Scapegoating is a much a part of market cycles as booms and busts (as are white-collar prosecutions, which will be coming soon). And now that we’re cratering into the worst bust since the Depression, the scapegoating has begun in earnest.
The targets du jour: Fannie Mae, Freddie Mac, and the Community Reinvestment Act. Barry Ritholtz sounds off:
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 emphasised 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?)
• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?
• 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?