Blaming the CRA, GSEs

It is almost as if Barry Ritholtz of the Big Picture placed a comment on my blog post " Shocking Video Unearthed Democrats in Their Own Words Covering up the On the role of Fannie Mae, Freddie Mac Scam". Of course Barry doesn't know who I am, but makes some pithy observations involving the roles of Fannie Mae, Freddie Mac and the Community Reinvestment Act in the credit crisis.

It's not that the video is any less real or shocking, but may not be relevant to the credit crunch.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.

I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify

income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive

federal supervision; another 30% were made by banks or thrifts which are not subject to

routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA?

Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed

this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the

same corrupt appraisers again and again? How did they manage to always come in at exactly

the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized

speed rather than accuracy in order to process the greatest number of mortgage apps as

quickly as possible?

• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple

AAA?

• What about piggy back loans? Were banks required by Congress to lend the first mortgage

and do a HELOC for the down payment -- at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages

prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at

JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund managers load up on an investment

product that was hard to value, thinly traded, and poorly understood

• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am

loans" also part of the legislative requirements also?

• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American

Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was

that a CRA requirement too, or just a grab for more market share, and bad banking?

The answer to all of the above questions is no, none, and nothing at all.

The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron's, there is plenty of things to be angry at D.C. about -- but this ain't one of them.

If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed's part in supervising bank lending, allowing banks to give money to people who couldn't possibly pay it back.

The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with -- which they promptly did.

There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

Shame on them for their foolishness or cowardice.

Whenever I see a CRA proponent blathering, I have a "Star Trek moment." That's when Captain Kirk proves to some random alien computer that its basic programming is logically inconsistent. It's the AI (artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .