The political origins of the mortgage crisis

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Don Danz traces the roots of the current upheaval in the mortgage industry back to Jimmy Carter's Community Reinvestment Act ("it wasn't the worst piece of needless economic legislation the Democrats had ever hobbled the American people with but, rather, simply a foundation on which bad policy could be built"), CRA changes approved by Bill Clinton and the Democrat-controlled 103rd Congress, requiring lenders to loosen their mortgage underwriting criteria, and Democratic resistance to mortgage industry reforms proposed by George W. Bush in 2003 and John McCain in 2005.

Don also explains why Barack Obama was one of the politicians most generously funded by Fannie Mae and Freddie Mac -- second only to Sen. Christopher "Countrywide" Dodd (D-ConnMan).

Now, why would these lending institutions spend such a disproportionate amount of money on a baby Senator? Because they knew it was money well spent and it all goes back to Obama's days as a community rabble-rouser, I mean, "organizer." The original lobbyists for passage of the CRA were hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they personally benefited from. These included various "community organizations" such as "ACORN" (Association of Community Organizations for Reform Now). As mentioned above, it is groups like ACORN which, for a handsome fee, provide the bogus "credit-counseling" to poor borrowers to qualify for loans instead of actually having a way of paying back the loan.

Neighborhood organizations, like ACORN, also benefit themselves from the CRA through a process of legalized extortion. The CRA is enforced by four different federal government bureaucracies: the Federal Reserve, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any new branch creation, branch expansion or bank merger can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a community organization. The delays and expenses associated with such a protest can cost banks huge sums of money, and the community organization not only understand this perfectly well, but count on it. The community organizations use the threat of protests to get the banks to give them millions of dollars in "donations" (read that as bribes) as well as promising to make a certain amount of bad loans in their communities. With his history as a "community organizer," the lobbyists for Fannie Mae and Freddie Mac knew Senator Obama was a good buy for their money.

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I lived in a part of Chicago, almost entirely non-white, that had no branches. None. The studies in our town showed equivalent loan applications by blacks were much less likely to be approved (controlling for credit score, neighborhood characteristics, income, etc.). It was only after ACORN started their extortion that we got them and money started to be lent to our neighborhoods. ACORN had held up expansion into other (white) areas of Chicago unless these branches were built. ACORN's extortion forced the banks to provide loans to my neighborhood under the same rules they had for whites. Which Don seems to find ignoble. But I'm sure that the Egyptians had a similar view of the Israelites when they started asking for fair treatment.

Blaming CRA for the current global crisis is high naiveté and shows an almost studied misunderstanding of how international financial instruments worked. That people would buy this argument bodes very poorly for the stability of any future market.

Don Author Profile Page said:

The most famous "studies" showing lending bias based on race have been shown to be fatally flawed. The fact is that if "equivalent loan applications by blacks" were truly "much less likely to be approved" there would be an opportunity for a small minority owned bank to come in and make money by the bushel. It never happened because there was no great underserved pool of "equivalent loan applications by blacks." The big bad bankers don't give a rat's butt about the color of people's skin...they only care about money and there was no money to be made.

Do you really think bankers were sitting around the board room saying: "You know, there's a lot of money to be made in neighborhood X." "Yeah, but it's all black people there." "Really, never mind, I think we've made enough money today."

ACORN did not "force the banks to provide loans...under the same rules they had for whites." Have you looked at the text of the CRA? I have, it got rid of objective criteria which minority applicants could not meet but which white applicants were meeting. The CRA allowed banks to make bad loans which groups like ACORN then forced the banks to make. Your description is the sales pitch, but it does not reflect reality.

Mike B Author Profile Page said:

However, none of this horrible, socialist, multiculturalist, secular-humanist legislation directed anyone in the mortgage industry to act unethically or illegally. i.e., moving bad debt into special offshore vehicles to hide it from the balance-sheet,etc.

I WHOLEHEARTEDLY AGREE with the conservative position that many of the people who took out mortgages engaged in serious fiscal irresponsibility and don't deserve to be bailed out. I just wish the same standards would be applied to the people who abused the system to make a quick buck.

Don Author Profile Page said:

"Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals."

12 C.F.R. §§ 25.21(d) (Comptroller of the Currency), 228.21(d) (Federal Reserve System) and 345.21(d) (Federal Deposit Insurance Corporation).

From the landmark Guide to Equal Opportunity Lending by the Boston Federal Reserve which became the defacto industry guide:

"Credit History: Lack of credit history should not be seen as a negative factor.... In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. For lower–income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record. In these instances, paying off past bad debts or establishing a regular repayment schedule with creditors may demonstrate a willingness and ability to resolve debts...."

"Successful participation in credit counseling or buyer education programs is another way that applicants can demonstrate an ability to manage their debts responsibly."

"Down Payment and Closing Costs: Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies to cover part of these costs...."

"Sources of Income: In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part–time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments, and unemployment benefits."

sbtulsa Author Profile Page said:

this mess was caused by people trying to buy homes they could not afford. the bankers (whether forced or purposefully) provided loans that gave the false impression that said people could handle the debt associated with a home priced higher than they could afford. ARMs are a horrible idea. They should not be legal.

Race has less to do with the genesis of the problem than people with unrealistic expectations about the houses they live in, no matter what their background, gender, or race. The bankers prayed on these expectations. The rest, the derivatives, was the financial system out of control and government not stepping in at one of the few periods in history where they should have.

In other words, the blame is wall to wall.

skeptic said:

Once again, the government implements socialist policies that fail and steps in with more socialism to 'clean up' the mess while simultaneously blaming capitalism and free enterprise. Sounds like a plan.

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This page contains a single entry by Michael Bates published on September 24, 2008 7:11 PM.

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