AMERICAN CONSERVATISM IN 2008 AND BEYOND

I refer you back to the links posted previously this morning. But no, nobody forced anybody to invest in mortgages, but investing in mortgages is a legitimate business that provides credit so that people can buy homes and other properties. Thank goodness we have people who choose that line of work. It has contributed to much, if not most, of our country's outstanding financial strength.

Mainstream economists agree that FDR's big mistake was attacking the depression half-heartedly. Thus, Obama is attacking full force. A piece in the Huffington Post states, in part, :

http://www.cato.org/special/stimulus09/cato_stimulus.pdf
"There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy." -PRESIDENT-ELECT BARACK OBAMA, JANUARY 9, 2009

With all due respect Mr. President, that is not true.
Notwithstanding reports that all economists are now Keynesians and that we support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

[Signed by 104 American economists from all over the United States of America.]
...

ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt
A-1. Employment status of the civilian noninstitutional population 16 years and over, 1970 to date
...
1977 ------------ 7.1 CARTER
1978 ------------ 6.1
1979 ------------ 5.8
1980 ------------ 7.1
1981 ------------ 7.6 REAGAN
1982 ------------ 9.7
1983 ------------ 9.6
1984 ------------ 7.5
1985 ------------ 7.2
1986 ------------ 7.0
1987 ------------ 6.2
1988 ------------ 5.5
1989 ------------ 5.3 BUSH 41
1990 ------------ 5.6
1991 ------------ 6.8
1992 ------------ 7.5
1993 ------------ 6.9 CLINTON
1994 ------------ 6.1
1995 ------------ 5.6
1996 ------------ 5.4
1997 ------------ 4.9
1998 ------------ 4.5
1999 ------------ 4.2
2000 ------------ 4.0
2001 ------------ 4.7 BUSH 43
2002 ------------ 5.8
2003 ------------ 6.0
2004 ------------ 5.5
2005 ------------ 5.1
2006 ------------ 4.6
2007 ------------ 4.6
2008
January -------- 4.9
February ------- 4.8
March ---------- 5.1
April ---------- 5.0
May ------------ 5.5
June ----------- 5.5
July ----------- 5.7
August --------- 6.1
September ------ 6.1
October -------- 6.5
November ------- 6.7
December ------- 7.2
2009
January ------------ 7.6

http://www.bea.gov/national/nipaweb/TablePrint.asp?FirstYear=1965&LastYear=2008&Freq=Year&SelectedTable=5&ViewSeries=NO&Java=no&MaxValue=14412.8&MaxChars=8&Request3Place=N&3Place=N&FromView=YES&Legal=&Land=
Bureau of Economic Analysis
National Income and Product Accounts Table
Table 1.1.5. Gross Domestic Product
[Billions of dollars]
Today is: 2/9/2009 Last Revised on January 30, 2009 Next Release Date February 27, 2009

Line 2005 2006 2007 2008
1 Gross domestic product 12,421.9 13,178.4 13,807.5 14,280.7
2 Personal consumption expenditures 8,694.1 9,207.2 9,710.2 10,058.5
...
6 Gross private domestic investment 2,086.1 2,220.4 2,130.4 2,004.1

The answer is in the links I posted this morning while I don't accept your opinion that ALL banks are in trouble. All the banks are inter-related via the Federal Reserve and all banks that bought Fannie Mae/Freddie Mac bundled loans incurred the debt, sometimes knowingly, sometimes unknowingly, but all banks were not careless and/or didn't bow to government pressure though all the big banks received the same pressures.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

These mortgages, which were extended to individuals with questionable creditworthiness, often were securitized, meaning they were pooled into securities and then were sold internationally.

You were doing fine until the last line. You liberals simply are incapable of making a point without resorting to ad hominem aren't you.

Now then. Please explain how all that 'greed' would have been possible without the Community Reinvestment Act of 1977 and the subsequent actions of Congress (explained in those previously posted links) that allowed, then encouraged, practically begged--could we say coerced?--financial institutions to make risky loans? Of course everybody, and I do mean EVERYBODY, was doing great while the increased sales pushed values up and improved everybody's bottom line. Stockholders were happy. Boards of Directors were happy. Certainly investors and homeowners with rapidly escalating home values were happy. Everybody was making out like bandits and with the government financing groups like ACORN and members of the Congress themselves leaning on banks to keep up the good work, the bubble was stretched to unimaginable limits.

Once those risky loans came home to roost and people who never had any reasonable chance to repay them began defaulting, the bubble burst. Housing values rapidly came down so many who had paid little or nothing down on their properties owned more than the property was worth. So even those who might have paid for the properties had little or no incentive to do so--they had bad credit to begin with remember?--and the defaults and foreclosures began mushrooming. Financial institutions stuck with massive amounts of bad credit on the books stopped lending at all and credit froze. That affected everybody. Without credit people could not buy planes or cars or furniture or houses and businesses who couldn't get credit or who lost market for their products began laying off people or closing up shop.

And so it goes.

And it all could have been avoided by Congress sticking to the pre-1977 rules saying that the government would back only low interest loans to people who actually qualified for those loans; i.e. people who had a reasonable chance to repay them, and requiring banks to keep risky debt to a minimum.

But again you threw out three terms that you seemed to think were the problem and implied that I should know what they are and how they are responsible for the economic collapse and how they rebut my opinion. I'm still waiting for your definition for those terms and your explanation for their pertinence in this discusssion.

All the banks are inter-related via the Federal Reserve

and all banks that bought Fannie Mae/Freddie Mac bundled loans incurred the debt,

sometimes knowingly, sometimes unknowingly, but all banks were not careless and/or didn't bow to government pressure though all the big banks received the same pressures.

I am fully prepared to defend anything I write by either explaining why I think what I think or providing support for my opinion.

http://hnn.us/articles/1849.html
What Are the Origins of Freddie Mac and Fannie Mae?
By Rob Alford
Mr. Alford is a student at the University of Washington and an HNN intern.

Editor's Note: This article was published in 2003.

In recent months, the nation's two largest mortgage finance lenders have come under increasing scrutiny at the hands of Congress, the Justice Department and the Securities and Exchange Commission (SEC). The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, have operated since 1968 as government sponsored enterprises (GSEs). This means that, although the two companies are privately owned and operated by shareholders, they are protected financially by the support of the Federal Government. These government protections include access to a line of credit through the U.S. Treasury, exemption from state and local income taxes and exemption from SEC oversight. A recent accounting scandal at Freddie Mac that resulted in the replacement of three of the company's top executives has led to mounting concerns over the privileged status these GSEs enjoy in the marketplace.

Fannie Mae was created in 1938 as part of Franklin Delano Roosevelt's New Deal. The collapse of the national housing market in the wake of the Great Depression discouraged private lenders from investing in home loans. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing.

Initially, Fannie Mae operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages for the benefit of the home buyer. This lead to the development of what is now known as the secondary mortgage market. Within the secondary mortgage market, companies such as Fannie Mae are able to borrow money from foreign investors at low interest rates because of the financial support that they receive from the U.S. Government. It is this ability to borrow at low rates that allows Fannie Mae to provide fixed interest rate mortgages with low down payments to home buyers. Fannie Mae makes a profit from the difference between the interest rates homeowners pay and foreign lenders charge.

For the first thirty years following its inception, Fannie Mae held a veritable monopoly over the secondary mortgage market. In 1968, due to fiscal pressures created by the Vietnam War, Lyndon B. Johnson privatized Fannie Mae in order to remove it from the national budget. At this point, Fannie Mae began operating as a GSE, generating profits for stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing. In order to prevent any further monopolization of the market, a second GSE known as Freddie Mac was created in 1970. Currently, Fannie Mae and Freddie Mac control about 90 percent of the nation's secondary mortgage market.

GSEs such as Fannie Mae and Freddie Mae, with their combination of private enterprise and public backing have experienced a period of unprecedented financial growth over the past few decades. The current assets of these two companies combine for a total that is 45 percent greater than that of the nation's largest bank.

On the other hand, their combined debt is equal to 46 percent of the current national debt. It is this combination of rapid growth and over leveraging that has lead to the current concerns of Congress, the Justice Department and the SEC with regards to the financial practices of these GSEs.

Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties that they may be having. In the event that there was some sort of financial collapse within either of these companies, U.S. taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts. A recent investigation by the Justice Department and the SEC into the accounting practices at Freddie Mac revealed accounting errors in the amount of 4.5 to 4.7 billion dollars and resulted in the termination of three of the company's top executives. Ongoing investigations by Congress, particular the House Finance Services subcommittee that oversees the activity of GSEs, will determine the future role of Fannie Mae and Freddie Mac and the secondary mortgage market that they dominate.

Please explain how all that 'greed' would have been possible without the Community Reinvestment Act of 1977 and the subsequent actions of Congress (explained in those previously posted links) that allowed, then encouraged, practically begged--could we say coerced?--financial institutions to make risky loans?

Well, I have to go soon, so I'll go ahead and post the answer to the question, which explains quite easily how these trading houses got into trouble with mortgages.

Quote:

The current financial crisis has many causes, some long-term and structural. I focus here, however, on three immediate aspects of the crisis: the trigger, how problems generated by that trigger spread through the markets, and how this produced the liquidity freeze that persuaded Mr. Paulson and Mr. Bush to act (unsuccessfully thus far).

The Trigger: Teaser-Rate Mortgages

The media talks about “sub prime mortgages” " by which it means mortgage loans to borrowers with less than stellar credit. The real problem, however, was the advent and widespread use of teaser-rate mortgages in both the prime and sub prime markets. A teaser-rate mortgage allows a borrower to make relatively small payments for several years. At some point, the rate jumps dramatically, and the borrower faces much higher monthly payment obligations.

Not surprisingly, borrowers loved this innovation. Teaser-rate loans allowed folks who otherwise could never have afforded to own a home to buy one, at least until the rate reset. But it wasn’t just sub prime borrowers who liked teasers. Teasers sold like hotcakes; loan originators made correspondingly fabulous profits.

(Some have tried to blame teaser-rates on the Community Reinvestment Act of 1977, which encouraged lending to minorities and lower income Americans. But that act only applied to commercial banks. A majority of this crisis’s teaser-rate loans were made by unregulated originators not subject to the act. More fundamentally, there is no evidence the present crisis started in 1977. Teaser-rate mortgages first became widespread after Mr. Bush took office in 2001.)

In any event, it’s not hard to predict what happens when rates reset. All of a sudden, buyers who have been paying $1,000 per month face monthly payments of $4,000. Many, perhaps most, go into default.

The possibility that this would become a major problem became apparent as early as 2005. (I actually wrote that fall predicting the current crash.) Mortgage economists began publishing reset schedules " schedules of how many billions or trillions of dollars of mortgages would reset and when. In effect, those tables offered a rough schedule of how many mortgages would go into default and when.

As defaults increased in number, lenders ended up holding large amounts of As defaults increased in number, lenders ended up holding large amounts of foreclosed property. When they tried to convert the property into cash, they put downward pressure on housing prices. And this, in turn, made financing and refinancing more difficult and further defaults more likely " even of non-teaser loans. (A perfect vicious cycle, and we’re not remotely near the end of it. In parts of the country, more half the homes offered for sale are now foreclosures. Banks are desperate to get those homes off their balance sheets and are dumping them much faster than the market can absorb them.)

The Spread: Securitization and Debt Chains

But why did Lehman Brothers and AIG go under? After all, they don’t make mortgage loans. I turn next to how the problem spread.

Assume that A borrows from B to buy a home, giving a mortgage on the home to secure her debt. B then borrows from C, using A’s mortgage as security. C in turn borrows from D, using B’s obligation as security. And so on.

Now assume that A’s mortgage goes bad. What happens to B, C, and D? Answer: all the loans up the chain go bad as well.

And this isn’t all. If the loan is secured (as mortgages and many other links in debt chains are), the lender is typically less interested in the creditworthiness of the borrower. The lender relies primarily on the collateral, not the borrower, for assurance of repayment.

As a result, each financial intermediary can be thinly capitalized. So a company with $10.1 billion in assets and $10 billion in debt may have a small amount of net equity. Indeed, the more thinly capitalized a company, the higher the return it can make on its capital.

Unfortunately, what this means is that when A’s mortgage goes bad, it’s not just the loans up the chain that go bad " financial intermediaries in the chain often go bust as well. A thinly capitalized intermediary cannot absorb many losses. And that is why teaser-rate mortgage defaults triggered and are still triggering defaults and failures across the entire financial sector. Almost everyone was in the debt-chain business and extended themselves to the max to take advantage of the extraordinary profit opportunities of that business.

I’ve explained the transmission mechanism in terms of debt because readers have an intuitive understanding of how debt works. In fact, however, many of the most important links in the chain were not technically “debt.” Some were shares in “mortgage pools”; some, “derivatives”; some, “credit default swaps.” What they all had in common was that each transferred some risk of default up the chain to someone else. Wall Street sometimes calls links in such debt chains “toxic waste,” because today no one wants them.

AIG, for example, held about $500 billion in “notional exposure” on credit default swaps. In English, it was at risk to the tune of about $500 billion if mortgages down the chain went bad. When mortgages began to go bad in large numbers, the market realized that AIG might not be able to cover its obligations and began to sell AIG stock seriously short. Lenders stopped lending. End of story.

What made this more than just a corporate problem was that AIG was a domino at the head of many long chains of dominoes. If AIG had gone, some believed the world would have faced immediate economic collapse. So the US government bought an 80% stake in AIG in exchange for enough money to allow AIG to dissolve gracefully " over a couple of years " instead of imploding overnight.

http://understandingtax.typepad.com/understanding_tax/2008/09/7-the-financial-crisis-what-went-wrong.html

The truth is that the financial investment companies knew that their investments relied upon other companies in order to keep their value. They knew it was risky. It was assumed that b/c so many were invested in this market, it 'couldn't fail' b/c it would take everyone down with it. Well, that is exactly what happened.

Here's the important part again -

Quote:

Almost everyone was in the debt-chain business and extended themselves to the max to take advantage of the extraordinary profit opportunities of that business.

The 'extraordinary profit opportunities.' That's what got the financial trading houses and companies like AIG into the housing market. It was greed on the part of the investors, a desire to get a part of the cheese that everyone else was getting. No law or rule passed by any government agency forced these companies to buy into this business model whatsoever. To blame the government for the failure of investment fund managers to properly understand their risk is farcical and nothing more than rank and uninformed politics on the part of Republicans.

If you disagree, please show me which laws forced investment houses to purchase these CDOs, forced AIG to do it. Draw a picture of how the market went south, with links from one part of business to the next, that do not include personal choice on the part of the investment managers.

At the end of the day I understand that you Conservatives are morally opposed to blaming big business for its' failures, and that you cannot accept the role Greed had in this, without raising uncomfortable questions about yourselves.

Cycloptichorn

http://www.econbrowser.com/archives/2008/07/fannie_mae_and.html
July 12, 2008
Fannie Mae and Freddie Mac
How did we get into this mess, and how do we get out of it?

First, a little background:

Both Freddie and Fannie were initially created by the U.S. Congress with the goal of expanding the residential mortgage market. They are for this reason referred to as "government-sponsored enterprises", or GSEs, even though both eventually were converted into private companies for which there is today no explicit government guarantee of their debt....

After a homeowner has borrowed money to buy a home, the original lender likely resold that loan to Fannie or Freddie. The GSE in turn collected some of those mortgages in a pool which was sold in the form of mortgage-backed securities (MBS) to private investors, for which the GSEs collect a fee in exchange for guaranteeing payment on the MBS. Other mortgages purchased by the GSE are held directly by the GSE for its own investment portfolio. The GSEs obtained the funds for these investments primarily with money borrowed directly from private investors, which instruments are referred to as "agency debt".

The table below provides a simplified balance sheet for Freddie Mac. Most of the nearly $800 billion in assets held by Freddie as of the end of 2007 consisted of mortgage loans or securities based on mortgages. The company acquired the resources to buy these assets primarily by borrowing, with outstanding debt as of the end of 2007 of $738.6 billion. The key item on the liabilities side of the balance sheet is stockholders' equity, which represents the capital raised by Freddie through direct sales of stock and cumulative retained earnings. This equity provides a cushion against possible losses on any of its assets, in that the first $26.7 billion in losses would come out of the company's original capital, with creditors losing nothing. That cushion, however, would only cover losses that were less than 26.7/794.4 = 3.4% of the assets.



Simplified balance sheet for Freddie Mac, in billions of dollars. Data source: 2007 Annual Report, p. 168. Assets Liabilities
mortgages 80.0 debt 738.6
securities 629.8 other liabilities 29.1
other assets 84.6 stockholder equity 26.7

total assets 794.4 total liabilities 794.4


Fannie's 2007 stockholders' equity came to 5.0% of assets.



Simplified balance sheet for Fannie Mae, in billions of dollars. Data source: 2007 Annual Report, p. 102. Assets Liabilities
mortgages 403.5 debt 796.3
securities 406.6 other liabilities 42.2
other assets 72.5 stockholder equity 44.0

total assets 882.6 total liabilities 882.6


These balance sheets leave out the mortgage-backed securities that the enterprises created and sold directly to outside investors, for which the enterprises have issued off-balance-sheet guarantees for payment. The OFHEO 2008 Annual Report to Congress states that Freddie had sold $1,381.9 billion in MBS and Fannie $2,118.9 billion. If you add together the mortgages retained outright by Fannie and Freddie (either as whole loans or MBS) plus the MBS that they have sold to others and offer a guarantee for payment, the OFHEO calculates a total "book of business" for the two enterprises of $4,934.4 billion as of the end of 2007, slightly less than the total publicly held debt of the U.S. government. Fannie and Freddie's combined stockholders' equity amounts to 1.4% of their total book of business.

Fannie and Freddie borrowed the funds with which this empire was leveraged at terms nearly as favorable as those for the Treasury itself. Unquestionably a key reason that investors have received agency debt so warmly over the years, and treated the guarantees as credible, was the assumption that Fannie or Freddie were too big for the federal government to allow to fail. This creates an unambiguous concern of moral hazard. When investors assume that the government will cover their losses, the result is a higher volume of funds flowing into the GSEs than is socially desirable. The upside goes to the lender, the downside is supposedly picked up by the government, and the result is the enterprise is expanded to a greater level of risk than makes economic sense.



Source: Lockhart (2008).

The GSEs' book of business represented 25% of outstanding residential mortgage debt in 1990 but comes to 41.4% today. It is hard to avoid the conclusion that these moral hazard distortions were one factor that contributed to the rapid expansion of mortgage debt over the last decade and attendant excessive price appreciation and risk taking. Granted, the real excesses, such as the subprime loans that everybody was initially discussing, came from MBS created by private institutions rather than the GSEs. But the stock market seems to be declaring pretty loud and clear this week that risks associated with enterprise assets are significant.



Source: Yahoo Finance.




Source: Yahoo Finance.



So where do we go from here? If we indeed reach a point where one or both of the GSEs can no longer honor its commitments, the Treasury's contingency plan might follow the Bear Stearns philosophy of leaving shareholders nothing but protecting creditors and counterparties fully. But if the U.S. Treasury ends up assuming a significant burden, this would at a minimum raise the logistical question of how taxes are going to be raised to cover the costs. One strategy that holds some appeal would be to let the burden of the tax fall entirely on the creditors and counterparties themselves-- in other words, no government bailout at all-- as argued by Nouriel Roubini:

notice that the hit that bondholders will take will be limited in the absence of their bailout. With a debt/liabilities of about $5 trillion and expected insolvency-- as of now and in the worst scenario of $200 to $300 billion-- the necessary haircut is relatively modest: either a reduction in the face value of the claims of the order of 5% (if the mid-point hole is $250 billion) or-- for unchanged face value-- a very modest reduction in the interest rate on their debt after it has been forcibly restructured.

So what's wrong with that idea? The overriding concern in dealing with the current mess is that the process of rapid and radical deleveraging would so impede the flow of new credit that the housing price declines, foreclosures, and bankruptcies significantly overshoot the values that we'd expect in a properly functioning credit market. In addition, I would worry about possible serious repercussions of a flight of foreign capital if there is a sudden perception that agency debt entails heavy risks.

The principle of "make those who caused the problem pay" has a lot of visceral appeal. But the principle of "don't impose severe and gratuitous extra costs on those who had no role in causing the problem"-- in other words, don't make the housing depression much more severe just to teach somebody a lesson-- has to be the basis for our policy decisions.

My recommendation would therefore be for a managed bailout in which the stockholders, creditors and taxpayers jointly share the bill.

And now we can haggle about the price.

Stop Covering Up And Kill The CRA
INVESTOR'S BUSINESS DAILY
11/28/2008

Regulation: The Community Reinvestment Act is to blame for the financial crisis, but it so powerfully serves Democrats' interests that they'll do anything to protect it " including revising history.

The CRA coerces banks into making loans based on political correctness, and little else, to people who can't afford them. Enforced like never before by the Clinton administration, the regulation destroyed credit standards across the mortgage industry, created the subprime market, and caused the housing bubble that has now burst and left us with the worst housing and banking crises since the Great Depression.

The CRA should be abolished, along with the government-sponsored enterprises that fueled the secondary market for subprimes " under pressure from Clinton, who ordered HUD to set quotas for "affirmative action" lending at Fannie Mae and Freddie Mac.

But powerful Democrats in Washington want to protect the act " along with Fannie and Freddie " and spin the subprime scandal as the result of too little regulation, not too much.

"Repealing or weakening the CRA would be a mistake," warns Senate Banking Committee Chairman Chris Dodd, D-Conn., who argues that the CRA should be strengthened.

Dodd, the top recipient of Fannie donations and himself a beneficiary of a sweetheart mortgage brokered by a subprime lender, recently invited one of Clinton's top enforcers of the CRA to testify.

"The notion that CRA has caused this problem is a pernicious thought," said former Comptroller of the Currency Gene Ludwig. "These are not truthful statements. The CRA has helped to create a better and sounder world for finance, not the opposite."

Dead wrong. But the mainstream media believe it, and have attacked those, including this paper, who dare to tell the truth about the crisis. Already the debacle has erased $13 trillion in wealth, while putting taxpayers on the hook for up to $8 trillion in bailouts.

"The latest salvo from conservatives began via a Sept. 15 editorial in Investor's Business Daily, titled 'The Real Culprits In This Meltdown,' " grumbled a column distributed by Scripps Howard News Service. "Its editorial blamed President Clinton for today's mess."

As we said, Clinton beefed up the CRA and used it to force banks to subsidize poor communities with close to $1 trillion in high-risk loans and other commitments that flouted underwriting rules.

Yet, somehow, these media-driven myths keep getting in the way of actual facts, such as:

Fact: The 1977 law was only lightly enforced until Clinton added teeth to it in 1994 and launched an anti-redlining campaign against banks, led by Ludwig, Housing Secretary Henry Cisneros (and later Andrew Cuomo) and Attorney General Janet Reno that lasted into this decade.

Minority homeownership rates, which had been flat, began a steep rise in 1995, and home prices soon followed, stoked by easier lending. Numerous bank officials complain that they still feel pressured by CRA regulators to make inner-city loans they know are at great risk of defaulting.

Myth: The CRA could not have led to financial Armageddon, because the overwhelming share of subprime mortgages came from lenders that were not banks and not regulated by the CRA.

Fact: Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA.

Last year, when the bubble burst, bank subprime loans totaled $142 billion, dwarfing those made by lenders.

What's more, the biggest subprime lender, Countrywide, while not subject to the law, still came under federal pressure to make risky loans in minority communities.

Clinton created a separate department at HUD to police "fair lending" at Fannie and Freddie and also at lenders like Countrywide, which became Fannie's biggest client. In 1994, Countrywide became the nation's first mortgage lender to sign with HUD a "Declaration of Fair Lending Principles and Practices."

As a result, Countrywide made more loans to minorities than any other lender " and not surprisingly, was one of the first lenders swamped by loan defaults.

Other lenders felt the heat from Reno's Justice Department, which prosecuted them for failing to operate enough branches in black neighborhoods. Reno put the entire banking industry on notice about the CRA and her enforcement program.

Myth: The CRA did not force anyone to do subprime loans or take excessive risks.

Fact: Subprime loans were the vehicle banks used to satisfy CRA compliance, and Clinton and his regulators encouraged their use. Before Clinton took office, subprimes were virtually unheard of. By the time he left, they made up more than 9% of the market for mortgage originations. Today they're 20%.

"It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA," ex-Fed chief Alan Greenspan said in recent testimony on the roots of the crisis.

Clinton pushed banks to grant mortgages to minorities with poor credit by using "flexible" underwriting standards " or risk being branded racist. Rules were weakened to the point where welfare and unemployment checks were accepted as qualifying income.

Myth: Greedy investment bankers, who securitized and sold subprime mortgages, drove us to the credit crisis, not government.

Fact: Clinton's regulatory policies led to the creation of this new risk on Wall Street. His CRA amendments created the subprime market, and only after he pressured Fannie and Freddie to socialize the risk and guarantee the profit from the subprime loans did Wall Street get involved in a big way.

The exotic securitizations that have gotten so much of the blame were a symptom, not the cause, of the crisis.

The architects of the crisis want to divert attention from their own culpability by blaming the markets rather than their own regulations mandating that banks make high-risk loans based on race.

In fact, regulations had almost everything to do with this mess. And instead of strengthening them to atone for the alleged "sins of capitalism," we should be abolishing them.

Two bills in the House would be a good place to start. HR 7264, which has nine co-sponsors, would repeal the CRA. And HR 7094, with 17 co-sponsors, would dissolve Fannie Mae and Freddie Mac.

During the last severe slump, President Reagan deregulated the economy, saying: "Government is not the solution to the problem; government is the problem." He's as right today as he was then.
http://www.investors.com/editorial/editorialcontent.asp?status=article&id=312766781716725&secid=1501

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6500 - Consumer Protection

{{8-31-00 p.6988.25}}
HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1977"TITLE VIII (COMMUNITY REINVESTMENT)




AN ACT


To amend certain Federal laws pertaining to community development, housing, and related programs.


Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled.


* * * * *


TITLE VIII"COMMUNITY REINVESTMENT


SEC. 801. This title may be cited as the "Community Reinvestment Act of 1977".


[Codified to 12 U.S.C. 2901 note]

[Source: Section 801 of title VIII of the Act of October 12, 1977 (Pub. L. No. 95--128; 91 Stat. 1147), effective October 12, 1977]


SEC. 802. (a) The Congress finds that--
(1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business;
(2) the convenience and needs of communities include the need for credit services as well as deposit services; and
(3) regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.
(b) It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.

The GSEs' [government-sponsored enterprises] book of business represented 25% of outstanding residential mortgage debt in 1990 but comes to 41.4% today. It is hard to avoid the conclusion that these moral hazard distortions were one factor that contributed to the rapid expansion of mortgage debt over the last decade and attendant excessive price appreciation and risk taking. Granted, the real excesses, such as the subprime loans that everybody was initially discussing, came from MBS [mortgage-backed securities] created by private institutions rather than the GSEs. But the stock market seems to be declaring pretty loud and clear this week that risks associated with enterprise assets are significant.

Article I. Section 8. The Congress shall have power
To lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

Definition of common
http://unabridged.merriam-webster.com/cgi-bin/unabridged?va=common&x=30&y=9
Definition of general
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Definition of imposts
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Definition of uniform
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To borrow money on the credit of the United States;
To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;
To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;
To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;
To provide for the punishment of counterfeiting the securities and current coin of the United States;
To establish post offices and post roads;
To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;
To constitute tribunals inferior to the Supreme Court;
To define and punish piracies and felonies committed on the high seas, and offenses against the law of nations;
To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water;
To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years;
To provide and maintain a navy;
To make rules for the government and regulation of the land and naval forces;
To provide for calling forth the militia to execute the laws of the union, suppress insurrections and repel invasions;
To provide for organizing, arming, and disciplining, the militia, and for governing such part of them as may be employed in the service of the United States, reserving to the states respectively, the appointment of the officers, and the authority of training the militia according to the discipline prescribed by Congress;
To exercise exclusive legislation in all cases whatsoever, over such District (not exceeding ten miles square) as may, by cession of particular states, and the acceptance of Congress, become the seat of the government of the United States, and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be, for the erection of forts, magazines, arsenals, dockyards, and other needful buildings;--And
To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.

Amendment XVI (1913)
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census of enumeration.

Amendment X
The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Article VI. This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.

The Senators and Representatives before mentioned, and the members of the several state legislatures, and all executive and judicial officers, both of the United States and of the several states, shall be bound by oath or affirmation, to support this Constitution; but no religious test shall ever be required as a qualification to any office or public trust under the United States.

Article III. Section 3. Treason against the United States, shall consist only in levying war against them, or in adhering to their enemies, giving them aid and comfort. No person shall be convicted of treason unless on the testimony of two witnesses to the same overt act, or on confession in open court.