Many politicians, some federal regulators, and many vocal media commentators claim that the Community Reinvestment Act (CRA) and its regulatory evolution had nothing to do with the creation of the U.S. housing and mortgage bubble. It seems that, at some point in the near future, an objective review of the facts may require a revision of the claim that the CRA was not a significant factor in the creation of the U.S. housing and mortgage bubble.1
The Community Reinvestment Act: Its Evolution and New Challenges*
A speech by Chairman of the U.S. Federal Reserve, Ben S. Bernanke
At the Community Affairs Research Conference, Washington, D.C.
March 30, 2007
From the third paragraph below the heading: The Evolution of The CRA
Even as these developments were occurring, extensive change was taking place in the financial services sector. During the 1980s and 1990s, technological progress significantly improved data collection and information processing, which led to the development and widespread use of credit-scoring models and the availability of generic credit history scores. Deregulation also contributed to the changes in the marketplace. Notably, the lifting of prohibitions against interstate banking was followed by an increased pace of industry consolidation. Also, the preemption of usury laws on home loans created more scope for risk-based pricing of mortgages. Securitization of affordable housing loans expanded, as did the secondary market for those loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a percentage of their activities to meeting affordable housing goals (HUD, 2006). A generally strong economy and lower interest rates also helped improved access to credit by lower-income households.
Comment:Many commenters here have used the term 'Shadow Foreclosures' the proper term is "Shadow Inventory'. Shadow inventory represents the excess supply of housing. Banks and other mortgage investors have been deferring foreclosures (for several reasons) but one primary reason is because they realize if all the inventory was to come to market in any short time period home prices in most markets would plummet (further). It's estimated, by S&P, that the current shadow inventory will take about 45 months 'to clear'.1 A subtlety, hedge funds invest other peoples' money (o.p.m.) and they collect an annual management fee while they wait for their strategy to pay-off. If the strategy pays-off they get a very large incentive bonus (portion of the profits). Hedge funds generally will not allow investors to 'cash-out' for a couple of years after the investor deposits his or her investment (the 'lock-up' period). So, the idea is to sell a very risky or a very volatile strategy, so you can get the management fee while you wait for - and hopefully eventually reap - the huge incentive fees.2What happens when a hedge fund strategy "blows-up"? The manager moves-on to a different strategy, and most likely, a different group of investors. Picking the bottom of any market is a timing issue, by the time these hedge fund "lock-ups" have expired most of the investors will probably start to see signs of life in the housing market and will decide that after a couple years of pain, during the "lock-up", it's probably a good idea to hang-in-there and perhaps enjoy some profit. In my opinion the hedge fund managers in this article are following a contrarian strategy and may be quite early . . . but, it takes time to convince those hedge fund investors to invest.Remember, home prices change at the margin, one-sale-at-a-time, the next sale is based upon comparable sales and an appraisal - and in most cases - the completion of the sale is dependent upon the availability of mortgage financing. Watch unemployment and don't just look at the published numbers for mortgage interest rates, look at the number of new mortgages actually issued. If what used to be a qualified buyer can't buy, the excess inventory will not be absorbed by anybody but investors who want to be landlords. I believe Mr. Mark Hanson (in the article) has the proper current view of the housing market.Footnotes:1. see article, S&P: 45 Months to Clear Shadow Inventory By Kerry Panchuk pub. Housing Wire November 23, 2011 - at: http://www.housingwire.com/2011/11/23/sp-45-months-to-clear-shadow-inventory2. see Introduction pages 1 and 2 to A Balancing Act: Privacy, Regulation, and Innovation in Hedge Funds By Thomas Van De Bogart and Justin Blincoehttp://www.ethicapublishing.com/inconvenientorinvasive/2CH17.pdf
A dubious prosecution but it helps set the record straight.
By Holman W. Jenkins, Jr.
As I read Mr. Jenkins’ article I was impressed by many of his points, but not his conclusion. Then, after some thought, I remembered the article is published in the OPINION section, not in the FACT section.Q. What does CMO stand for? A. Collateralized Mortgage Obligation. What caused the COLLATERAL in CMO to become price inflated?In my opinion, The Housing Bubble and the ensuing financial crisis were caused by several factors which played-out in concert. Political pressure for every person to receive a home loan was one principle cause. The Greenspan Federal Reserve's manipulation of interest rates, and the Fed’s long low interest rate policies, in order to avoid any-and-every anticipated economic slowdown was another. The irrational levels of leverage used by large financial institutions (including Fannie and Freddie) was another factor in the formation of the bubble. The unregulated and irrational use of mortgage derivatives was another contributor (adding another layer of leverage). Serial reductions in mortgage loan qualification standards, the move to low-down payment or no down payment mortgages, and exotic mortgages with deferred payment options, also contributed.1 These were just a few of the ‘moving parts’ which contributed to the home price bubble.Then, when a few people began to look at the home price inflation - late in the bubble - those few people began to analyze the economics of home prices - it became clear to them that the 'house-of-cards' was dependent on infinitely increasing home prices and infinitely available financing for those infinitely higher home prices. That's when the music began to slow-down, and all the dancers began to head for that small exit.2Watch this video-clip in which Warren Buffett tries to explain the dynamics of bubble formation and bubble bursting to the Financial Crisis Inquiry Committee (FCIC) at:Note: Late in the bubble the impending implementation-date for the requirement that banks and other investors use mark-to-market3accounting for valuing ‘infrequently traded assets’ (way back in history mortgage backed securities were infrequently traded) might have also created a more sober attitude toward the volatility and risks involved in holding, leveraging and trading CMO’s 4* On December 16, 2011 The SEC filed lawsuits - charging fraud- against former senior executives of Fannie Mae and Freddie Mac. The filings provide interesting information and evidence which might force retraction and republication of past financial disclosures made by Fannie and Freddie, and which might also force significant revisions to volumes of analysis and statements about the safety and soundness of the two Government Sponsored Enterprises. [See SEC Filings at: http://www.sec.gov/news/press/2011/2011-267.htm ]Footnotes:1. See, SEC filing against former executives of Fannie Mae: page 9 para. 32 “Desktop Underwriter” and page 10 para. 35 “Fast and Easy” and “Clues” at: http://www.sec.gov/litigation/complaints/2011/comp-pr2011-267-fanniemae.pdf2. From, Inside Trillionaires’ Club of BlackRock By Shawn Tulley - Fortune Magazine - pub. August 18, 2009: “In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.” see complete article at: http://money.cnn.com/2009/08/12/news/companies/blackrock_trillionaires_club.fortune/index.htmand see, Former Countrywide #2 Sees Opportunities in Troubled Mortgages By Matthew Padilla - Orange County Register pub. June 10, 2008 at: http://mortgage.ocregister.com/2008/06/10/former-countrywide-no-2-sees-opportunities-in-troubled-mortgages/ and see, Betting on The Blind Side By Michael Lewis - Vanity Fair – pub. April 10, 2011 at: http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-2010043. see, FAS #157 at: http://en.wikipedia.org/wiki/Mark-to-market_accounting4. see, Congress Helped Banks Defang Key Rule By Susan Pulliam and Tom McGinty – WSJ, June 3, 2009 at: http://online.wsj.com/article/SB124396078596677535.html ).
* Why I dissented from The Majority Report of The Financial Crisis Inquiry Commission > http://online.wsj.com/video/opinion-journal-wallison-why-i-dissented/AF6220AF-4A4E-43E8-A393-1700F613CEF8.html
Also see Wall Street Journal online article, What Fannie and Freddie Knew: How the Toxic Twins Turbocharged The Housing Bubble
B of A Settles Lending Case By Ruth Simon and Brent Kendall
Wall Street Journal ~ December 22, 2011
Mr. Melton Commented: BofA just did not do due diligence and helped CW hide it's wrong doing and would have gotten away except for the housing mess.
Reply To: Mr. Melton, Please note that the allegations in the article claim that most of the overcharging took place "from 2004 through 2008, at the height of the housing bubble". During that time Bank of America was actually, in many ways, a competitor of Countrywide Financial. During that time Countrywide Financial had borrowed significant amounts of money from B of A, and Countrywide had a large authorized line-of-credit with B of A.
Toward the end of Countrywide's independent existence, executives at Countrywide, and most significantly Angelo Mozilo, claimed Countrywide had insignificant sub-prime exposure and that the company was in strong financial condition. Not long after the last time they made that claim Countrywide exercised the balance of the authorized B of A line of credit. I have always thought that when B of A bought Countrywide, B of A did it, in significant measure, to protect the B of A loans which B of A made to Countrywide without any knowledge (apparently) of what a snake-pit Countrywide actually was.
It's interesting that you claim that B of A participated in the alleged activities while in fact it was a competitor of, and a banker for, Countrywide, yet you don't question why Countrywide's Board-of-Directors and the CFO at Countrywide weren't more aware of the alleged abuses, and why they weren’t more actively engaged in monitoring and bridling-in the alleged abuses.
What kinds of people sat on Countrywide's Board-of-Directors almost up-to the very end? Were they unsophisticated rubes with no understanding of mortgage finance and no understanding of what was going on? If you think that might be the case, key-words-search: "The Tragedy of Countrywide Financial and Angelo Mozilo Muckety". Notice that Kathleen Brown, the very financially savvy and well credentialed sister of then California Attorney General - now Governor of California - Jerry Brown sat on the Countrywide Board of Directors, as did former (under President Bill Clinton) Director of the U.S. Department of Housing and Urban Affairs (HUD) Henry Cisneros [see, “The Reckoning: Building Flawed American Dreams” By David Streitfeld & Gretchen Morgensen, NYT 10/18/2008.]
Maybe the abrupt retirement of former President of Countrywide, Stanford Kurland, (who most considered the obvious 'heir apparent' to CEO Angelo Mozilo) about a year 'before the fall' should have been recognized as a sign that it was time to look more closely at what was going on inside Countrywide Financial. [see, "Former Countrywide No. 2 Sees Opportunities in Troubled Mortgages" By Mathew Padilla - Orange County Register, 6/10/2008].
 “The Tragedy of Countrywide Financial and Angelo Mozilo” at: http://news.muckety.com/2008/06/26/the-tragedy-of-countrywide-financial-and-angelo-mozilo/3712
 “The Reckoning: Building Flawed American Dreams” By David Streitfeld & Gretchen Morgensen, NYT 10/18/2008 at: http://www.nytimes.com/2008/10/19/business/19cisneros.html?pagewanted=all
 “Former Countrywide No. 2 Sees Opportunities in Troubled Mortgages” By Mathew Padilla – orange County Register - 6/10/2008, at: http://mortgage.ocregister.com/2008/06/10/former-countrywide-no-2-sees-opportunities-in-troubled-mortgages/
An excerpt from an article which appeared in The Wall Street Journal Opinion Section – December 8, 2011
Subsidizing Wall Street to Buy Chinese Solar Panels*
By T.J. RODGERS
At the end of the recently released film "Margin Call," the chairman of the fictional investment bank that triggered the mortgage-backed securities meltdown sits in his executive dining room, looking down on the Hudson River sunset while enjoying a steak and an expensive bottle of Bordeaux. Why not? He has just saved billions for his shareholders by dumping the firm's entire "toxic loan" portfolio in one hectic trading day. Just before giving a bonus to the brilliant analyst who foresaw the meltdown only hours in advance, the chairman predicts, "There's going to be a lot of money made coming out of this mess."
Wall Street understands how to make money, up-market or down. "Margin Call" may fuel Occupy movement ire, but in creating mortgage-backed securities, Wall Street did nothing other than facilitate home-financing access to the next tier of less-qualified home buyers, as demanded by every president since Bill Clinton. After that, the bankers did exactly what their shareholders wanted: bundle those risky loans into securities, sell them to lock in the profits, and dump the risk right back onto the federal government—where it belonged.
My purpose is not to debate the morality of mortgage-backed securities but to update the Law of Unintended Consequences with the corollary Law of Misguided Subsidies: Whenever Washington disrupts a market by dumping subsidies into it, Wall Street will find a way to pocket a majority of the money while the intended subsidy beneficiaries are harmed by the resulting market turmoil.
The recent crash in mortgage-backed securities was a near-repeat of the savings-and-loan crash of the 1980s, in which Washington insured the S&L industry but failed to set limits on high-risk loans. When the bubble burst, Washington paid Wall Street the insurance money while homeowners lost huge sums in real-estate hell. Wall Street understands how to manage risk; the federal government and consumers do not.
The complete article may be seen at:
See an article announcing the Massachusetts Attorney General’s lawsuit against firms in the mortgage industry.
The Mortgage Electronic Registration System (MERS) which is mentioned in the lead article is based upon a concept and operating model which was proposed to The Mortgage Bankers Association by the GSE’s, Fannie Mae and Freddie Mac, at a Mortgage Bankers Association meeting in the mid-1990’s. The Mortgage Bankers seemed to like the concept, so Fannie and Freddie financed the creation of MERS with a contribution of 2 million dollars each (from Fannie and Freddie). After MERS was created, Fannie and Freddie invited other major mortgage banking entities to join the MERS via an annual subscription arrangement.
The structure and the processes in the MERS system seem to have had some “destined to fail” characteristics which would make an interesting case study of ‘management control and audit procedures’. And, the system also raises some questions about the legality of the system’s processes in the context of common law of land title conveyance. See, “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory” by Professor Christopher L. Peterson at > http://search.earthlink.net/search?q=Two+Faces%3A+Demystifying+the+Mortgage&area=earthlink-ws&channel=sbt_sgin&abtcgid=219&abtli=1
In late 2010 in a hearing before a Congressional Banking Committee the acting U.S. Controller of The Currency, John Walsh, stated that results from a multi-agency investigation of MERS would be released in early January of 2011. (The investigation was led by The Office of the Controller of The Currency. I never could find the results of that investigation).
A bit off-point, but still interesting, current California Governor, Jerry Brown, was the Attorney General of the State of California from 2007-2011. For much of that same period Jerry Brown’s sister, Kathleen Brown, was a member of the Board-of-Directors of Countrywide Financial [Henry Cisneros former Director of the Department of Housing and Urban Development (HUD), during President Bill Clinton’s first term in office, was also on the board at Countrywide during that time]. Kathleen Brown resigned from that board of directors shortly after information about the depth of Countrywide’s financial problems became public and only weeks before Bank of America acquired Countrywide. A few months later, when Jerry Brown was elected governor of California, Kathleen Brown almost immediately moved her Goldman Sachs municipal finance consulting office from Los Angeles, CA to Chicago, IL ‘to avoid any appearance of conflicts of interest’ with her brother’s gubernatorial administration. (See, “The Tragedy of Countrywide and Angelo Mozilo” at > http://news.muckety.com/2008/06/26/the-tragedy-of-countrywide-financial-and-angelo-mozilo/3712 and see Kathleen Brown's Wikipedia at > http://en.wikipedia.org/wiki/Kathleen_Brown