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Thursday, September 18, 2008

The Latest Wall Street Fashion: Brown Trousers

As our economy is engulfed by a disaster so bad that its shocks have actually forced the Russians to shutdown their stock market, you may find yourself wondering, "How the fuck did we get here?"

Well, what precipitated the current crisis was the collapse of the subprime mortgage market. And how did the that market get big enough to take down the rest of economy? Well, this eerily prophetic 2000 article from the Manhattan Institute's City Journal goes a long way towards explaining things:
The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects ...
In other words banks were pushed into okaying these CRA-related loans in order to meet the political goal of expanding homeownership. It worked like this: If the banks did not make enough "community" loans for low-income people they were marked under CRA's rating system as racist redliners. The problem was a lot of the people who got these loans eventually had a hard time making the payments. A wave of potential defaults built up over the years:
Even without a no-down-payment policy, the pressure on banks to make CRA-related loans may be leading to foreclosures. Though bankers generally cheerlead for CRA out of fear of being branded racists if they do not, the CEO of one midsize bank grumbles that 20 percent of his institution's CRA-related mortgages, which required only $500 down payments, were delinquent in their very first year, and probably 7 percent will end in foreclosure. "The problem with CRA," says an executive with a major national financial-services firm, "is that banks will simply throw money at things because they want that CRA rating." From the banks' point of view, CRA lending is simply a price of doing business—even if some of the mortgages must be written off. The growth in very large banks—ones most likely to sign major CRA agreements—also means that those advancing the funds for CRA loans are less likely to have to worry about the effects of those loans going bad: such loans will be a small portion of their lending portfolios.

Looking into the future gives further cause for concern: "The bulk of these loans," notes a Federal Reserve economist, "have been made during a period in which we have not experienced an economic downturn." The Neighborhood Assistance Corporation of America's own success stories make you wonder how much CRA-related carnage will result when the economy cools. The group likes to promote, for instance, the story of Renea Swain-Price, grateful for NACA's negotiating on her behalf with Fleet Bank to prevent foreclosure when she fell behind on a $1,400 monthly mortgage payment on her three-family house in Dorchester. Yet NACA had no qualms about arranging the $137,500 mortgage in the first place, notwithstanding the fact that Swain-Price's husband was in prison, that she'd had previous credit problems, and that the monthly mortgage payment constituted more than half her monthly salary. The fact that NACA has arranged an agreement to forestall foreclosure does not inspire confidence that she will have the resources required to maintain her aging frame house: her new monthly payment, in recognition of previously missed payments, is $1,879.
That's not the end the only cause. The author goes to list a number of actions the Bush Administration could have pursued to prevent the current crisis, none of which were done to my knowledge. Meanwhile Fannie Mae and Freddie Mac grew out of control while their Congressional patrons, Democrats primarily, attacked anyone who dared to suggest the entities needed to be reformed. And the titans of Wall Street expressed no alarm over what was an obvious real estate bubble fatter than Chris Farley on the day after Thanksgiving. So we all got fucked.

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