Low-Income Borrowers Blamed in Bailout Crisis

By
Tuesday, September 30, 2008 at 6:00 am
Illustration by: Matt Mahurin

Illustration by: Matt Mahurin

Did poor and minority borrowers cause the housing crisis?

That seemed to be the consensus from the fight over the failed $700 billion bailout bill. As Congress and the Treasury Dept. debated how to fix the mortgage mess, the battle over what caused it took hold.

A prime suspect soon emerged: The government forced banks, lenders and Fannie Mae and Freddie Mac to make loans in poor neighborhoods to meet affordable housing goals and regulations. The loans went bad, setting off the market meltdown.

Illustration by: Matt Mahurin

Illustration by: Matt Mahurin

As a measure of how widespread that idea became, House Republicans revolted at an plan to give 20 percent of any government profits from the sale of toxic mortgage securities to affordable housing groups — asserting that ACORN and others like it caused the problem in the first place.

On Sunday, as it reported on the bailout bill negotiations in Congress, Fox News continually explained that ACORN and other community groups pushed for government regulations that caused the foreclosure crisis, citing this Wall Street Journal editorial as a source.

In the end, the proposal for money for housing groups was dropped, confirming that most lawmakers probably agreed with that theory — which has taken hold on the Internet, in conservative circles and in the business press. Last week, Investor’s Business Daily ran a front page story: “How a Clinton-era Rule Rewrite Made Subprime Crisis Inevitable.”

The only problem with all this: it’s completely wrong.
Neither the Community Reinvestment Act — the law most cited as the culprit — nor other affordable housing goals set by the government forced Fannie, Freddie or any other lender to make loans they didn’t want to. The lure of the subprime market was high yields and healthy profit margins — it’s as simple as that.

“The rest is a lie — and it’s industry propaganda,” said William Brennan, director of the Home Defense Program of the Atlanta Legal Aid Society, who, in 1991, began raising the alarm over predatory lending in poor neighborhoods. “It’s also racist.”
Popular belief now holds that government regulators ordered Fannie and Freddie to buy more loans made to low-income borrowers, and that housing advocates applauded the agencies’ move to enter the subprime market. In fact, the exact opposite is true, Brennan said.

He was among many advocates, back in 2000, who warned that subprime loans were dangerous and decried Fannie and Freddie’s decisions. By purchasing subprime mortgage-backed securities, the two agencies ended up providing capital to predatory lenders — leading to the foreclosures of borrowers Brennan and others saw in increasing numbers coming to them for help.

It makes no sense that housing advocates would have pressured the agencies. They were stuck with cleaning up Fannie and Freddie’s mess.
“They weren’t forced to do it,” Brennan said of Fannie and Freddie’s entry into subprime. “They wanted to do it. They were looking at raising their profit margins; and they wanted to please their shareholders.”
Everyone’s pointing fingers at Fannie and Freddie now because it’s convenient — they are down and out, seized by the government and they can’t defend themselves, said Guy Cecala, publisher of Inside Mortgage Finance, which follows the subprime industry. It’s all part of larger search for villains in a saga where everyone is guilty, he said.
“Basically, everybody’s rewriting history now,” Cecala said. “One thing that’s difficult is that there is no villain when everyone can be blamed.”
To Gregory Squires, a sociologist at George Washington University who studies banking practices, the motivation in the blame game is more nefarious. “My guess is that there are some observers out there who view any targeted effort to serve under-served communities as problematic,” Squires said, “and are quick to point to such initiatives today to try to explain away our problems. Better to point to low-income blacks than high-income [white] executives, perhaps.”
The main initiative usually cited is the Community Reinvestment Act, a 1977 law that required banks to provide credit to the communities they served. The law was an attempt to offset years of redlining in poor neighborhoods and in minority communities, some of which were middle-to-high income, that had been cut off from conventional credit. In the late 1980s and mid-1990s, the law was strengthened so that banks pursuing mergers or takeovers had to show their compliance with the CRA to get federal approval.
In recent months, the idea that the CRA caused the housing crisis took hold, as proponents of the theory argued that lenders were forced to make bad loans to poor borrowers to meet their CRA requirements. That expanded into blaming the poor and minority borrowers, and the community organizers who helped them:

“I always listen to Mark Levin while making Friday night dinner … Funnily enough, he has explained just what it is community organizers do. Advocating, for instance, for affordable housing for the poor — the poor who traditionally rent, because they are bad loan risks. The day that reasoning by banks was junked as “racist,” was the day this crisis became a possibility.,” – Lisa Schiffren, NRO.

But despite its current portrayal as a burdensome regulation, CRA rules were always viewed as loose guidelines within the industry, said Cecala, of Inside Mortgage Finance. Banks were routinely found in compliance with the CRA, and an insider joke among bankers was that you’d have to mug a disabled, elderly, minority homeowner to lose your outstanding CRA rating, Cecala said.
Beyond that, as the housing boom grew, so did the number of unregulated mortgage lenders, who made the bulk of subprime loans and who didn’t even have to comply with CRA rules, said John Taylor, president of the National Community Reinvestment Coalition, which represents housing and community development groups. Some 75 percent of subprime loans were made by independent mortgage banks and lenders not covered by the CRA, he said.
Taylor’s group met with Federal Reserve Chairman Ben Bernanke last week, and he was “aghast” that the CRA was being fingered as a culprit, Taylor said.
“People see an opportunity here, because the economy’s in trouble,” Taylor said. ” The easiest thing to say is, ‘Oh, it was all those poor people.’ It’s easier to try to shift the focus, and to blame the victims and blame the government.”
Banks that were making CRA loans profited from them, and they had few complaints, said Squires of George Washington. If they had tried to sell high-rate subprime loans and count them toward their CRA goals, it wouldn’t have worked.

“The CRA explicitly calls for safe and sound lending,” Squires said. “It does not call for lenders to engage in riskier lending than they would normally practice. A few years ago, both the Fed and Treasury conducted studies which found that CRA-related lending was profitable. If a lender is making bad loans, or a compliance officer is encouraging a lender to do so, neither party understands the CRA. That is not the fault of the legislation — but of those who do not understand it.”

When it comes to Fannie and Freddie, there’s also a lot that’s been misunderstood.

The two agencies were created by Congress but privately run, until their takeover. They’ve always had dual missions — to serve their shareholders and increase homeownership.

Like the CRA rules, requirements for either agency to provide affordable housing were pretty loose, Cecala said. At the end of the year, both agencies usually would meet their goals by purchasing some loans for multi-family dwellings, he said. In 2004, the agency that regulated their housing efforts, the U.S. Dept. of Housing and Urban Development, informed both entities they needed to increase affordable housing efforts, with the mortgage market so strong.

But HUD never told Fannie and Freddie to jump into the subprime market. Both chose to dive into subprime mortgage securities, and the purpose wasn’t to satisfy regulators — it was to increase market share, Cecala said. Afterward, they asked HUD if some of the securities they purchased could count toward their affordable housing goals. HUD agreed.

Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals. They continued to buy loans made to multi-family dwellings, as in the past, to satisfy regulators.

Despite claims to the contrary, the two did not rely, for the most part, on subprime securities to meet their regulator’s goals. In any case, the majority of subprime loans were refinancings, which wouldn’t have counted anyway.

“Everybody and their dog had refinanced their prime-rate mortgage” by 2003, Cecala said. And there was no way to make money except by aggressively moving into subprime — meaning it was a business decision by Fannie and Freddie, not a government-mandated one.

The arguments over who caused the crisis go beyond politics alone.

In the last two decades, non-profit community development groups across the country have been making strides in helping increase home ownership among under-served populations – but not through subprime lending. Groups like Manna, Inc. in Washington counseled homeowners through Homebuyer’s Clubs, a support group for borrowers that helped them to clean up credit problems, save for a downpayment and prepare for homeownership.

The default rate on Manna’s prime, fixed-rate loans is zero. There are streets in Washington’s tough Anacostia neighborhood, once abandoned and dangerous, that have been rebuilt entirely by Manna, one house at a time. Banks like working with these groups because it’s profitable for them while it increases homeownership.

That all this success could become sullied by partisanship and finger-pointing worries many housing advocates. “The facts don’t support the people who are trying to undermine fair lending,” NCRC’s Taylor said.

But in the bitter politics of bailing out, the search for a scapegoat is only likely to continue.

Comments

69 Comments

joeymortgage
Comment posted September 29, 2008 @ 8:21 pm

“In 2004, the agency that regulated their housing efforts, the U.S. Dept. of Housing and Urban Development, informed both entities they needed to increase affordable housing efforts, with the mortgage market so strong.”

“Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals.”

The point of this article is to make it clear that there was no government sponsored program that led to the subprime housing mess. But the first statement above directly contradicts this, despite the authors attempt to downplay it. And as for the 48% of all subprime-mortgage backed securities – my GOD! Am I the only one who recognizes that Fannie and Freddie were creating the very feeding frenzy that led more and more people to offer subprime loans by purchasing so much of the “subprime mortgage backed securities” (which I guess are the credit default swaps I keep hearing about?)

Something fishy here when people try to minimize the role of Democrat-backed social engineering via cheap mortgages in the current crisis. Something ain't adding up!


wendy
Comment posted September 29, 2008 @ 11:56 pm

Barney Frank & Congress approved Fannie and Freddie for the practice, two years ago a bill to rein in the agencies failed in Congress


LIllian
Comment posted September 30, 2008 @ 1:48 am

I feel they such help the home owner and then let the market work it self ,I don't feel they such help Wall St. those greedy MF, their the one's who started this mess and I feel they should pay for everything not the tax payers if I committed fraud they would come after me in a min but these greedy MF who committed fraud and predatory lending are getting away with it.I feel they should let the bankruptcy court deal with these mortgages not any of these group like neighborhood works,acorn,hope these groups just want the money congress gives them they are not helping. I went to some of these group because of my mortgage and they did noting to help us but tell us to sell our home in a short sale.


Chuck Cardiff
Comment posted September 30, 2008 @ 7:03 am

“The U.S. Department of Housing and Urban Development's mortgage policies fueled the trend towards issuing risky loans. In 1995, Fannie Mae and Freddie Mac began receiving affordable housing credit for purchasing mortgage bank securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities. Subprime mortgage loan originations surged by a whopping 25 percent per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years. As of November 2007 Fannie Mae a held a total of $55.9 billion of subprime securities and $324.7 billion of Alt-A securities in their portfolios. As of the 2008Q2 Freddie Mac had $190 billion in Alt-A mortgages. Together they have more than half of the $1 trillion of Alt-A mortgages.[82] The growth in the subprime mortgage market, which included B, C and D paper bought by private investors such as hedge funds, fed a housing bubble that later burst.”

See http://www.washingtonpost.com/wp-dyn/content/gr…

and http://en.wikipedia.org/wiki/Subprime_mortgage_…

Note this was all related to Mr. Clinton's ingenious changes to the CRA in 1995.


MaryMary
Comment posted September 30, 2008 @ 7:05 am

And how do explain the voter fraud charges against ACORN, lefty Washington Independent? I'm sure you have an answer for that as well.


bacalove
Comment posted September 30, 2008 @ 7:46 am

Posted on Pollster.com,09/30/2008

Andrea Mitchell said on MSNBC's Morning Joe that former Speaker of the House Newt Gingrich,, worked very hard behind the scenes to kill the bailout plan, despite issuing a statement that he would have supported the legislation if where still in Congress.

Mitchell Said: “I am told reliably by leading Republicans who are close to him. He was whipping against this up until the last minute…. Newt Gingrich was telling people in the strongest possible language that this was a terrible deal, not only that it was a terrible deal., that it was a disaster it was the end of democracy as we know it that it was socialism, and then at the last minute comes out with a statement when the vote was already in play” (More GOP, spin, lies and hypocrisy!)

My take on this crisis, is that Lenders suckered average folks into mortgages which they could afford at first. Because there were no Regulations or Oversight, these Lenders would raise the monthly mortgages to an amount they could no longer afford! The houses were then foreclosed on and then re-sold again to some other unsuspecting victim, until the whole deck of cards has collapsed. What is compelling, is that before the total collapse, CEO's pay themselves millions, sometimes billions as compensation pay for the said collapse! For instance, “In 2007, Wall Street's five biggest firms– Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – paid a record $39 billion in bonuses to themselves.” From ABC's Political Punch

Could these enormous salaries the CEO's unjustly earn be one of the Main reasons why these companies fail and go under, and which actually, and in the end, bankrupt these companies to fail!


ajm8127
Comment posted September 30, 2008 @ 8:38 am

I don't know how people can blame the CRA. The lenders knew the risks associated with sub prime mortgages, and they did it anyway, at an alarming scale. They were operating in a capitalistic manor where they were trying to make more money. If anything regulations should have been in place to insure that huge companies, ones too big to fail, would be required to have only a certain percentage of sub prime loans, because of the paramount risk involved.

It also doesn't help that the gap between rich and poor is increasing, food is more expensive, and fuel is through the roof. So those homeowners that once could pay their bills, are now forced to choose between things like gas to get to work to make money, mortgage payments to prevent foreclosure, medical bills to keep their families healthy, and even FOOD!

If anything, I blame the trickle down effect, and the general loosening of regulations over the past eight years.


Mary Kane
Comment posted September 30, 2008 @ 9:44 am

Actually, I do have an answer. The fraud charges involve Acorn's voter registration arm. Its housing development work is entirely different. Money given to developing housing is not, by law, allowed to be used for voter registration. No one has ever paid much attention to the housing work done on the ground by Acorn, until all this became political, due to the controversy over voter registration efforts. As I've said in an earlier post, if conservatives don't like giving money to Acorn to do housing development, then they should create housing groups of their own and do the hard work themselves. You can't complain about the rules if you don't have a player in the game.


Richard
Comment posted September 30, 2008 @ 12:20 pm

The points I'd like to make is that this is caused by both Republicans and Democrats and at least the last TWO administrations and includes our “Country Club” on the Hill (Congress). Our elected officials in the Country Club work 4 days a week, 21 weeks a year and get paid $160,000+ yearly. They say they need to other time to meet with their constituents. I wonder if they have ever heard of E-mail, telephone, appointments to come to their office? This is one of the biggest boondoggles ever created. Consider, we are STILL talking about becoming energy (think oil) independent and it's been at least 30+ years of talk. When we look at the corruption in other countries governments, we should first look at what is going on in our own back yard. The three biggest recipients of monies from Freddie Mac were 1) Chris Dodd, 2) Barney Frank furter, and 3) Barack Obama. I'm not picking on Democrats, I'm just pointing out how money talks and BS walks. Both parties are nearly useless. Where has Hillary been in the last couple of weeks. Such a great leader who wanted to be our next president. I haven't heard a peep out of her on any of this. Now that's leadership!!!! That's my $.02 but I can provide the other $.98 if asked.


BHGobuchul
Comment posted September 30, 2008 @ 2:18 pm

At the end of an ailing bull market, money flows to profitable, but riskier and riskier instruments.

So no, minority and low-income borrowers aren't *personally* to blame (except in the case of liar's loans.)

Securities backed by mortgages to the previously redlined were just another financial weapon of mass destruction, just another symptom of irrational exuberance.


jpstrick
Comment posted October 1, 2008 @ 9:48 am

Remember the three little pigs? They were poor little piggies, and each wanted to buy a home. The first little pig heard about a straw-house deal. “How can I possibly afford to buy this house?” said P1. “I can get you an interest-only loan from one on my investors. You will only pay the interest for the first five years. In five years you will be making more mone, and with housing prices going up, the house will be worth more money. You will be able to refinance.”, said Mr. Mortgage Broker. “Really? Wow! A dream come true!” said P1, as he bought the home. The second little pig hear about a stick-built home deal. “How can I possibly afford this home? My brother used a strawohouse deal, but I'm afraid of that balloon payment.” said P2. “I can put you into a mortgage with interest that starts out at 1.5% … just what you can afford. Then I will increase the interest rate over the years. Over the years you will be making more money, and with housing prices going up, your house will be worth more money. You will be able to refinance at any time.” said Mr. Bank. “Really? wow! Adream come true!” said P2 as he bought the home. the third little piggy heard about a brick-house deal. “How can I possibly afford a home?” said P3. “You can't … just yet. With a little work, you can clean-up your credit. when you are ready, we can provide downpayment assistance. First you will have to take a homebuyer class. Then our counselors will work with you to develop a spending plan. Along the way, you and the counselors will work to clean-up your credit. After you know what you can afford and how to avoide predatory lending, we will help you buy a home that you can afford with the help of downpayment assistance.” said Ms. Not-for-profit Organization. “Really? wow! That sounds like a lot more work than what P1 and P2 did!” said P3 as he signed up for a homebuyer class. After a year, P3 bought his brick-deal home. Five years later P3 cooked a big dinner for P1 and P3 who had lost thier homes to foreclosure and were now living with him. P1 had lost his job and the value of P2's house had dropped. meanwhile, the big Bad Economy Wolf and the real estate agent sat at the bar having a drink. “Remember the good 'ol days when it was easy to amke a real estate commission? asked the real estate agent.


jc
Comment posted October 1, 2008 @ 11:00 am

Let's get this right. The BIG boys loose money and they blame it on the little people.
It was NOT us(little people) you morons, it was GREED on your part. You got that GREED nothing more nothing less. How dare you blame people that are just trying to make life a little better, with you UNREGULATED GREED.
You all should be horsewhipped and ran out of town on a rail.


Warren Metzler
Comment posted October 2, 2008 @ 11:20 am

It is obvious that every major player; Republican and Democrat; is lying through their teeth. And yet the majority of Americans continue to accept these sorry excuses for humans, these predatory, self-centered egomaniacs as their leaders.

As the Pogo cartoon character once said, “I've seen the enemy and it is us”. Until a substantial number of Americans undergo a fundamental change in their personalities, thereby being able to recognize charlatans and thieves and not let such people near the country's government, we are doomed to keep repeating such catastrophes.


Laker
Comment posted October 3, 2008 @ 7:07 pm

The Government-Created Subprime Mortgage Meltdown

by Thomas J. DiLorenzo

The thousands of mortgage defaults and foreclosures in the “subprime” housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call “communities of color” that they might not otherwise make based on purely economic criteria.

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various “neighborhood organizations,” as they like to call themselves, such as “ACORN” (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.

So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the “Neighborhood Assistance Corporation of America.” He once boasted to the New York Times that he had “won” loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one “community group” operating in one city – Boston.

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as “subprime” loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.

But this is discriminatory!, complained the “community organizations.” Thus, if one browses the ACORN web site, one can read of their boasts of having “predatory lending laws” passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to “subprime” borrowers.

These are price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws therefore force the banks to “eat” the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.

Then of course there is the issue of the Fed’s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.

The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fed’s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the “subprime” mortgage meltdown.

Don’t expect to read about this in the “mainstream media,” however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover many of the bad “subprime” loans. This will create what economists call a “moral hazard” by encouraging even more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA effectively guaranteeing the loan.

September 6, 2007

Thomas J. DiLorenzo [send him mail] professor of economics at Loyola College in Maryland and the author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, (Three Rivers Press/Random House). His latest book is Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe (Crown Forum/Random House).

Copyright © 2007 LewRockwell.com

Thomas DiLorenzo Archives at LRC

Thomas DiLorenzo Archives at Mises.org

Find this article at:
http://www.lewrockwell.com/dilorenzo/dilorenzo1…


doug
Comment posted October 3, 2008 @ 9:11 pm

Absolutely incredible. When all else fails…blame minorities and lower income. The article explains that greed was by far the larger problem. Even if Freddie and Fannie hold a lot of mortgages, lets just forget about the other banks who did this. They werent trying to ONLY meet minimal housing standards…they were GREEDY. Greenspan kept interest artificially low and EVERYONE used their house equity to live high on the hog(mostly upper middle class). If Repub and conservatives were so worried about Clintonian rules hurting the housing market then why in the world would they have resisted basic regulations. Why would they try and “deregulate” risky credit default swaps. PPLLEEEAAASSSSEE, stop blaiming the poor and minorities…it just makes you look petty and desperate!!!


frit
Comment posted October 15, 2008 @ 1:30 am

Citi was sued in 1995 by Acorn, with Obama on mount. Citi had big trouble in subprime loans.
Household International (now HSBC) was sued in 2002 by Acorn. HSBC had trouble in subprime loans.
After the ligtigations, Citi and HSBC worked closely with Acorn to make lots of loans to low income persons.
Did Countrywide had close work relationship with Acorn to make subprime loans?

HSBC was a little bit lucky that their UK Headquarter called it an end on subprime loans in early 2007, announced to their shareholders that they would stop expanding their US business in 2007, after noticing the abnormal increase in delinquency rate. Look at how good, in terms of bad debt ratio and capital ratio HSBC have had during the financial crisis 2007 and 2008. HSBC is a very conservative bank for many year, they did not blame any party. But they stop their business expansion plan in US and would focus on emerging markets. Reason? They fear of something in US banking environment.

HSBC would not make any provocative statement on this issue. Their strategy change in 2007 meant something. Obviously you have not study the reasons behind HSBC strategy change.
If this is caused by simple greed, HSBC can manage the problem.
If this is caused by something HSBC cannot manage, what do you think HSBC was afraid of?


SteveQuestioner
Comment posted October 21, 2008 @ 6:11 pm

Great article, but I feel that it understates the role of Freddie and Fannie, as well as the pressure on them that tempted them to underwrite bad loans.

First, it wasn't just subprime; at a critical period, they seem to have tossed their previous high standards, as demonstrated by their exposure to Alt-A (unverified income) loans. Here is the official Fannie Mae 2007 document:
http://www.fanniemae.com/ir/pdf/earnings/2007/c…
Note subprime exposure down to $56 Billion, but Alt-A up to $360 Billion!!!
They were relying on credit scores, without verifying sufficient income to maintain payments.

Did government FORCE them to do this? No, but the target percentage of “loans to below median income recipients” had been steadily increased by HUD, under both Clinton and Bush; 52% of all their new loans in 2005 had to be to such recipients, to maintain their government benefits.

Given what competing mortgage companies were doing, and what the government required, they may have faced an impossible situation. Well, not completely impossible: they could have chosen to shrink: to maintain their high standards, and make far fewer loans, since they would no longer have been competitive versus other loan offerings. Is it surprising that they instead chose to increase their risk?

So yes, it was a BUSINESS decision, but it was compounded by the government requirements.

Granted, their actions are still only a secondary cause; the primary causes appear to be years of low interest rates allowing housing prices to rise to unsustainable levels, plus the interaction of securitization / credit default swaps & non-transparent risks / the ability to duck capital-holding requirements via these financial shell-games.

I'd also like to point out something I don't see mentioned much: when everyone was able to get mortgages more easily, that inevitably meant housing prices rose, helping home owners but hurting home buyers. Why? Because if I want a house and you want a house, and we are competing to buy that house, and we are both now able to come up with more money, then one of us is likely to be willing to pay that extra money to be the one who gets the house. This helped drive the housing price boom, which helped drive the illusion that housing prices could keep going up and up. My point is that the unsustainable housing prices weren't just due to Greenspan's < 2% interest rates in 2002-04 increasing the money supply, though those contributed. Meanwhile, people pulled that new equity out, rather than leaving it in. It isn't just the financial companies that exposed themselves to unnecessary risks; so did the average homeowner.


Ann Nonymous
Comment posted January 13, 2009 @ 4:54 pm

Not worth the electrons I spent to read it.


Thomas
Comment posted March 26, 2009 @ 3:44 pm

You still don't get it do you? It was a lend to these people or else, proposition dimwit. Lend or we'll block your expansions, lend or we'll picket your branches, lend or we'll drag you into the governing bodies and bleed out your finances, lend or we'll pull your rating, lend or you'll not be able to do mergers! They handed a loaded gun to lobbyists and potential LMI debtors so that the politicians could keep their hands clean and let groups like ACORN help accomplish their goals for them. Clinton wasn't called Slick Willie for no reason pal.


Thomas
Comment posted March 26, 2009 @ 10:44 pm

You still don't get it do you? It was a lend to these people or else, proposition dimwit. Lend or we'll block your expansions, lend or we'll picket your branches, lend or we'll drag you into the governing bodies and bleed out your finances, lend or we'll pull your rating, lend or you'll not be able to do mergers! They handed a loaded gun to lobbyists and potential LMI debtors so that the politicians could keep their hands clean and let groups like ACORN help accomplish their goals for them. Clinton wasn't called Slick Willie for no reason pal.


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