minds based on what data they can gather, rather than accept the received wisdom of the “experts” who got us into this mess.

    Me personally, I saw this coming a long time ago, and prepared accordingly. I’m glad I didn’t listen to the experts who kept telling me “buy and hold” and “real estate always goes up”. But then I didn’t listen to the medical “experts” who told me that my daughter was “mentally retarded” and had “ADHD” and “would never learn to read”. She’s 18, in college now, on no meds and doing fine.

    I believe in doing my own research rather than trusting “experts”.

  41. Ken Peck says:

    Bill wrote:

    [blockquote]…there were a large number of Federal, state, and local laws and regulations that all pushed riskier lending…[/blockquote]

    It might be interesting to get a partial enumeration of the “large number” of laws and regulations at all levels of government that “pushed riskier lending.” Perhaps “state and local laws and regulations” might explain why the default rates were so high in California and Florida, while being much lower in Texas. The default rates in Michigan, Ohio and Pennsylvania would appear to be more a function of the rising unemployment rates there than any federal, state and local laws and regulations. It is also possible that the revision of bankruptcy laws so as to prohibit judges from ordering workable mortgage plans contribute to the foreclosure rates.

    But if blame is to be assessed on government for “laws and regulations” at whatever level, one might also ask what role the absence and repeal of “laws and regulations” may have contributed to the crisis. There seems to be wide spread opinion that non-regulation, deregulation and lax regulation on the part of the federal government were significant contributors to the collapse of the markets.

    And in this context it should be noted that non-regulation, deregulation and lax regulation played an important role not only in the current crisis, but also in the Savings and Loan crisis in the 80s, in the Great Depression and, for that matter, in every major financial collapse in American history. Yes, it is at least theoretically true that “free markets” are self-correcting. But it is also true that those hypothetically “free markets” go through cycles of boom and bust and that, for some, those boom periods are very profitable and that, for many, those bust periods are disasterous.

    Now it should be pointed out that for many, many years the Republican Party, including John McCain, have opposed government regulation of financial institutions in order to protect depositors and investors from the abuse of their savings and investments by the officers of those institutions.

    We can, of course, talk about the “incestuous relationship among Fannie Mae, Countrywide, and Kauffman and Broad,” but we need to be clear. It is not merely a matter of Democrats. It is a matter of the work of lobbyists working with and for Fannie Mae, Freddie Mac, Lehman Brothers, AGI, Countrywide and the rest to get from government that preferred treatment which enables them to engage in exceedingly risky activities and, need it be said, to get the government to assume the bad fruits of risk while they enjoy the good fruits.

    And if you want to paint the Democrats and liberals as the villians in all of this, then expect others to paint the Republicans and conservatives as the villians in all of this. Look at John McCain’s record on economic issues and on regulation of financial institutions and being indebted to those manipulating those institutions, look at the past associations of his top economic advisors, his Senate office Chief of Staff, and his top campaign staff. Yes, there are connections between Democrats and Obama and the tenacles of financial institution lobbyists; but they are by no means unique to Obama or to Democrats.