Posted by: distributorcap | September 23, 2008

Real Estate was the new black

Meet the new whipping boy of the right — the Community Reinvestment Act (CRA). Didn’t you know — once again the those damn liberals and progressives have brought the nation to the brink.

The CRA is a Federal law passed in 1977 that requires federally insured banks and thrifts to provide loans, credit and mortgages to underserved (aka low income) people and businesses in their sphere of market. It also prohibits redlining – the practice of targeting wealthier and upscale areas of financial institution’s market areas while neglecting poorer ones.

Needless to say the banks were not in favor of this.

Each bank is assessed on compliance of the CRA based on the composition of the community it serves. There is a periodic evaluation of each member, which becomes part of the public record. The rating can then be used as part of an institution’s application for Federal deposit rights. Regulators include the FDIC, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Bank, among other agencies.

Like every Federal program on the books, the CRA is over wrought with bureaucracy and rife with graft. Since a bank needs federal approval to make substantive changes (notably mergers) to business operations – its CRA evaluation needs to be up-to-date and clean. Community groups often sued to stop banks from expanding operations – sometimes with merit, often without.

The CRA is far from perfect. It forced more regulations (that nasty word) and paperwork on banks. It did make banks issue some higher risk loans that they may not have made. But studies by the Federal Reserve and the Harvard Joint Center for Housing Studies have shown the CRA has increased profitability while also helping low income community members. There have also been sociological benefits to communities due to this program (no wonder the right wing hates it). Success is not always about obscene profits celebrated with $1,000 bottles of champagne.

In 1995 the law was revised to expand the number of loans issued to low-income families seeking mortgages. Regulatory requirements for loans were loosened and streamlined. The revision also allowed for the securitization of these CRA loans into the secondary market for mortgages – aka as Mortgage Backed Securities (MBS). This freed up cash for banks and thrifts to make even more loans. The first CRA loans were bundled into MBS by none other than Bear Stearns in 1997. Freddie Mac and Fannie Mae (who both had implied Federal guarantees) soon entered the game.

The CRA has come under intense criticism as one of the primary reasons for the financial freefall we are currently experiencing. It is classic chicken and egg. Critics state that banks were forced (or some will say extorted) to make loans to people with little or no credit history, assets or verification. The other side will say while the banks were required to make CRA loans, they went completely overboard since the regulated banks could sell or “pass” these subprime and high risk loans into the unregulated MBS market. While housing prices kept skyrocketing – there was virtually no risk, no downside. Bad loans were refinanced and collateralized by the rising housing prices. Once these bundled mortgages were sold into the secondary market, much of the risk that existed was then sold off by financial institutions via Credit Default Swaps (CDS) – a very complex financial derivative that operates like an insurance policy for defaults.

Loans by independent mortgage companies also soared – at a rate much higher than banks and thrifts. These companies are not directly covered by CRA – although they often act as a broker between a federally insured bank (which is under CRA) and the home buyer. Seeing this as some sort of regulatory loophole, firms like Countrywide stated making larger and riskier loans. Everyone wanted to be at this party.

There is no doubt that the CRA was a factor in the mortgage mess of 2008. All Federal laws, no matter how noble, have unintended consequences. Everything that made the game easier and slimier – even Federal law – has to be considered part of the problem. Billions of dollars in CRA loans are now in default. Some (maybe many) of these CRA loans were made to people that were way too risky. But financial institutions found an ingenious way to pass that risk to someone else and make money. As long as the bottom line kept growing and more cash was flowing, no one seemed to mind that the henhouse was being raided by a fox.

The question is – how much of a factor was the CRA? If you ask free marketers, wingnuts or die hard Republicans lemmings – they will point their finger directly at the CRA and say it was the ONLY factor (OK that and Clinton) in this collapse. Since government is always the problem, it must have been those damn liberals in Congress that have caused such hardships for the idle rich. Never mind that the CRA could perhaps foster a better sense of community and personal responsibility and allow more people to partake in the economy. Since when has the right wing ever cared about the betterment of some of the fringes of society? Especially if it means lower profits – and of course the chance of more Democratic votes.

Did banks issue subprime and high risk mortgages to comply with the CRA or to make money? Probably both, but after 1995 it was more the latter, which just happened to comply with the former. How much of a game changer was permitting CRA loans to be sold into the secondary market? Obviously a lot. High risk loans were being issued for 18 years without any signs of massive defaults. Was there really a loophole that allowed firms like Countrywide to bypass the CRA laws? Seems like it to me. But I am not a securities lawyer. And Countrywide is no longer around.

Considering the CRA started in 1977 – it took a full 31 years for all this liberal political correctness to come crashing down. For its first 20 years, CRA mortgages had relatively low default rates and the banks made a tidy, if smaller profit from them. The changes in 1995 did put these CRA loans into the world of highly complicated MBS and derivatives. The money to lend became easier, the returns greater and risk seemingly minimal. Around the same time banks and securities firms were becoming more and more de-regulated by our friends in the Newt Gingrich-Phil Gramm led Congress. Housing prices began an upward spiral that no one wanted to think (but knew) would ever end. Real Estate was the new black (definitely not red). It was a confluence of events that ultimately lead to the perfect storm in 2008.

So now we are hearing the rants from the right and the Republicans – basically accusing all liberals, all progressives, the left and the Democrats of crimes against humanity (after all, one of the only things Republicans do with such style, grace aplomb, and emotion is accuse everyone else or screwing up and passing the buck). In other words, the Republicans (led by Rush, Cavuto and others) have gone right to blaming the poor!

In reality the final straw in this camel’s back was greed. It was not the CRA, not the clenis, not regulation and even not Gramm led de-regulation – but plain old human greed. Everyone saw this coming, even George W. Bush. Even Alan Greenspan. Only Chimpy (with help from cronies like Hank Paulson, Ben Bernanke among others) tried as he could to kick this can down the road to 2009 (like Iraq), but it turns out some things are actually beyond his control.


  1. yep, it’s the poor people and the minorities who are greedy, not the rich folks who were making money hand over fist giving out the loans. serves those damned poor people right for daring to want a better life. they should know their place, just like that black guy running for president.

  2. Hell, I saw it coming. Ask my husband. I’ve been ranting about this for several years now. If I saw it coming, and I know jack shit about economics, then of course the administration saw it too. When bush spoke first about this last week, he appeared to be pissed. I think you are right, he saw it coming but it looked to him like it could be shoved aside at least until he scampered off to Crawford for an eternal brush clearing project.I have just a few words for congress as they deal with this mess, haste makes waste. This is no time to panic and once again vote on a bill just because of pressure from the administration. That’s happen two times before and the result was, one-the Patriot Act and two-giving bush the a-okay to invade Iraq. The third time will not be a charm.

  3. Excellent description of the problem DC! I’ve been furious about the new conservative spin on the mortgage crisis, repeated endlessly by Limbaugh and Levin (I haven’t heard Hannity address it yet, he’s too busy trying to hang Ayers on Obama) that all this is the fault of GOVERNMENT forcing lenders to give “risky” loans. Neil Cavuto on Fox actually said, specifically “loaning to minorities and risky folks is a disaster”.

  4. The die is cast.The game over. The ‘Weapons of mass destruction’ derivatives are still not seen as culprit.The do not need a bailout. Create new banks, transfer deposits and bankrupt old ones.No more bets, short selling. Just straight across the board sales and purchases of common and preferred shares in corporations.They economy will make it even if America’s reputation and the Halo of Capitalism doesn’t.

  5. The wingnuts used to (still do?) scoff at lefties who say that communism just needed the right people to run it, that you can’t blame Stalin. Now that the shoe is on the other foot…Unregulated capitalism just don’t work, chumps.

  6. Yep, blame the poor. Why not? It couldn’t have anything to do with the rich doing everything they can do to ship jobs overseas to make another buck, right?

  7. Since when do corporations have *more* rights than…people?I’ve read the constitution. (Duh.)That’s not in there, anywhere.

  8. I think the problem started when the banks were permitted to package those CRA loans and hide them in with paper sold all over the world. Had they stayed local and remained a percentage of the bank’s loans we wouldn’t be in this mess. I’ve seen no info about any limits to how much could be loaned in relation to the banks assets.Here’s a good one. Ask your bank if they know who owns your mortgage. When I paid off my place the paper landed up in Florida. All the way from the northwest. It took six months to track down.Oh and that’s a good way to avoid foreclosure. For a bank to foreclose they must present the current paperwork and who owns it. If you have an older loan the bank usually doesn’t have the current agreement and may have a hard time tracking it down. That would give you a good negotiating position for refinancing.

  9. Hey DCap-I want to send you an e-mail. If you get a chance, send me one through the address on my blog. I promise, no spam!

  10. derivatives

  11. And while all this is going on the U.S. military is planning to go into perpetual war for diminishing resources and ideological enemies.US generals planning for resource warsI have to wonder how you guys are going to pay for it…

  12. I get damned tired of getting blamed for everything.

  13. Just watched Paulson stutter & blink through his hearing today. His *have the fox watch the hen house* immunity proposal is bunk. Thankfully (and maybe because it is an election year). Experts say this fix is not the right answer.They can't have an ex wall street guy, embracing other wall street brokers as his counsel for fixing the problem w total immunity. No bailout with fat cat perks. The bonuses these folks get are around $300,000 +. Hmm maybe they are going to have to make due without.The US was already on thin ice economically, and now they are looking to stretch it further. I question how much ff the book debt war/china exists & george is doing a heck-of-a-job.My fear was congressional clowns were going to approve this shoddy plan in their rush to getto vacation at the end of the week.Even Nancy Pelosi was quoted as saying *the party is over" for big finance & their hefty perks.& I really dislike Pelosi…. but at least she is saying the immunity/free for all is off the table.Better late than never- but for the recordNancy needs to be kicked to the curb for her obstruction of justice re impeachment.One expert is saying make this loans – the bailout no dividends, no exec perks until the loan is paid back. They need to sober up & tow the line.

  14. Dammit! I knew my buddy Dcap would have some extraordinary, finely detailed post to help me understand this whole loan mess! Like I might have mentioned before, I have a hard time with the economics side of things and barely passed the req’d courses in college! Anyway, I have been hearing the usual rightwing blowhards-Hannity, Beck spewing the most vile crap that I have from these idiots in a while! I have to vent! I can’t believe these guys have turned this whole thing back onto 1. Demos 2. the poor-(who Beck said-many are barely making it, but they have to have those huge flat screen TVs! and 3. Obama-Hannity claims that one of the large brokerages head guys is a Obama campaign staff member! This is classic! These guys all have the same playbook-they sound like they’re reading off a cue card! They have to turn it around-Obama’s poll numbers were going up as the Palin drool fest winded down! Arrgh! Well, as usual-thanks for all the info-I actually will have to read it over again! But I know its well documented, researched, and above all from a guy who believes in Americans first, and not just making a profit off those Americans!

  15. Thanks for the English version of what’s going on out there, DCap. All these assholes who are blaming people like me (I’m a poor minority!) for this mess are the same ones who were telling us we could afford a house, no problem! We should shop to defeat the terrorists! Bring it on! Let’s see Chimpy and Darth Cheney try to hang on to power NOW.

  16. What a great post. The Republicans are going to kick into high gear trying to hang this on the Dems.

  17. This is seriously ugly shit.

  18. This is great. You should have a show on PBS called DCap Explains Everything.

  19. thxs, excellente, right up there with Greider and the big boys.XXX

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