02 January 2009

Right Wing Bullshit (Again) ~ The Poor Are Responsible for the Mortgage Crisis

This post is something of a repeat in the sense that I already have invoked the following passage from this article by Peter Dreier and John Atlas in The Nation last fall. Dreier & Atlas were then taking on the Republican attack on ACORN, but the right wing drum beat has continued. We still regularly hear right wingers, and journalists who've bought their faulty "analysis," blaming the current mortgage crisis on the 1977 Community Reinvestment Act (CRA) and the poor constituencies at whom it was directed. This morning on the ever insipid Diane Rehm Show we heard it again from Jim Angle (FOX News) and Susan Page (USA Today). In fairness Clarence Page eventually spoke up and told listeners and other guests - in a polite way - to cut the crap. Indeed Clarence pointed out that it seems misguided to blame the the poor for the "securitization" of sketchy mortgages. That would be the game played by rich speculators. In any case, for those operating in a reality-based world:

"The right-wing case against the CRA is entirely bogus--a diversionary tactic to take the heat off the financial services industry and its allies, . . . The CRA applies only to depository institutions, like commercial and savings banks, but thanks to Congress's deregulation mania, there are now many other lenders, including private mortgage companies like CitiMortgage, Household Finance and Countrywide Financial (which was recently bought out by Bank of America). These outfits, which exist in a shadow world without government oversight, account for most of the predatory loans in trouble today.

When Congress enacted the CRA in 1977, the vast majority of all mortgage loans were made by lenders regulated by the law. In 2006 only about 43 percent of home loans were made by companies subject to the CRA. Indeed, the main culprits in the subprime scandal--the nonbank mortgage companies, which successfully grabbed the bulk of the mortgage market away from the CRA-regulated banking industry--were not covered by the CRA.

Wall Street investment firms--including Lehman Brothers, Goldman Sachs, Bear Stearns and Citigroup--set up special units, provided mortgage companies with lines of credit, then purchased the subprime mortgages from the lenders, bundled them into "mortgage-backed securities" and sold them for a fat fee to wealthy investors worldwide, typically without scrutiny. By 2007 the subprime business had become a $1.5 trillion global market for investors seeking high returns. Because lenders didn't have to keep the loans on their books, they didn't worry about the risk of losses.

Congress passed the CRA after many studies, using the banks' lending data, had documented widespread racial discrimination in mortgage lending. The CRA encourages federally chartered banks to examine the credit needs of the communities they serve and to lend based on these needs--for small businesses, homes and other types of loans. It does not require banks to make loans to businesses or people who can't repay them. It does not ask banks to engage in charity. It simply tells banks: don't discriminate against qualified borrowers.

At first, many banks were reluctant to make loans to minority borrowers seeking to fix up their homes, buy new ones or start new businesses in urban neighborhoods. In the late 1970s and early '80s, community organizing groups like ACORN, National People's Action and others pushed banks and federal regulators to remove their racial blinders. Once they did so, banks discovered that many working- and middle-class black and Latino borrowers were excellent customers with good credit histories. These new markets generated good profits on stable loans with little risk.

The explosion of subprime mortgages was touched off in the early twenty-first century, as the number of lenders regulated by the government and covered by the CRA dramatically dwindled. In 2002 subprime loans made up 8 percent of all mortgages; by 2006 they had soared to 20 percent. Since 2004 more than 90 percent of subprime mortgages have come with exploding adjustable rates.

Not surprisingly, the foreclosure rates on subprime, adjustable-rate and other exotic mortgage loans have run four to five times higher than the foreclosure rates on conventional CRA mortgages. Testifying before the House Financial Services Committee in February, University of Michigan law professor Michael Barr reported that only about 20 percent of subprime mortgages were issued by banks regulated by the CRA. The other 80 percent of predatory and high-interest subprime loans were offered by financial institutions not covered by the CRA and not subject to routine examination or supervision. "The worst and most widespread abuses occurred in the institutions with the least federal oversight," Barr told Congress.

In contrast, the CRA actually penalizes banks for reckless, irresponsible or otherwise predatory lending. According to Ellen Seidman, director of the Treasury Department's Office of Thrift Supervision from 1997 to 2001, federal regulators warned CRA-covered institutions that "badly underwritten subprime products that ignored consumer protections were not acceptable." Lenders not subject to CRA did not receive similar warnings.

And unlike the institutions that offer unregulated predatory subprime loans, banks that make CRA loans are required by federal regulation to verify borrowers' incomes to make sure they can afford the mortgages. In 2006 the Federal Reserve reported that just 11.5 percent of mortgages made by CRA-regulated institutions were high-cost loans, compared with 33.5 percent for lenders not covered by the CRA. Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, has criticized those who blame CRA lending for the subprime crisis: "Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households."

While the CRA helped boost the nation's homeownership rate, particularly among black and Latino borrowers, subprime and other exotic mortgages had very little impact on homeownership. Most subprime loans were refinances of existing mortgages. From 1998 through 2005, more than half of all subprime mortgages were for refinancing, while less than 10 percent of subprime loans went to first-time home buyers. Moreover, a significant number of borrowers who took out subprime loans could have qualified for conventional, prime-rate mortgages with much better terms. Even the Wall Street Journal acknowledges that "plenty of people with seemingly good credit are also caught in the subprime trap." Brokers and lenders misled many of these homeowners, replacing safe thirty-year fixed-rate mortgages with deceptive, risky loans."

Updated later that same day ~ In the event that for some demented reason you find The Nation an untrustworthy source, here are some other sources that essentially confirm Dreier & Atlas' view: [1] [2] [3] [4] [5] [6] . . .



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