Saturday, November 26, 2011

Semi-Busted: The "CRA/Feds/Barney/Clinton Made Us Do It" Housing Myth

Barry's lengthy essay is half-dispositive of the narrative that "CRA (et al) Made Us Do It" vis-a-vis the housing boom/bust.

It certainly didn't help that most elected officials were pushing "everybody owns a home" as some sort of Magic Beans Solution to poverty, crime, drugs, illicit children, and any other social ill.  And it did not help that the Fed's interest-rate policy made mortgage debt attractive. 

(One could argue, by the way, that the earliest cause was the massive entry of women into the workforce, which increased family incomes and gave them a lot of surplus cashflow.  However, after 30 or so years, that increase in incomes (in 1970 dollars) diminished, as the supply of labor increased faster than the demand, reducing incomes for men if measured in 1970 dollars.  When recessions hit in 2000 and 2009-10-11, the effects were devastating.)

But the array of evidence presented in the essay is useful.

The boom and bust was global.  (Chart at the link).  Obviously, US mortgage policy, law, and regulation did NOT have an effect on Birmingham, England, or South Dogpatch, Ireland.  But the boom/bust was present there--and lots of other places.  This is the biggest trump card in Barry's deck, and it is important.

...if the CRA was to blame, the housing boom would have been in CRA regions

This is a weaker argument.  CRA shares some blame; what happened is that CRA made credit available (forced it, perhaps) in some areas.  People bought homes there--but those who SOLD the homes moved to more upscale areas, perhaps with weaker-than-necessary income streams.

Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom

Umnnnhh....even weaker.  It's true that Countrywide--a non-bank--was a Big Playah here--as were many other non-banks (like e.g., Central States Mortgage in Milwaukee.)

However, some of the "non-banks" were subsidiaries of banks.  WellsFargo, USBank, and Chase each had mortgage-banking subsidiaries (non-regulated) which contributed to the problem.  (Chart at the link).

It wasn't Fannie/Freddie until the very end.

Fan/Fred didn't get into the game until '06/'07.  Their standards were much tighter than those of the 'bundlers' and the MBS buyers such as Lehman and BearStearns.  However, they DID get into the game, and it will cost taxpayers a bunch of money.


Jim said...

In its simplest terms, the people who "made" the loans were not accountable for the risk, so they didn't underwrite them in a financially responsible way. Everyone was making money by passing on the risk and turning it into financial instruments that nobody really understood.

As soon as the "smartest" people started to figure out what was happening, rather that work to rectify the situation, they worked to figure out how they could make MORE money when things went bust.

Without proper regulation, banks were allowed to "take" risk without "assuming" risk.

Without proper regulation, financial institutions were able to create and sell financial instruments that they knew would collapse.

In its simplest terms.

Beer, Bicycles and the VRWC said...

As long as the Federal Government buys up mortgages, leaving the taxpayer on the hook, expect mortgage companies to sell more questionable mortgages. It is less a problem of not enough regulation than a problem of too much government "help".