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The sub-prime crisis and why differing political views on the cause are a problem.

Both sides of this argument have valid points and as strange as it may sound, both sides are corect.

Yes the changes and strong enforcement of the CRA was responsible, and yes laws like the CFMA that loosened investment regulations were responsible. But repealing portions of Glass Steagal, as I've so often heard is responsible, gave banks other avenues to generate profit, but didn't play a significant role in causing the crisis.

In simple, general terms, this is what went down:

1. When the Clinton Administration began in 1993, one of their goals was to increase minority home ownership.

2. To achieve that goal they made adjustments to the CRA, changed the methods in which compliance was determined, and the Justice Department began strictly enforcing compliance.

a) Method change - How bank compliance of the CRA was determined, was changed from being "process" based (whether banks had a process in place designed to achieve more community-based lending) to "performance" based (whether such lending actually occurred).

b) Enforcement - The Justice Department (Janet Reno) took a hard line stance and began taking legal action against both banks (mortgage lenders) and insurance companies (insurers of mortgages) who were either accused of (by community organizations) or seen by them, as engaging in "redlining" (the practice of not issuing many loans in certain high risk neighborhoods), unfair pricing, or underwriting discrimination (the qualifications of credit applicants). According to Reno herself, in the Administration's first 5 years they "filed and settled 13 major fair lending lawsuits". For example, they filed suit against Allbank of New York who they "alleged" had "refused to make loans" in high risk "urban minority enclaves". The Justice department forced Allbank to agree to issue $55 million in loans to people in those high risk neighborhoods, and do so at below-market rate.​

3. This created a problem for banks, putting them in financial risk. The problem was, those (sub-prime) loans couldn't be sold to or secured by, companies like Fannie Mae and Freddie Mac, as was the standard practice for small and localized banks. They also couldn't get them insured through companies like AIG, The reason for both was because the loans simply didn't meet their standards and were deemed too risky. This forced banks to carry those loans in house, subjecting them to significant financial risk if too many defaulted.

4. That lead to pressure being put on the Administration and congress by lenders, to loosen banking restrictions that would allow them other avenues of income to offset some of that risk, and it also lead to...

5. The Clinton Administration pressuring companies like Fannie Mae into lowering their standards, purchasing risky sub-prime mortgages from banks, and guaranteeing them in order to protect the banks as well as insurers.

6. With strong bi-partisan support congress passed, the senate approved, and President Clinton signed into law, several pieces of legislation that eased restrictions and/or removed regulations in the banking and investment industries.

7. Everyone was happy... Until it all came crashing down a decade later.

****

So you have people like myself, who blame the CRA and the changes made to it during the Clinton Administration for the financial crisis, and you have others who blame deregulation and corporate greed for the crisis.

The fact is, both are right, but...

While those on my side of the argument acknowledge the chain of events that lead to the crisis, seemingly out of political convenience, those on the other side do not. The fact is, without the minority home ownership agenda being pushed by the Clinton Administration, it's very likely the deregulation would have never gained traction, never gotten bi-partisan approval in congress, nor been signed into law by President Clinton.

If we don't want to see this type of thing happen again, people had better start telling the whole story, or history will surely repeat itself.
 

AdamT

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This is just the same bogus argument in new clothes, and it is factually incorrect. The root of the financial crisis had nothing to do with CRA. The funadmental problem was that banks were offloading mortgages to unwary investors -- exactly the opposit of what you hypothesize. AIG had virtually NO standards for issuing swaps, just as the private (non-CRA regulated) lending market had virtually NO standards for issuing mortgages.

Lenders weren't forced by the government to issue subprime loans. Again, that is just the opposite of what actually happened. The unregulated lenders were issuing supbrime at such a furious rate that they were putting F&F out of business. F&F and the regulated lenders responded, grudgingly, by expanding their subprime offerings and holdings.

On the whole the subprime loans given out under CRA were of higher quality than the loans given out in the unregulated market. Accordingly, they had a much lower foreclosure rate. Thus, if there had been no CRA the crisis would have been worse rather than better. The borrowers who got loans under CRA had no barrier to entry, because private lenders weren't turning away anyone, but they would have gotten worse terms.

It's true that Gramm Leach Bliley and the CFMA weren't triggers for the crisis, but that's only because they were essentially just a formal recognition of a state of affairs that had evolved over the course of 20 years. At the end of the day the crisis was a result of insufficient regulation and insufficient enforcement of regulations.
 

Grim17

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Again, it's people like you that put politics first and refuse to accept the truth, that assures we will one day repeat the same mistakes again.

What I stated about the Clinton Administration, their agenda, their changing of the CRA, their strict enforcement, and their pressuring GSE's like Fannie Mae into lowering their standards to accommodate those risky loans, is absolutely factual. It's what lead to the bi-partisan support for the deregulation measures, and why Clinton signed those measures into law.

Keep playing games all you like, it will only lead to more public ignorance and pave the way for the next economic crisis that our government causes.
 

AdamT

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Forest < -- > Trees. CRA had nothing to do with the financial meltdown.
 

pbrauer

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President Bush wasn't pushing home ownership to the poor?
 
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RabidAlpaca

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You're absolutely right, Grim, it's all about cause and effect. The banks were encouraged/forced ("Oh, you won't loan to that poor black neighborhood, are you RACIST!?") by the CFA to take subprime loans, and being the slick, rich bankers that they are, they found a way to reduce their risk: by creating credit default swaps. They created a market where they could then offload their new sub-prime risk onto other institutions. This new market gave lending institutions a blank check and like kids in a candy store they threw money at everyone who walked in their doors. All the while the federal government was cheering them on from the sidelines.

The banks certainly carry their share of the blame, but the federal government is without a doubt the instigator in all of this.
 
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AdamT

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So that explains why all of the investigations into the crisis have determined that CRA was not implicated? How does your theory handle the fact that the vast majority of the bad subrime loans were given out by private lenders not subject to CRA? What is the explanation for the fact that the subprime crisis was mainly a suburban phenomenon ... when CRA only addresses inner city lending? Do you honestly believe that poor people were responsible for the trillions in affected mortgages?

This theory is total garbage.
 

RabidAlpaca

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AdamT;bt2022 said:
So that explains why all of the investigations into the crisis have determined that CRA was not implicated? How does your theory handle the fact that the vast majority of the bad subrime loans were given out by private lenders not subject to CRA? What is the explanation for the fact that the subprime crisis was mainly a suburban phenomenon ... when CRA only addresses inner city lending? Do you honestly believe that poor people were responsible for the trillions in affected mortgages?

This theory is total garbage.
How could poor people be responsible for trillions in affected mortgages, that's just silly. I don't ever remember blaming poor people, actually. I remember blaming politicians and bankers.

The bankers certainly took the situation and ran with it, but to say that the politicians had no play in it is rather ridiculous. Encouraging/forcing (whichever you choose) banks to lend to people who can't afford it is a dangerous practice.

Maybe instead we should recognize that poor people can't pay back large sums of money, and should avoid lending said large sums of money to them, you know, like the banks were doing prior to the CRA.
 

AdamT

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See, the thing is that there was never a real problem with banks getting paid back under CRA. Even in the real estate meltdown CRA subprime loans had a significantly lower default rate than non-CRA subprime loans. That's in part because CRA specifically requires lenders to take into consideration the ability of the borrower to repay.
 

CalGun

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Banks were no doubt encouraged to make loans they never should have and thanks to the allowance of plenty of points and fees they eagerly did. The origin of that belongs to Clinton, but too many have left sided blinders on to see that.
 

Middleground

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Seriously, Grim... never heard of predatory lending? Some of these lending companies would nab people off the street and convice them they could afford a house! From wiki:

Three important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2–28 loan, that mortgage lenders sold directly or indirectly via mortgage brokers.[46] On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.[47]

Amazing that you blame Bill Clinton for this. Actually, it's incredibly laughable.
 

UtahBill

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The poor have to be part of the problem.....when you can suddenly get a loan by lying, or accepting the mortgage broker's lies when put on the application, you are part of the problem. And this is nothing new....In 1977 I had neighbors in Idaho who had FHA 235 homes that were in violation of the standards....you could have a garage, or a basement, but not both. Most opted for the basement as a garage is easily added later. You had to have inexpensive siding, but not brick or stone. Your lot size was limited. My next door neighbor's house was in violation of all 3, AND even tho the govt was paying most of the loan's interest, he was encourage to use the full interest paid as a deduction on his income taxes.
 

JP Hochbaum

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Grim17;bt2014 said:
Again, it's people like you that put politics first and refuse to accept the truth, that assures we will one day repeat the same mistakes again.

What I stated about the Clinton Administration, their agenda, their changing of the CRA, their strict enforcement, and their pressuring GSE's like Fannie Mae into lowering their standards to accommodate those risky loans, is absolutely factual. It's what lead to the bi-partisan support for the deregulation measures, and why Clinton signed those measures into law.

Keep playing games all you like, it will only lead to more public ignorance and pave the way for the next economic crisis that our government causes.
This is just a lie the CRA loans were actually of the lowest default rates than all other mortgages.

The majority of sub=rime and defaults were done by mortgage brokers not even under the CRA.

If anyone is being partisan here it is you.
 
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