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« NC healthcare forum | Main | Burn before reading »

Mar 20, 2012


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Do you really believe the real estate boom markets of Florida and California are reliable bellweathers especially considering the cost of housing in both places put properties out of reach of many who might otherwise qualify for CRA guarantees elsewhere ?

Ed Cone

Sure. These epicenters of the bubble seem like logical places to look for causes of the bubble.

As the report says, "We focus on California and Florida as these states had large shares of subprime mortgage originations and experienced a large share of defaults in the aftermath of the subprime boom." The authors have no trouble stating generalized conclusions based on these sample markets.

I have not seen any data showing the relatively small and circumscribed low-interest programs leading to mass securitization of terrible loans.

It is clear that banks were doling out terrible loans to keep their mortgage machine rolling.


Also nonbanks like Countrywide, which weren't bound by CRA (and escaped other kinds of regulation as well).

Spag, if you want a detailed and balanced look, read Barry Ritholtz's Bailout Nation. There's blame enough to go around on this, and he seems to apportion it with an eye toward data and fairness.


But subprime mortgages aren't necessarily CRA mortgages. Everyone knows that the California market in particular had vastly inflated real estate prices which would tend to price out many people from CRA loans because of the borrowing limitations.

I think a better analysis might involve states like Ohio, Texas, or here in North Carolina where there was growth during the boom, but housing prices were not grossly inflated.

But it is also important to remember that the study is about whether CRA subprimes stimulated securities investment- not the effect that defaults had after the fact.

From the study: "While it is unquestionable that Fannie Mae and Freddie Mac held substantial amounts of subprime mortgages, and that their holdings of these securities played a significant role in their demise, the evidence in this paper refutes the claim that the affordable housing mandates were responsible for the risk-taking behavior of these two institutions."

Somewhere between "CRA had nothing to do with it" and "CRA caused it" lays the truth.

Andrew Brod

Spag, as the St. Louis Fed paper puts it, "No."

The truth is somewhere in the middle only if you change the question. Scratch that--even then it's not. The question this paper addresses is whether "affordable housing policies influenced origination or affected prices of subprime mortgages." The researchers go to where origination and pricing issues were most acute and they find no effect. You'd have them go where those issues were least acute.

I presume most people see the logical problem already, but let's carry on with this. Suppose the researchers would have found a "CRA effect" in Ohio, Texas, and North Carolina. You might call that a "somewhere in the middle" result. I'd call it bupkis. Even if affordable-housing policies had some small origination and pricing effects there (and they'd have to be small given that you've imagined targeting less-bubblicious states), the reasonable reaction would be to see further evidence against the claim that affordable-housing policies were a cause of the crisis.

Are you really going to go in the polifrog, um, I mean opposite, direction?

Andrew Brod

"But it is also important to remember that the study is about whether CRA subprimes stimulated securities investment- not the effect that defaults had after the fact."

Again, no. Or in any case, only by implication. This study is not about the market for MBSs, but about the mortgage market proper: pricing and origination.


Nice try at the snarky baiting, Andrew, but I'm not playing. You are missing my point. If housing prices in California are inflated by 200% during the boom and only 50% in North Carolina, fewer people in California are going to qualify for CRA subprimes because they are priced out of the market because of borrowing limitations.

Simply put, are you more likely to get a cross section of CRA subprimes in Silicon Valley or in Raleigh ? Trying to qualify for a CRA subprime when you make $40,000 per year and the average cost of a home is $400,000 is quite different than trying to qualify when you make $40,000 per year and the average cost of a home is $200,000.

Even assuming California and Florida are reasonable studies, the article is about the effect that CRA's had on investments in MBS. That does not address the default rates. It's possible they had little effect on investment behavior but a large effect on lending behavior and that resulted in an increased number of defaults.

It's too easy to make it appear as though the study greenlights the CRA when that is not what it does at all.


"CRA subprimes stimulated securities investment"

If you switch that around, you'll be a lot closer to the truth.

Andrew Brod

It's not snark. It's logic. And I can tell that you're not playing.

Ed Cone

Let's all work on establishing the good relationships that allow a little jostling back and forth without derailing threads.

Re the report: Scale matters a lot here. If a hypothesized cause of the systemic failure is shown to be absent in a sufficient percentage of cases, then that hypothesized cause probably was not a meaningful contributor to the failure.

One wrong lesson to draw from this redundant nail in the CRA-did-it coffin would be that government/GSE were in no way implicated in the disaster. But we can better focus on what actually went wrong, and maybe even fix it, if we move past discredited suspects.


Again Ed, the truth lies somewhere between "CRA did it" and "CRA had nothing to do with it".

Anecdotaly, I can tell you that many bankruptcy clients are CRA qualifiers and had no business getting loans based on their incomes- particularly considering adjustable rates. That's what put many into bankruptcy.

Ed Cone

I don't see evidence to support that truth-lies-in-the-middle view of CRA as a cause of the systemic failure.


Why do you give this report credit? Not only is the conflict of interest is large, but claiming that the CRA had no impact - none - is an indication of dishonesty that supports the notion that the conflict of interest involved is playing a role.

"No.", however, does produce a wonderful sound bite if the goal is a simple message.


How does common sense escape so many.....

Dave Ribar


Conflict of interest?

Two of the authors are from the research division of the St. Louis Fed and the other author is from the Business School at Baruch College. Could please explain their conflicts?

Andrew Brod

Paging Dr. Paul for the answer...


The CRA had nothing to do with subprime mortgages going from 10% to 30% of the market. It had more to do with feeding the MBS beast on Wall St., and the lenders, speculators, realtors et al were more than happy to play along.

The bubble burst.


Dave Ribar:

Could please explain their conflicts?

Does the Fed not set interest rates? Did it not intend to stimulate housing with "cheap money"?

Did our government not also push cheap housing via the CRA by way of "cheap money"?

Did our government not also reduce barriers to getting their cheap money from banks and into the hands of people who wanted to buy "cheap housing" with "cheap money"?

Did government not facilitate mortgage bundling so that banks could more easily sell mortgage assets and use those proceeds to lend more "cheap money"?

Is Baruch College and its staff not dependent on government's "cheap money"?

Our government has spent the last 15 years doling out "cheap money", then in response to a depression the government itself stimulated triples down on "stimulative" "cheap money" as a solution -- and you refuse to view critically a report from a government orifice and a government dependent?


Andrew Brod

I knew it'd be a Paulist blame-the-Fed explanation.

So it's Dave who's delusional, whereas Frog would disqualify anything from researchers connected to government, however tangentially, because he doesn't like that government's policy. That's not how Fed research works, let alone at public universities like Baruch College, but I suppose when one is ignorant of how things work, one assumes that everyone's in on the scam. No point in responding, Dave, you're in on it too.

Frog also doesn't understand how Fed policy works. Cheap money was only one of many causes, and not even the most important cause, of the financial crisis and Great Recession. The government didn't double- or triple-down on cheap money. It followed the market. When the market-clearing interest rate is negative, the Fed has little choice but to "cheapen" money.

But Frog's right that government facilitated mortgage bundling. In trying to impugn the CRA, Frog effectively admits that derivatives regulation was insufficient.

Andrew Brod

And insufficient regulation was an important cause of the financial crisis. This "cheap money" stuff is just an Austrian fetish.


Don't get lost in the conflation. This article does not address defaults, it only addresses the influence of CRA on investment. The crisis in the MBS market was due to defaults.


"This 'cheap money' stuff is just an Austrian fetish."

....as if your economic viewpoint is not the larger and dangerous perversion.


"So it's Dave who's delusional....."

You can take the boy out of Sterling Park, but you can't take the Sterling Park out of the boy.

Andrew Brod

"The crisis in the MBS market was due to defaults."

Well, yeah, but you're making a distinction without a difference. Why do you think those defaults happened? It was mispriced and over-originated mortgages. It was precisely the dysfunction in investment markets that fed back down to mortgage markets. That's why the result that CRA and other affordable-housing policies didn't affect pricing or origination is so important.



however tangentially, because he doesn't like that government's policy.

It has nothing to do with me. I was explaining the conflict of interest Dave requested. The exoneration of government malfeasance should not come from government or those under the influence of lucrative relationships with the government.

And, yes, government spawned bubbles are more damaging than private sector bubbles. When government has been given Keynesian reins over the national economy it must also accept responsibility for the results. It readily claims responsibility when things are going well, but it refuses to accept responsibility when things turn sower. And it is within that dynamic that the danger lurks.

The danger is that government shifts blame to the private sector it incentivized, cajoled or forced to engage in risky business activities while denying any responsibility for its failed Keynesian policies. Where is the moral hazard for governance under this mechanism. There isn't one and the price will be a repetition of the same mistakes we saw made between 1930 and 1936 which created a recession within a recession, the mistakes we have seen in Japan for nearly 20 years and the mistakes in America today.

It is ridiculous to argue government's only wrong choice was deregulation unless you first have as your goal the vilification of the private sector and the benediction of governance.

Andrew Brod

Strawman 101:

Frog: "It is ridiculous to argue government's only wrong choice was deregulation."

Brod: "Insufficient regulation was an important cause of the financial crisis."

Brod: "Cheap money was only one of many causes... of the financial crisis and Great Recession."

And when you have no argument, accuse the other side of "vilifying the private sector." That always works.


The entirety of my comment was not directed to you alone, Doc. In fact, I gave you only the first paragraph then moved on to general commentary.

It ended on a general but very accurate note.

But aside from that:

Brod: "Insufficient regulation was an important cause of the financial crisis."
is an indication not that you blame government, but that government claims a greater proportion of your trust than your fellow citizen, thus it is the private sector you ultimately blame for the regulation you claim is necessary. Therefore, nothing strawman on my part. Retake Strawman 101.

And when you reference:

Brod: "Cheap money was only one of many causes... of the financial crisis and Great Recession."
you admit that your "Paulist blame-the-Fed" comment was a disingenuous attempt to marginalize despite the fact that you agree with him. Apparently you took Deceptive Debating 101.

Whatever, the linked propaganda in the post is just that, propaganda. It has no place in intelligent discussion.

Andrew Brod

I do not agree with him.

Or you.

Dave Ribar


The Fed doesn't "set" general interest rates for the economy, though it has policy tools that affect the interest rate.

The Fed consists of the Board of Governors in Washington, and the regional banks, of which the St. Louis Fed is one.

Monetary policy is decided by the Federal Open Market Committee, which consists of the Federal Reserve Board, the president of the New York Fed, and selected presidents (on a rotating basis) from the other regional banks.

The research department within the St. Louis Fed is distinct from its board and President, which in turn are distinct of the FOMC and FRB.

In addition, the St. Louis Fed (and its research department) has a reputation for "hawkishness" in monetary policy, meaning that it emphasizes inflation control over economic growth.

And of course all of this is completely removed from the CRA, which would have to be the potential source of conflict.

In short, there's no basis whatsoever to your assertion that the authors had a conflict of interest.

David Hoggard

I believe poli's "conflict of interest" claim boils down to this: If any fraction of a person's paycheck is derived from the public's money, that person cannot possibly render an unbiased opinion.

If I'm right, holding such an opinion is about as cynical as it gets.

Dave Ribar


Employees of the St. Louis Fed aren't paid with public (taxpayer) money. The regional federal reserve banks are formally owned by private member banks. The regional banks cover their expenses through their lending operations and other services that they provide to the member banks. Revenues beyond expenses are returned first to the private banks in the form of dividends and secondly to the federal government, so the Federal Reserve System adds to the treasury rather than subtracting from it.

Ed Cone

Kim, when you say "The CRA...had more to do with feeding the MBS beast on Wall St," what are you referring to?

We're talking about a relatively small and regulated program here -- in what sense did it contribute in a meaningful way to feeding the beast?

I don't think the numbers back up your assertion, in terms of either volume or quality of loans.

David Hoggard

Thanks Dave. Unsure why you know of such wonkiness, but it is appreciated information.

With that, then, my revised supposition is that poli is espousing a contrarian's view because that is the only schtick he knows.


Sorry, poor writing skills. The CRA had nothing to do with the housing crisis,I thought that had been well established, the housing crisis is what I meant to refer to as being caused by MBS,spec buying, lenders, etc.... I'm not going to let Fannie and Freddie get a free pass either.

Ed Cone

Thnx for the clarification.

"I'm not going to let Fannie and Freddie get a free pass either."

That's a key point I was trying to make earlier -- harping on CRA is a distraction, and one that might lead people to think that exonerating one program means defending all government/GSE programs.


Hmm. 28 million weak mortgages by 2008, 20.4 million of which were held by government agencies like Fannie and Freddie and by banks due to the CRA.

There is no viable way to argue, as the St. Louis Fed does, that the CRA had no role in government housing policy. Spag is correct to argue that the role of the CRA was somewhere between full responsibility and none. That alone calls their findings in question.

The fact is that without government housing policy which included the Federal Reserve's lowering of interest rates on funds lent to banks which in turn lowered the cost of borrowing from banks(cheap money), which included the CRA that forced banks to make risky loans to those who could not afford them, which included deregulation so that government could more effectively implement its housing policy, the depression we have been suffering under would not have occurred.

The CRA was a part of government housing policy, as was the Fed, as were the banks and as was congress. They are each connected to one another via their their roles and culpability in poor government housing policy, thus when Ribar claims that each participant is independent from the other, he requests a willful suspension of disbelief especially when one defends the actions of the other.

Every single cause of our depression can be traced back to government housing policy which created a bubble that inevitably popped. The CRA was a part of that and arguing otherwise discredits the St. Louis Fed, and those who believe the St. Louis Fed's finding discredit themselves.

Andrew Brod

"There is no viable way to argue, as the St. Louis Fed does, that the CRA had no role in government housing policy."

The St. Louis Fed isn't arguing that. No one's arguing that.

The rest of your comment is just assertion. You believe (you really, really believe!) that lending to low-income borrowers was a significant cause of the financial crisis. In contrast, the Fed researchers provide evidence that it wasn't. That's irrelevant to you, because mere evidence is insufficient to move you off your fervent belief. You're a true believer, and that means you can't be taken seriously.

So go sacrifice a few squirrels to your blame-the-poor-people gods.



The St. Louis Fed isn't arguing that. No one's arguing that.
I'll refer you to the post:
Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?



They should not have said "No." They did.

Not sure what you think I "believe" as you did not reference my claim that I "believe". Furthermore, I never claimed "that lending to low-income borrowers was a significant cause of the financial crisis."

Instead, pointed out that it was part of a larger package of government interference with the housing market that undeniably contributed to a housing bubble, a bubble from which we are now painfully recovering.

Simply put "animal spirits" exist not only in the herds of individual interest, but in government policies that working in concert incite stampede.


The report states that CRA did not cause an increase in MBS investments. Yet, so many CRA loans went into default. These are separate issues regardless of how others try to conflate them.

Ed Cone

My understanding is that CRA loans default at an unspectacular rate, and that they were less likely than other loans to end up securitized, and that the numbers involved simply were not meaningful factors in a systemic crash.

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