Debunking Conservative Myths About Mortgage Crisis

Debunking Conservative Myths About Mortgage Crisis April 2, 2012

A new study by the Federal Reserve Bank of St. Louis explodes the conservative myth that federal policies encouraging banks to loan money to minorities and lower-income borrowers are what caused the housing crisis and the collapse of the mortgage industry. From the abstract:

We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.

ThinkProgress provides more detail:

Here’s what really happened. During the housing bubble of the mid-2000s, over-leveraged shadow banks packaged risky subprime mortgage loans into securities and passed them along to consumers that were often unaware or misinformed of the underlying risks. It was the poor performance of these private-label securities — not those issued by Fannie and Freddie — that led to the financial meltdown, according to the bipartisan Financial Crisis Inquiry Commission.

Since their inception, the Community Reinvestment Act and affordable housing goals have helped millions of creditworthy low-income and minority families access affordable mortgages. Most high-risk subprime loans were originated by non-bank lenders not subject to CRA, and the loans were usually issued to middle- and high-income borrowers that did not qualify for CRA. It’s also important to note that Fannie and Freddie did not securitize subprime mortgages.

I was in the mortgage business at the time all this went down. I can tell you that the dramatic loosening of subprime mortgage criteria that helped precipitate the foreclosure crisis — you wouldn’t believe the loans that got approved, almost always by non-bank mortgage lenders — was not caused by the government encouraging broader home ownership. It was brought on by mortgage companies jumping on the gravy train. By selling bundled mortgage securities on the secondary market at incredible rates of profit — 7, 8, 9 points sometimes — the lenders could easily pass all the risk of bad loans on to those who purchased those securities. In most cases, as long as the borrower didn’t default in the first six months, the bad loans didn’t come back to them; whoever purchased the mortgage was stuck with it.

In the early part of the last decade, the entire industry was on the gravy train, making money as fast as possible because the derivatives market was completely unregulated (because Clinton and his appointees actively prevented such regulation). It was a financial wild west for a few years. That is why the government is responsible for it, not because they were encouraging banks to lend money to lower income and minority homeowners.

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  • Um…how did Clinton and his appointees actively prevent financial regulation after he left office? Did they use the same time machine Obama used to retroactively fake his birth certificate?

  • Zugswang

    Raging Bee, I believe he’s referring to, among other things, the Gramm-Leach-Bliley Act, which was signed into law by Clinton towards the end of his second term, and a piece of legislation that his administration had a big hand in shaping, and which he was actually quite enthusiastic about.

  • Randomfactor

    By signing the bill BEFORE he left office.

  • abb3w

    @0, Ed Brayton:

    I was in the mortgage business at the time all this went down.

    …are there no limits to your godless depravity?

  • I’ve always been suspicious that banking management would be behind any loosening of regulations. Look at the Savings and Loan meltdown.

  • rabbitscribe

    I don’t have time to do this justice, but this anecdote captures it perfectly: a buyer is given a no-doc (1) negatively-amortized (2) 1.5 million dollar mortgage. This mortgage is bundled into a bond that is rated AAA (3). Meanwhile, the buyer immediately defaults- that is to say, he fails to make the first minimum payment of less than $200.00. Nonetheless, the bond backed by this mortgage among many others becomes the collateral for a derivative called a credit default swap (4) and also for a theoretically unlimited number of derivatives called collateralized debt obligations (5). This represents a passive failure on the part of government: insofar as we had to buy these “troubled assets” (6) to prevent the crash of the global economy, in retrospect we never should have allowed them to be created. However, there was never any active, statuatory obligation to make those loans or create those derivatives, obviously…

    (1) We promise not to verify that any of the information on your mortgage application is true.

    (2) You don’t ever have to pay the interest in any given month. Just pay the principal, which is a tiny percent in the first years, and the interest will accrue indefinitely.

    (3) There is a less than one in one thousand chance the bond will default in the next ten years. By the way, forty in one hundred defaulted in two years.

    (4) Enormously complicated pile of shit.

    (5) See (4)

    (6) See (4) and (5)

  • kermit.

    The wealth creators do not, of course, create wealth. They instead accumulate money. which is another matter entirely. Wealth consists of: medical procedures, a working internet, music, a house, a garden, a farm, a good hat. All the stuff and processes that make the world a better planet for humans.

    Accumulating money does not produce that; instead, it simply concentrates control of the financial realm in the hands of the financial elite. The process of their doing this is nearly always destructive: homes are rotting while former homeowners or tenants are homeless; the Koch brothers make yet more billions while the fossil fuel by-products destroy forests, oceans, crops, and our grandchildren’s future; medical drugs are held captive by patent lawyers while under-ensured sick people suffer; and public lands are violated and ruined for millennia.

    These people are like the metal thieves, who do $10,000 worth of damage to a house to steal $1000 worth of copper, only to sell it for $100 to the local unscrupulous metal recycler.

  • Okay, so how did Clinton and his appointees prevent the Republicans from imposing sensible regulations after they got complete control of the government? You still need a time machine to make that work.

  • Pierce R. Butler

    Raging Bee @ # 8: … how did Clinton and his appointees prevent the Republicans from imposing sensible regulations after they got complete control of the government?

    Through faithfully following in Republican footsteps by re-appointing economic crazyman Alan Greenspan as head of the Federal Reserve, for one…

  • Raging Bee –

    During the Clinton administration, the head of the Commodity Futures Trading Commission, Brooksley Born, wanted to regulate derivatives, since they were essentially futures contracts, and proposed a plan to do so. Robert Rubin, Lawrence Summers and Arthur Levitt (head of the SEC) all strongly opposed any such regulation and she was forced to resign in 1999. Clinton and his appointees then pushed for legislation that would prevent a future head of that agency from doing it again, resulting in the very quick passage of the Commodity Futures Modernization Act, which explicitly forbid the CFTC from regulating derivatives. Clinton signed it on his way out the door in December 2000, between the election and Bush’s inauguration. So yes, Clinton did indeed prevent future regulation of the derivatives market — with the help of Phil Gramm, who sponsored the legislation, and whose wife was a former head of the CFTC herself.

  • Michael Heath

    To pile on to Ed’s point. Bob Rubin and Larry Summer’s testified to Congress, along with Alan Greenspan, to shut down Brooksley Born and demonstrate their support of congressional Republicans. She also testified. She was right, they were all wrong.

    I find it interesting that President Clinton allowed this division within his White House to be so vividly illustrated. How often do we encounter the executive branch using Congress as a venue to demonstrate dissent in the ranks.

    As a long-time non-conservative moderate I readily concede our support on this issue was perhaps our greatest failure in my lifetime. Rubin and Summers had some spectacular successes in the 1990s, but this was certainly a spectacular failure.

    PBS did a wonderful documentary on Ms. Born which is available through Netflix.

  • You have to hand it to conservatives. Not only did they manage to hold the wealthy and powerful mortgage and financial companies blameless, they pinned all the fault on government over-regulation, and of course, on black people.

    This is not the first report showing that they’re totally wrong, nor will it be the last. But it hardly matters. The narrative is set in their minds, and it’s the now the official truth. Thirty years from now, when most people won’t remember or won’t have lived through the ’08 financial crisis, conservatives will still refer back to it as a dire warning about the dangers of government regulation and the greed of undeserving minorities.

  • omnicrom

    @12 has it.

    I find it extremely sad that In the years since the market crash I have not heard about the latest “It’s the Poor Black Latino’s fault” line yet but I have absolutely no problems believing it to be true. I really wish we actually had 2 real parties in America, rather than people who should be good but aren’t and people who are half-way to the Sherbert Kingdom.

  • Tualha

    It does sound like the failure to regulate here was a bipartisan effort. Clinton and company started it off, then Bush and company failed to do anything about it for eight years. Kind of hard for Democrats to ask them to fix it when their own guy signed the bill in the first place, eh?

    Or, to put it another way, it was the fault of two right-of-center parties and presidents, both serving their real constituency, the 1%. Would be nice to have a real two-party system, wouldn’t it.

  • juice

    It really lies at the feet of the credit ratings agencies. Looks like they need their credibility ratings lowered.

  • Reginald Selkirk

    #12: I find it extremely sad that In the years since the market crash I have not heard about the latest “It’s the Poor Black Latino’s fault” line yet but I have absolutely no problems believing it to be true.

    I have heard both “It’s all the fault of Freddie and Fannie” and “it’s the fault of liberals for passing the Community Reinvestment Act, which mandated loans to low income people who couldn’t afford them.”

    .

    When I point out that most of the bad loans were not part of the CRA, I heard that the CRA “drove the market.” Odd it was to hear conservatives argue that something other than supply or demand drove the market. Odder still to think that the guvmint did so well forcing loans to a market segment which had been previously overlooked that private companies felt obligated to mimic them. I expect that next private companies will begin issuing food stamps and free cheese, hoping to make incredible profits.

    .

    These lies have been around since 2008. Here’s essentially the same story from last year: Fed: Loans to Poor People Did Not Cause Crisis. Such reports won’t make any difference; modern-day conservatives are not influenced by evidence.

  • It’s not just conservatives pinning the blame for the crisis on the CRA and/or Fannie/Freddie. Mr. Skeptic himself Michael Shermer has used both these memes to argue that too much government control lead to the financial crisis, in keeping with his libertarian faith.

    You’ll find these argued somewhere in two of his skepticblog posts, if you’re interested in digging.

  • stace

    Through faithfully following in Republican footsteps by re-appointing economic crazyman Alan Greenspan as head of the Federal Reserve, for one…

    Economic crazyman? But I thought that being a disciple of Ayn Rand, he would be ruled by rational self-interest, not craziness.

  • unbound

    @14 – I do think you have pointed out the heart of the problem some people have in understanding Clinton’s complicity in the matter. Clinton was not a liberal. In another age, he would be a moderate to slightly liberal Republican, but both parties have shifted so far to the right that not everyone understands that the Democratic party are actually moderate conservatives (with occasional flashes of liberalism) and the Republican party are actually extreme conservatives (with occasional flashes of moderate views).

    It would be nice to have a party that was actually for the people of the US. But I don’t see that happening anytime soon when the masses just don’t care to know what is really going on and actually vote for idiots into public office because they don’t want smart people leading.

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