I45owl
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I Root For: Rice Owls
Location: Dallas, TX
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RE: 2009 A Very Scary Year
uhmump95 Wrote:Yeah but the banks did not have to get rid of their income verification policies and start offering loans to anyone who could sign their name on some loan applications.
I do agree that there is plenty of blame to go around then to just blame it on the government, free market, or the people. My only problem is instead of having us take our lumps and learn from our mistakes, the government seems content on trying to perpetuate this current mess by throwing money at it.
This is far more complicated than I think you think it is. As I understand it, the direct influence that Fannie Mae and Freddie Mac have is very small, but the indirect effect that the banking regulations to support those institutions have is enormous.
Not to be a one trick pony, but I highly recommend this from the Hudson Institute: The Community Reinvestment Act and the Subprime Mortgage Crisis: Is There a Connection?. [ transcript]
transcript Wrote:HOWARD HUSOCK: Thank you very much. The title of this discussion, which raises the question of whether there is a connection between the Community Reinvestment Act and the current crisis, is an apt one. It would be a foolish overstatement, in my view, to assert that the CRA is somehow the cause or main cause of the current crisis. Exceptionally low interest rates, high levels of available capital, and the advent of mortgage securitization combined – it’s clear in retrospect – to spur an overinvestment in housing, an underinvestment in the sort of due diligence which once typified lending. These are huge changes in the financial industry, and I think that they must be considered the key precipitants of the current situation. But as for the question of whether the CRA is at all linked to our current problems, I would answer in the affirmative.
It’s a long way from the world of the original act to the role it played in the housing crisis, but let me try to connect the dots. At the time of the passage of the CRA, as Debby (Goldberg) alluded to, the world of banking was – as Monty Python might put it – “something completely different.” Banking was largely a local industry; indeed, interstate branch banking was not permitted.
Mortgage lending, moreover, was largely the province of thrift institutions – local savings and loans – which had a kind of a deal with the government. They would pay relatively low rates of interest to their many small depositors, but they would charge relatively low rates of interest of mortgage borrowers. This limited spread strongly discouraged risk. Combined with the lack of bank competition, it undoubtedly led many neighborhoods to lack access to credit.
The term red-lining developed to describe that situation, and it led many advocates of the poor at the time – and believe it or not, I was a young left-wing journalist at the time, and if you look at the records of the Boston Pheonix newspaper you can find an article by me called “Neighborhood in the Red” describing exactly this problem – to conclude quite plausibly that only a legislative mandate could guarantee that those of modest means living in struggling urban areas could get access to credit.
Until the Clinton administration, CRA compliance was not a difficult matter. Banks could get what amounted to an “A for effort” by advertising in certain newspapers and certain neighborhoods. But the Clinton Treasury Department changed matters a good deal through 1995 regulations requiring banks that wanted “outstanding” CRA ratings to demonstrate numerically that they were lending both in poor neighborhoods and to lower-income households.
In my view, this new era of strict enforcement was a response to conditions which no longer existed. The bank deregulation of the 1980s had put us on a road to seeing sharp competition among mortgage lenders. A paper by the Dallas Federal Reserve Bank entitled “Redlining or Red Herring?” published in 1999 put it this way: “The CRA may not be needed in today’s financial environment to ensure all segments of our economy enjoy access to credit.”4 Competition – market forces – had changed the landscape tremendously.
But the ramped-up enforcement of the Clinton administration had powerful effects, in no small part because banks were engaged in a frenzy of mergers and acquisitions, and in order to obtain the permission of regulators for these deals “outstanding” CRA ratings became coin of the realm.
And what’s more, nonprofit advocacy groups including the now very famous ACORN and the Neighborhood Assistance Corporation of America, based in Boston, came forward to demand – successfully – that banks seeking regulatory approvals commit large pools of mortgage money to them, in effect outsourcing the underwriting function to groups that viewed such loans as a matter of social justice rather than due diligence. Bruce Marks, founder and still head of the Neighborhood Assistance Corporation, told me when I visited his office in Boston in 2000, “Our job is to push the envelope.” He specified that he would use his “delegated lending authority” – that’s the term – to make loans to households with limited savings, significant debt, and poor credit histories.
The sums at the disposal of his group and others were nontrivial; when NationsBank merged with Bank of America and took the name “Bank of America,” it committed $3 billion to Bruce Marks’ group. ACORN Housing received a similar $760 million from the Bank of New York. So it is that we begin to see an indirect connection between CRA and our present troubles. Quite sizeable pools of capital began to be allocated in a new way. Rather than lending on the basis of an individual household’s demonstrated ability to repay, regulators were pushing for lending to occur on the basis of other criteria. Bank examiners at the Office of Thrift Supervision began to use federal home loan date broken down by neighborhood, income, and race to rate banks on their CRA performance. This starts to stand traditional lending on its head. The key difference? In sharp contrast to the traditional regulatory emphasis on safety and soundness, banks were now
being judged not on how their loans performed, but on how many loans they made.
I spoke to a staff member at the Neighborhood Housing Services of Chicago, Michael Traynor (ph), who put it to me this way – he was a former Harris Bank vice president: “You just had to make sure you didn’t turn anyone down. If anyone applies for a loan, it’s better just to give them the money. A high denial rate is what will get you in trouble with the regulators.” And this is from a housing advocacy group in Chicago.
edit: added last paragraph, which speaks directly to the issue.
(This post was last modified: 11-24-2008 06:56 PM by I45owl.)
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Anyway, obviously you make over 250,000 so I guess your taxes will probably go up. If I am not mistaken, it is a 3% increase. If you are going to not be able to afford food and necessities with a 3% increase on that 250,000, you REAALLY have a major problem with your finances.
