Washington Post:
After President Obama signs into law an overhaul of financial regulation at a ceremony set for Wednesday, his administration will turn to reforming an area at the root of the financial crisis: the U.S. housing market.
Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.
"In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go," said Raphael Bostic, a senior official in the Department of Housing and Urban Development. "You're not going to hear us say that."
My take:
The bureaucrats still don't get it.
The housing debacle and resulting recession could not have happened in the absence of Fannie Mae and Freddie Mac. Fannie and Freddie were central to a debauched mortgage process that appeared to have done away with risk, a central concept in economics and finance.
Risk is present in every transaction. The proper pricing of risk, through interest rates, is the challenge.
In the mortgage bazaar that grew out of the 1977 Community Reinvestment Act, lenders reduced their risk to near-zero by promptly unloading new mortgages to Fannie and Freddie. The intrinsic risk was high in many of those mortgages, but the writers of the mortgages bore almost none of it.
Fannie and Freddie also bore little risk because they sold the mortgages to investment banks, which bundled them and sold them as securities throughout the world.
The only bearers of large risk were the ultimate investors, who weren't aware of their jeopardy until the bubble burst and the value of morgage-based securities plunged.
The history of the debacle, in effect, authors the solution. Abolish Fannie and Freddie. Problem solved.
That won't happen under Democrat control because Fannie and Freddie also serve as hiring halls for out-of-work Democrats and a rich source of campaign contributions. It should, however, be a talking point for Republicans as they try to capture control of the House and Senate in November.
Many taxpayers, no doubt, would see the sale or closure of Fannie and Freddie as tantamount to escaping the aroma of a skunk.
Showing posts with label Community Reinvestment Act. Show all posts
Showing posts with label Community Reinvestment Act. Show all posts
Wednesday, July 21, 2010
Friday, July 16, 2010
His new book will enable George Bush to elbow his way into the headlines just in time to muddy a conservative GOP message
George Bush has positioned himself as the author of this year's October Surprise. To surprise us, however, he would have to come across as a conservative, and nothing in his past suggests such an unlikely course.
He has not received the discredit he deserves for the sorry condition of the American economy, the gigantism of its government, or the high-handedness that Washington officials demonstrate toward American citizens and state and local institutions on a daily basis.
We are where we are because Bush took it upon himself, as president, to destroy the traditional housing market so that banks, other financial institutions, and two hiring halls for out-of-work Democrats, Fannie Mae and Freddie Mac, could compassionately distribute house mortgages to anyone who asked.
The vehicle for Bush's largesse, the Community Reinvestment Act, had already been in effect for 23 years when Bush assumed the presidency in 2001. In truth, however, it had never amounted to much, as is apparent in the accompanying illustration. That soon changed, as Bush called for higher and higher increases in home ownership.
Some questions remain unanswered. Why, for instance, was it compassionate to encourage borrowers to obtain mortgages when there was little or no chance that the borrowers could keep up the monthly payments?
Once the housing bubble had materialized, why was it compassionate to continue pushing out high-risk mortgages given the likelihood of an eventual bursting of the bubble?
In deliberately destroying a traditional housing market that had relied largely on local lenders who could assess credit worthiness, Bush and his allies contravened free market principles that were central to the founding. Through elections and commerce, the founders left it to individuals and families to determine who had power, what was produced, and who was eligible to borrow money.
Bush's free-wheeling, high-risk mortgage bazaar ran directly counter to that carefully crafted system.
Now, while still reeling from the housing market collapse, we have to contend with an even more anti-market regime that believes government knows best, even as Arlington National Cemetery tries to correcr errors by matching corpses with the correct headstones.
While the arrogance, fascism and incompetence of the Obama administration is annoying, to say the least, it is having the effect anticipated by the founders. Free market, small government conservatives are again ascendant in the Republican Party, while the Tea Party provides strong conservative voices inside and outside the party.
Republicans appear to be heading for triumph in the November election.
So, the question arises: why is Bush publishing his book, Decision Points, shortly after the election, knowing that the publisher will start isssuing teasers to build interest in the book weeks earlier, during the campaign? A president known, and sometimes reviled, as a Big Government, big spending Republican apostate will elbow his way into the headlines at a time when a chastised Republican Party, under the watchful eye of the Tea Party, has a chance to return to power and place a tether on runaway government.
By doing so, Bush will muddy the Republican message, perhaps deliberately. After all, if the Republican Party makes a right turn, no more Bushes will be elected president. Conservatism is not to be found in their genes.
Steve Sailer in VDare.com
...the Community Reinvestment Act was negligible until the 1990s. And it was still small potatoes until the Clinton “reforms” of 1995 and the rise of well-organized pressure groups of the kind affiliated with the NCRC.
But the biggest flood of CRA assurances came during the presidency of George W. Bush, who repeatedly called in 2002-2004 for 5.5 million more minority homeowners by 2010. Cumulative bank pledges (typically doled out over ten years) grew from $1.85 trillion in 2002 to $4.20 trillion in 2004.
Indeed, total CRA commitments increased by $1.63 trillion in 2004 alone, the first year of the Housing Bubble.
(snip)
In 2004 alone, banks publicly promised to lend over the next decade to CRA-qualified minority and lower income neighborhoods the sum of $1,630,000,000,000.00.
That’s a big number.
And those kind of numbers put a lot of upward pressure on home prices as they got incorporated into expectations. Not surprisingly, the subsequent mortgage defaults that plunged the world into economic crisis are disproportionately concentrated in CRA-covered minority and lower income communities.
Using the NCRC’s data, I created this more readable graph to show CRA agreements by year from 1977-2004:
...the CRA has contributed to the mortgage disaster through a more subtle “selection effect”.
Assume there are two distinct kinds of bankers:
Optimists who think lending more money to CRA-approved folks will turn out to be profitable.
Pessimists who don’t.
Of course, there are always a lot of people in the middle without strong opinions who will go with the flow toward whichever camp seems to be gaining in money, power, and popularity.
If you were a Pessimist who didn’t believe that the government’s favored borrowers were likely to pay their mortgages, the CRA couldn’t make you lend to them. But if you didn’t play ball with the CRA, you couldn’t buy other banks, which is the easiest way for a bank to get big.
And the CEOs of big banks get paid more:
"There continues to be a high correlation between CEO compensation and bank asset size, and no correlation with three-year [earnings-per-share] growth and shareholder returns,’ Citigroup banking analyst Ruchi Madan wrote in a May 6, 2005 report on bank executive pay.”[Are reforms working? Experts say link between pay, performance is lacking, By Len Boselovic, Pittsburgh Post-Gazette, May 15, 2005]
See how it works?
Not surprisingly, over the years the CRA’s chokehold on mergers changed the culture of banking. The most powerful and highest paid executives publicly saluted the CRA, while the CEOs who thought it was politically correct nonsense were relegated to the sidelines in the great game of mergers and acquisitions.
The optimists who agreed with Presidents Clinton, Bush, and Obama that “underserved” minorities would somehow come up with the scratch to pay off their mortgages were allowed to build empires, while the pessimists were not. Those in the middle camp went with the flow and started believing the CRA propaganda.
Q. Whom do we want to win: the Optimists or the Pessimists?
A. Neither! We want a financial system in which the realists succeed and wind up in positions of power. Whether the realists will turn out to be this moment’s Optimists or the Pessimists is not something we should decide ahead of time.
But, that’s exactly what the Community Reinvestment Act does. It puts the government’s thumb heavily on the scale on the side of the Optimists, with, as we’ve seen, catastrophic results.
It’s time to repeal the CRA.
And it’s long past time to recognize the reality of human differences.
In 2006, commenting on Iraq, I wrote:
“Not for the first time, our public class’s refusal to think rationally about race and ethnic differences had resulted in bad—in this case, catastrophic—public policy.”
He has not received the discredit he deserves for the sorry condition of the American economy, the gigantism of its government, or the high-handedness that Washington officials demonstrate toward American citizens and state and local institutions on a daily basis.
We are where we are because Bush took it upon himself, as president, to destroy the traditional housing market so that banks, other financial institutions, and two hiring halls for out-of-work Democrats, Fannie Mae and Freddie Mac, could compassionately distribute house mortgages to anyone who asked.
The vehicle for Bush's largesse, the Community Reinvestment Act, had already been in effect for 23 years when Bush assumed the presidency in 2001. In truth, however, it had never amounted to much, as is apparent in the accompanying illustration. That soon changed, as Bush called for higher and higher increases in home ownership.
Some questions remain unanswered. Why, for instance, was it compassionate to encourage borrowers to obtain mortgages when there was little or no chance that the borrowers could keep up the monthly payments?
Once the housing bubble had materialized, why was it compassionate to continue pushing out high-risk mortgages given the likelihood of an eventual bursting of the bubble?
In deliberately destroying a traditional housing market that had relied largely on local lenders who could assess credit worthiness, Bush and his allies contravened free market principles that were central to the founding. Through elections and commerce, the founders left it to individuals and families to determine who had power, what was produced, and who was eligible to borrow money.
Bush's free-wheeling, high-risk mortgage bazaar ran directly counter to that carefully crafted system.
Now, while still reeling from the housing market collapse, we have to contend with an even more anti-market regime that believes government knows best, even as Arlington National Cemetery tries to correcr errors by matching corpses with the correct headstones.
While the arrogance, fascism and incompetence of the Obama administration is annoying, to say the least, it is having the effect anticipated by the founders. Free market, small government conservatives are again ascendant in the Republican Party, while the Tea Party provides strong conservative voices inside and outside the party.
Republicans appear to be heading for triumph in the November election.
So, the question arises: why is Bush publishing his book, Decision Points, shortly after the election, knowing that the publisher will start isssuing teasers to build interest in the book weeks earlier, during the campaign? A president known, and sometimes reviled, as a Big Government, big spending Republican apostate will elbow his way into the headlines at a time when a chastised Republican Party, under the watchful eye of the Tea Party, has a chance to return to power and place a tether on runaway government.
By doing so, Bush will muddy the Republican message, perhaps deliberately. After all, if the Republican Party makes a right turn, no more Bushes will be elected president. Conservatism is not to be found in their genes.
Steve Sailer in VDare.com
...the Community Reinvestment Act was negligible until the 1990s. And it was still small potatoes until the Clinton “reforms” of 1995 and the rise of well-organized pressure groups of the kind affiliated with the NCRC.
But the biggest flood of CRA assurances came during the presidency of George W. Bush, who repeatedly called in 2002-2004 for 5.5 million more minority homeowners by 2010. Cumulative bank pledges (typically doled out over ten years) grew from $1.85 trillion in 2002 to $4.20 trillion in 2004.
Indeed, total CRA commitments increased by $1.63 trillion in 2004 alone, the first year of the Housing Bubble.
(snip)
In 2004 alone, banks publicly promised to lend over the next decade to CRA-qualified minority and lower income neighborhoods the sum of $1,630,000,000,000.00.
That’s a big number.
And those kind of numbers put a lot of upward pressure on home prices as they got incorporated into expectations. Not surprisingly, the subsequent mortgage defaults that plunged the world into economic crisis are disproportionately concentrated in CRA-covered minority and lower income communities.
Using the NCRC’s data, I created this more readable graph to show CRA agreements by year from 1977-2004:
...the CRA has contributed to the mortgage disaster through a more subtle “selection effect”.
Assume there are two distinct kinds of bankers:
Optimists who think lending more money to CRA-approved folks will turn out to be profitable.
Pessimists who don’t.
Of course, there are always a lot of people in the middle without strong opinions who will go with the flow toward whichever camp seems to be gaining in money, power, and popularity.
If you were a Pessimist who didn’t believe that the government’s favored borrowers were likely to pay their mortgages, the CRA couldn’t make you lend to them. But if you didn’t play ball with the CRA, you couldn’t buy other banks, which is the easiest way for a bank to get big.
And the CEOs of big banks get paid more:
"There continues to be a high correlation between CEO compensation and bank asset size, and no correlation with three-year [earnings-per-share] growth and shareholder returns,’ Citigroup banking analyst Ruchi Madan wrote in a May 6, 2005 report on bank executive pay.”[Are reforms working? Experts say link between pay, performance is lacking, By Len Boselovic, Pittsburgh Post-Gazette, May 15, 2005]
See how it works?
Not surprisingly, over the years the CRA’s chokehold on mergers changed the culture of banking. The most powerful and highest paid executives publicly saluted the CRA, while the CEOs who thought it was politically correct nonsense were relegated to the sidelines in the great game of mergers and acquisitions.
The optimists who agreed with Presidents Clinton, Bush, and Obama that “underserved” minorities would somehow come up with the scratch to pay off their mortgages were allowed to build empires, while the pessimists were not. Those in the middle camp went with the flow and started believing the CRA propaganda.
Q. Whom do we want to win: the Optimists or the Pessimists?
A. Neither! We want a financial system in which the realists succeed and wind up in positions of power. Whether the realists will turn out to be this moment’s Optimists or the Pessimists is not something we should decide ahead of time.
But, that’s exactly what the Community Reinvestment Act does. It puts the government’s thumb heavily on the scale on the side of the Optimists, with, as we’ve seen, catastrophic results.
It’s time to repeal the CRA.
And it’s long past time to recognize the reality of human differences.
In 2006, commenting on Iraq, I wrote:
“Not for the first time, our public class’s refusal to think rationally about race and ethnic differences had resulted in bad—in this case, catastrophic—public policy.”
Thursday, April 22, 2010
Goldman Sachs helped to blow up a 33-year-old social engineering project; now it must pay
Why is the Obama administration pursuing Goldman Sachs for enabling financial transactions between sophisticated, consenting adults?
Because the financial instruments at issue blew up a 33-year-old social engineering project that destroyed markets in pursuit of an unreachable liberal objective: universal home ownership.
Goldman Sachs devised those complex investments.
The campaign for universal home ownership began in 1977, when President Jimmy Carter secured enactment of the Community Reinvestment Act, which prohibited lenders from red-lining, a practice that denied home mortgages to residents of high-risk neighborhoods.
Over time, the CRA movement spilled out of its original constituency, the conspicuously compassionate, as radicals from ACORN and other activist organizations joined the fray, gaining legal sanction to browbeat bankers and picket lenders who refused to confirm to the growing demands for mortgage accomodation.
Still, the CRA remained a modest effort by federal government standards, From 1977 through 1991, only $8.8 billion was committed under the CRA. Then Democrat Bill Clilnton became president and business picked up. From 1992 through 2005, the first year of George Bush's second term, $4.2 trillion in CRA loans went out the door.
The concept of risk apparently had been erased from the mortgage industry. Local lenders could bend to pressure for loans and then wash their hands of risk by immediately selling those loans to Freddie Mac or Fannie Mae, which were backed by the federal treasury and supported by the political class. That was the first step in the process of bundling mortgages as securities, a process that resulted in mortgages from Pequot Lakes and Tuscaloosa finding eager buyers in Madrid.
The U.S. housing market sizzled.
But one savvy investor, a hedge fund operator in New York, wasn't buying it. John Paulson studied records of the bundled mortgages and made a list of the ones he considered most likely to go bad through default. Then he persuaded Goldman Sachs to craft securities based on the suspect mortgages and bet against the market by selling them short. That is, he sold securities without first buying them.
Paulson's trading was prophetic. When the housing market collapsed, Paulson earned billions of dollars, closing out his transactions by buying back the Goldman Sachs securities for pennies on the dollar. He sold high, then bought low, reversing the usual process.
What troubles sophisticated observers is this. The securities that Paulson shorted were bought by sophisticated, willing investors. Neophytes don't participate in short sale transactions. So what's the problem? Why did the Securities and Exchange Commission vote, 3 to 2, in favor of legal action against Goldman?
Here's a thought. In essence, the CRA was a colossal social engineering project. When it was enacted, and for many years thereafter, a high-risk borrower could get a loan only by paying a higher-than-average interest rates. In recent years, however, the CRA and subsequent legislation, court decisions and rabble rousing tactics reduced the reliance on interest rates as compensation for high risk.
During the Bush administration the Federal Reserve kept interest rates so low that more and more high-risk borrowers could get loans. As social engineering, the CRA was a success story.
Now, the Obama agenda is largely made up of social engineering projects designed to overcome market forces and make scarce resources available to all, whether they want them or not, whether they can afford them or not. Obamacare, for instance, would force the young and healthy to buy health care insurance even though many would prefer to take their chances and spend their money on something else. One result will be more generational theft, with the young forced to buy insurance they will not need.
Coming soon: cap and trade, which will require consumers to alter preferences and manufacturers to bear increased costs, even though the science behind global warming theory has been thoroughly discredited. In recent years, global warming has become the most powerful social engineering project of our time.
But that project runs counter to market forces, which require least cost solutions. Cap and trade would raise costs, and prices, for many of the things people buy and use. To secure enactment, the Obama administration will have to use thuggish tactics, as it did to pass Obamacare, bribing members of congress to vote against the desires of their constituents.
The SEC's lawsuit against Goldman Sachs may cause opponents to think twice about going up against the White House.
Because the financial instruments at issue blew up a 33-year-old social engineering project that destroyed markets in pursuit of an unreachable liberal objective: universal home ownership.
Goldman Sachs devised those complex investments.
The campaign for universal home ownership began in 1977, when President Jimmy Carter secured enactment of the Community Reinvestment Act, which prohibited lenders from red-lining, a practice that denied home mortgages to residents of high-risk neighborhoods.
Over time, the CRA movement spilled out of its original constituency, the conspicuously compassionate, as radicals from ACORN and other activist organizations joined the fray, gaining legal sanction to browbeat bankers and picket lenders who refused to confirm to the growing demands for mortgage accomodation.
Still, the CRA remained a modest effort by federal government standards, From 1977 through 1991, only $8.8 billion was committed under the CRA. Then Democrat Bill Clilnton became president and business picked up. From 1992 through 2005, the first year of George Bush's second term, $4.2 trillion in CRA loans went out the door.
The concept of risk apparently had been erased from the mortgage industry. Local lenders could bend to pressure for loans and then wash their hands of risk by immediately selling those loans to Freddie Mac or Fannie Mae, which were backed by the federal treasury and supported by the political class. That was the first step in the process of bundling mortgages as securities, a process that resulted in mortgages from Pequot Lakes and Tuscaloosa finding eager buyers in Madrid.
The U.S. housing market sizzled.
But one savvy investor, a hedge fund operator in New York, wasn't buying it. John Paulson studied records of the bundled mortgages and made a list of the ones he considered most likely to go bad through default. Then he persuaded Goldman Sachs to craft securities based on the suspect mortgages and bet against the market by selling them short. That is, he sold securities without first buying them.
Paulson's trading was prophetic. When the housing market collapsed, Paulson earned billions of dollars, closing out his transactions by buying back the Goldman Sachs securities for pennies on the dollar. He sold high, then bought low, reversing the usual process.
What troubles sophisticated observers is this. The securities that Paulson shorted were bought by sophisticated, willing investors. Neophytes don't participate in short sale transactions. So what's the problem? Why did the Securities and Exchange Commission vote, 3 to 2, in favor of legal action against Goldman?
Here's a thought. In essence, the CRA was a colossal social engineering project. When it was enacted, and for many years thereafter, a high-risk borrower could get a loan only by paying a higher-than-average interest rates. In recent years, however, the CRA and subsequent legislation, court decisions and rabble rousing tactics reduced the reliance on interest rates as compensation for high risk.
During the Bush administration the Federal Reserve kept interest rates so low that more and more high-risk borrowers could get loans. As social engineering, the CRA was a success story.
Now, the Obama agenda is largely made up of social engineering projects designed to overcome market forces and make scarce resources available to all, whether they want them or not, whether they can afford them or not. Obamacare, for instance, would force the young and healthy to buy health care insurance even though many would prefer to take their chances and spend their money on something else. One result will be more generational theft, with the young forced to buy insurance they will not need.
Coming soon: cap and trade, which will require consumers to alter preferences and manufacturers to bear increased costs, even though the science behind global warming theory has been thoroughly discredited. In recent years, global warming has become the most powerful social engineering project of our time.
But that project runs counter to market forces, which require least cost solutions. Cap and trade would raise costs, and prices, for many of the things people buy and use. To secure enactment, the Obama administration will have to use thuggish tactics, as it did to pass Obamacare, bribing members of congress to vote against the desires of their constituents.
The SEC's lawsuit against Goldman Sachs may cause opponents to think twice about going up against the White House.
Friday, April 16, 2010
Now that the CRA is again in the news, here's a little awkward history on that fateful lunacy
From Vdare.com
...the Community Reinvestment Act was negligible until the 1990s. And it was still small potatoes until the Clinton “reforms” of 1995 and the rise of well-organized pressure groups of the kind affiliated with the NCRC.
But the biggest flood of CRA assurances came during the presidency of George W. Bush, who repeatedly called in 2002-2004 for 5.5 million more minority homeowners by 2010. Cumulative bank pledges (typically doled out over ten years) grew from $1.85 trillion in 2002 to $4.20 trillion in 2004.
Indeed, total CRA commitments increased by $1.63 trillion in 2004 alone, the first year of the Housing Bubble.
Tardy: Texas congressman seeks repeal of disastrous Community Reinvestment Act
Rep. Jeb Hensarling, R-Texas, has introduced legislation to repeal the 1977 Community Reinvestment Act, a damaging relic from Jimmy Carter's presidency. The CRA empowered left-wing activist groups like ACORN and the Greenlining Institute to use claims of racism to force banks and other financial institutions to make loans and mortgages on the basis of the ethnic and demographic makeup of neighborhoods instead of the creditworthiness of borrowers. At the time, this tool of political blackmail was cleverly camouflaged by its proponents behind the righteous cause of ending redlining, the practice in which bankers allegedly drew red lines around certain local neighborhoods, putting them off-limits for loans and mortgages. The redlined areas were typically populated by minority residents, usually African-Americans or Hispanics.
But the CRA didn't actually ban redlining, it just reversed the money flow's direction, as decisions on loans and mortgages are still made on the basis of the ethnic identity of the recipients' neighborhoods. (Ultimately, this approach led banks and commercial lenders to invest massively in subprime mortgages backed by Fannie Mae and Freddie Mac, which in turn caused the economic meltdown of 2008). The CRA gave ACORN, Greenlining and legions of similar groups leverage to extort loans and mortgages in return for not conducting devastating PR and political pressure campaigns designed to libel offending banks and bankers as racists. If federal regulators could be convinced that a bank was guilty of racism, it could be prevented from acquiring or merging with other banks. The law created a powerful incentive for banks to pay off the activists groups to make them "go away." When mobsters do the same thing, prosecutors call it a "protection racket." When groups like the Greenlining Institute do it, they call it "social justice."
But the CRA didn't actually ban redlining, it just reversed the money flow's direction, as decisions on loans and mortgages are still made on the basis of the ethnic identity of the recipients' neighborhoods. (Ultimately, this approach led banks and commercial lenders to invest massively in subprime mortgages backed by Fannie Mae and Freddie Mac, which in turn caused the economic meltdown of 2008). The CRA gave ACORN, Greenlining and legions of similar groups leverage to extort loans and mortgages in return for not conducting devastating PR and political pressure campaigns designed to libel offending banks and bankers as racists. If federal regulators could be convinced that a bank was guilty of racism, it could be prevented from acquiring or merging with other banks. The law created a powerful incentive for banks to pay off the activists groups to make them "go away." When mobsters do the same thing, prosecutors call it a "protection racket." When groups like the Greenlining Institute do it, they call it "social justice."
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