dachda wrote:
"University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject to comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.
But the question is why did they do this? Because the CRA made it A. Difficult to open new branches and avoid fines without a 'diverse' portfolio and B. because they knew that Fannie Mae and Freddie Mac would eventually buy back any loans that went south. It's a carrot and stick situation, which is exactly how it was envisioned when the bill went before Clinton and the Democrat congress in 1995.
As far as supervision goes,there is a reason supervision was so limited. Chris Dodd (D, no.1 recipient) and Barney Frank (D, no.3 recipient) were head of the Banking and Finance commitees respectively and they along with Barack Obama (D, no.2 recipient) and John Kerry (D, no.4 recipient) were the top recipients of 'campaign money' from both of these government instituted bailout machines which might go some way to explaining why they've been downplaying the coming crisis for years (up to last July, actually) as well as poo-poohing the need for more supervision and oversight. Bush, McCain and other republicans have attempted to add more regulation to these two banks, but have been stymied at every turn by cries of 'racism' and resistance by house and senate democrats, since 2000.
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Also this:
"Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
Okay, you got me. The subprime loans were of a lower rate. Unfortunately, the vast majority of those raters were ARMs, so when the housing market relaxed and other economic factors kicked in, all those 'cheap' $600/month mortgages turned into $1900/month mortgages, and with a depressed housing market, families who could no longer afford their homes couldn't sell them to get out from under them. Hence, the foreclosures.
And to top it all off, the bill signed in 1995 allowed lenders to consider welfare payments as 'income' when applying for a loan. So we're talking about people with houses who couldn't even afford to live in a shanty without government assitance in many cases. Is that the best bet for getting your money back? Probably not.
In fact, the biggest sign of the coming housing problem had to be the birth of the 'distressed housing' business of the 90's. Remember the horde of TV ads for guys (that Vietnamese guy in particular) who had a 'secret system' to show you how to make easy money buying 'distressed properties?' Well, their 'secret' (which was no secret to anyone who knew the market) was that the bad loans that Fannie and Freddie purchased eventually end up being sold at dead cheap prices like second hand clothing. This of course led to housing prices dipping even more as folks who had no business owning a house and no interest in keeping it up, merely renting it, caused a decline in the quality of the neighbourhoods they lived in.
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Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the laws reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasnt until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. "
The reason it was strongest in the 90's isn't becuase it was a good system, it was because housing prices stayed up and the effects of Clinton's other economic policies during his second term wouldn't be seen until the first term of the next president. Economies don't turn on a dime.
The market started to go south after the millenium, the decline was accelerated by 9/11, the Bush Tax cuts kept it from going completely under, but speculation ran rampant and the housing bubble burst last year. Up until July of this year, Chris Dodd, chairman of the banking commitee, has been saying that both these agencies are solvent and doing well, despite the 6.3 billion scandal which forced CEO Franklin Raines to step down and join the Obama Campaign as a financial advisor along with Jim Johnson, the former head of Freddie Mac.
Bush never cut back on enforcement for Fannie and Freddie. In fact, he was trying to bring the problem up in 2003, McCain brought it up again in 2005 and a host of other congressfolk and senators have been bringing it up for years. It is folks receiving money from the two banks that have said consistently 'no oversight is needed.' You can actually Youtube Barney Frank saying that all the concern was 'overblown.'
The Fed, by the way, probably acted as it did because it was trying to keep the boat afloat. But even Alan Greenspan (who was no financial genius, IMO) said that these two banks were going to cause a major problem down the line, especially as they were closely linked to numerous other financial entities, Lehman Brothers being a superlative example.
Do the republicans bear some blame? Certainly, but it was because they let class politics, in particular the fear of being branded as racist or insensitive to the poor, make their decisions. It also didn't help that, instead of being true conservatives, they spent 4 years acting like frat boys with an unlimited trust fund instead of stewarding the government and following up the Bush Tax Cuts with reduction of government spending and repairing the Social Security system (our next great financial disaster).
They paid for that in 2006, but that started another era of ridiculousness, some of which I've already mentioned, that falls outside of this discussion...
