Re: The FCIC falls apart

On Dec 16, 2010, at 5:57 PM, Karl wrote:

> " the long-standing and harmless Community Reinvestment Act"
>
> Harmless?  Really?


Actually, not only harmless, but perhaps even helpful, according to  
this article (at the end).

regards,
-Lance

http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

Private sector loans, not Fannie or Freddie, triggered crisis


By David Goldstein and Kevin G. Hall | McClatchy Newspapers

WASHINGTON — As the economy worsens and Election Day approaches, a  
conservative campaign that blames the global financial crisis on a  
government push to make housing more affordable to lower-class  
Americans has taken off on talk radio and e-mail.

Commentators say that's what triggered the stock market meltdown and  
the freeze on credit. They've specifically targeted the mortgage  
finance giants Fannie Mae and Freddie Mac, which the federal  
government seized on Sept. 6, contending that lending to poor and  
minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the  
private sector, not the government or government-backed companies, was  
behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers  
during the housing boom that lasted from 2001 to 2007. Subprime  
lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

	• More than 84 percent of the subprime mortgages in 2006 were issued  
by private lending institutions.


	• Private firms made nearly 83 percent of the subprime loans to low-  
and moderate-income borrowers that year.


	• Only one of the top 25 subprime lenders in 2006 was directly  
subject to the housing law that's being lambasted by conservative  
critics.

The "turmoil in financial markets clearly was triggered by a dramatic  
weakening of underwriting standards for U.S. subprime mortgages,  
beginning in late 2004 and extending into 2007," the President's  
Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed  
Fannie Mae and Freddie Mac to make home ownership more available to  
riskier borrowers with little concern for their ability to pay the  
mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a  
disaster. Loaning to minorities and risky folks is a disaster," said  
Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the  
Federal Home Loan Mortgage Corp., don't lend money, to minorities or  
anyone else, however. They purchase loans from the private lenders who  
actually underwrite the loans.

It's a process called securitization, and by passing on the loans,  
banks have more capital on hand so they can lend even more.

This much is true. In an effort to promote affordable home ownership  
for minorities and rural whites, the Department of Housing and Urban  
Development set targets for Fannie and Freddie in 1992 to purchase low- 
income loans for sale into the secondary market that eventually  
reached this number: 52 percent of loans given to low-to moderate- 
income families.

To be sure, encouraging lower-income Americans to become homeowners  
gave unsophisticated borrowers and unscrupulous lenders and mortgage  
brokers more chances to turn dreams of homeownership in nightmares.

But these loans, and those to low- and moderate-income families  
represent a small portion of overall lending. And at the height of the  
housing boom in 2005 and 2006, Republicans and their party's standard  
bearer, President Bush, didn't criticize any sort of lending,  
frequently boasting that they were presiding over the highest-ever  
rates of U.S. homeownership.

Between 2004 and 2006, when subprime lending was exploding, Fannie and  
Freddie went from holding a high of 48 percent of the subprime loans  
that were sold into the secondary market to holding about 24 percent,  
according to data from Inside Mortgage Finance, a specialty  
publication. One reason is that Fannie and Freddie were subject to  
tougher standards than many of the unregulated players in the private  
sector who weakened lending standards, most of whom have gone bankrupt  
or are now in deep trouble.

During those same explosive three years, private investment banks —  
not Fannie and Freddie — dominated the mortgage loans that were  
packaged and sold into the secondary mortgage market. In 2005 and  
2006, the private sector securitized almost two thirds of all U.S.  
mortgages, supplanting Fannie and Freddie, according to a number of  
specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration  
pressured Fannie and Freddie, the private sector sold into the  
secondary market just 18 percent of all mortgages.

Fueled by low interest rates and cheap credit, home prices between  
2001 and 2007 galloped beyond anything ever seen, and that fueled  
demand for mortgage-backed securities, the technical term for  
mortgages that are sold to a company, usually an investment bank,  
which then pools and sells them into the secondary mortgage market.

About 70 percent of all U.S. mortgages are in this secondary mortgage  
market, according to the Federal Reserve.

Conservative critics also blame the subprime lending mess on the  
Community Reinvestment Act, a 31-year-old law aimed at freeing credit  
for underserved neighborhoods.

Congress created the CRA in 1977 to reverse years of redlining and  
other restrictive banking practices that locked the poor, and  
especially minorities, out of homeownership and the tax breaks and  
wealth creation it affords. The CRA requires federally regulated and  
insured financial institutions to show that they're lending and  
investing in their communities.

Conservative columnist Charles Krauthammer wrote recently that while  
the goal of the CRA was admirable, "it led to tremendous pressure on  
Fannie Mae and Freddie Mac — who in turn pressured banks and other  
lenders — to extend mortgages to people who were borrowing over their  
heads. That's called subprime lending. It lies at the root of our  
current calamity."

Fannie and Freddie, however, didn't pressure lenders to sell them more  
loans; they struggled to keep pace with their private sector  
competitors. In fact, their regulator, the Office of Federal Housing  
Enterprise Oversight, imposed new restrictions in 2006 that led to  
Fannie and Freddie losing even more market share in the booming  
subprime market.

What's more, only commercial banks and thrifts must follow CRA rules.  
The investment banks don't, nor did the now-bankrupt non-bank lenders  
such as New Century Financial Corp. and Ameriquest that underwrote  
most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them  
to be regulated by 50 different state banking supervisors instead of  
the federal government. And mortgage brokers, who also weren't subject  
to federal regulation or the CRA, originated most of the subprime loans.

In a speech last March, Janet Yellen, the president of the Federal  
Reserve Bank of San Francisco, debunked the notion that the push for  
affordable housing created today's problems.

"Most of the loans made by depository institutions examined under the  
CRA have not been higher-priced loans," she said. "The CRA has  
increased the volume of responsible lending to low- and moderate- 
income households."

In a book on the sub-prime lending collapse published in June 2007,  
the late Federal Reserve Governor Ed Gramlich wrote that only one- 
third of all CRA loans had interest rates high enough to be considered  
sub-prime and that to the pleasant surprise of commercial banks there  
were low default rates. Banks that participated in CRA lending had  
found, he wrote, "that this new lending is good business."


Read more: http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#ixzz18K9Glzdi

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