AI's answer to the CRA:
- Subprime Source: The vast majority of risky, high-default subprime loans originated from non-bank, independent mortgage companies not covered by CRA requirements.
- Performance: Loans made by banks under CRA scrutiny actually performed better than similar loans made by non-CRA lenders in the same neighborhoods.
- Default Causes: Defaults were widespread, even in higher-income areas not targeted by the CRA, largely driven by nationwide issues like adjustable-rate mortgage resets and dropping home prices.
- Empirical Evidence: Studies, including analyses by the Federal Reserve, found little to no connection between CRA compliance and the explosion of high-risk mortgage lending that led to the crisis. [1, 2, 3, 4, 5, 6]
Your AI slop is making you dumber.
By the time of the 2008 financial crisis, Fannie Mae and Freddie Mac (the GSEs) held or guaranteed roughly 70% of all subprime and other low-quality, high-risk mortgages that were in default or at risk of defaulting. These government-sponsored enterprises held, in total, about 19.2 million risky loans (over 70% of the 27 million outstanding) by 2008
CRA and Freddie/Fannie are apples and bowling balls. One has nothing to do with another. CRA covered traditional banks.
As already mentioned, vast majority of subprime was originated by non bank mortgage companies. Nothing to do with CRA.
Furthermore, only something like 2-3% of mortgages backed by Freddie/Fannie were even in default by 2009. Which was much lower than the default rate of mortgages outside of the conforming space (which was like 7-8% by this same period). They ran into liquidity problems because they couldn't roll their paper, requiring the government takeover.
You should really try reading something other than the slop arguments that were originated in political shops. The factual, dry history doesn't support your conclusions.
You should really try reading something other than the slop arguments that were originated in political shops. The factual, dry history doesn't support your conclusions.
But then he can't blame Clinton.
@larsiu it’s not the presidents job to encourage MBS. I doubt Clinton had an understanding of what effect repealing Glass-Steagal would have on the housing market but that really isn’t the issue.
In terms of ‘08, all of the Wall Street deregulation in the world is moot without cramming down low income mortgages at the ground level. Banks don’t lend to bad debtors, it’s not in their interest to do so, unless there is pressure to do so. And that’s the genesis of the entire crisis.
@jdb help us out. Farva's take here just feels instinctively stupid, but we need someone with better financial knowledge to explain why.
Sorry what is the question here? I'm trying to catch up
Farva seems to be saying that the real problem was government pushing risky loans. Not the deregulation, not the consolidation. Just the push to give out more loans to poor people.
Seems silly to me. Not saying risky loans are a good idea. Just saying it looks to me like the changing structure of the banking industry was more directly the culprit.
I know we've talked or discussed this in the past. It was such a clusterfuck (pardon my French), that you cannot logically place blame on a single factor.
However, I think you are being too dismissive of his stance. Few serious people (read Bernanke, Ray Dalio, Jamie Dimon) would view the repeal of Glass-Steagall as a primary factor in the GFC. There is an argument to be made that it exacerbated the problem, but there are a couple of clear counterarguments.
1) The investment banks hurt the most by MBS deterioration (Lehman, Bear, Merrill Lynch) were really pure play investment banks, not hybrid commercial-centric banks with large investment banking presence (e.g., JP Morgan, Wells Fargo). Think about all of the key players that you heard about aside from Lehman and Bear - such as AIG, Countrywide, etc. - none of those would have been subject to G-S.
2) Many commercial banks without investment banking presence that failed (M&I, WaMu, etc.) also weren't subject to anything G-S related. They just issued boatloads of shitty mortgages and C&I loans that couldn't be offloaded when liquidity dried up.
3) Many Canadian and European banks that had dual offerings (commercial + investment banking) were in the camp of JP Morgan, Wells, etc. Examples would be RBC, UBS, Credit Suisse, and Deutsche.
There is an argument that deregulation impacted the GFC, even if G-S wasn't a contributing factor. The emergence of the shadow banking and non-bank lending and origination community was a huge issue. Those skirted regulations that traditional banks and lenders had to abide by. I'd put some of the subprime lending into the deregulation camp, as well.
If you think about it, banking standards and how banks value mortgages and loans on their books are directly related to credit quality and risk. The idea that aggregating a bunch of subprime mortgages into a pool via securitization materially derisks the security and thus enhances its value has some financial logic. Until economic indicators break down and nobody wants to own any of those assets, including the underlying subprime mortgages that shouldn't have been pushed in the first place.
If you read some of the old articles from the NY Times with James Johnson and Frank Raines, they made it clear that there was a noble intention behind reducing underwriting standards to make homeownership more widely attainable. While that might give people the warm and fuzzies, it is poor economics and financial sense.
Furthermore, only something like 2-3% of mortgages backed by Freddie/Fannie were even in default by 2009. Which was much lower than the default rate of mortgages outside of the conforming space (which was like 7-8% by this same period). They ran into liquidity problems because they couldn't roll their paper, requiring the government takeover.
That completely dismisses F&F's role in the 2000s, though. It lost market share rapidly to private lenders, and thus, became one of the biggest buyers of paper in the secondary market. To this point, their underwriting standards, even for subprime loans, were relatively strong. But they bought $600B of securities, including subprime MBS that were packaged as AAA or AA paper but were a pile of crap. Do the ratings agencies deserve blame for this? Of course. Did F&F do reasonable due diligence? Hell no.
Some stats:
- Private-label subprime PLS purchases: GSEs bought roughly $600 billion combined in subprime private-label securities from 2000–2007. In 2003–2004 alone, they purchased ~$214 billion, representing about 40% of all subprime PLS issued that period (a sharp increase from prior years). They were the single largest buyer of these securities at times.
- Holdings: Despite large purchases, they did not hold most long-term (they securitized or sold much of it). At end-2008, reported combined holdings were ~$154.6 billion in subprime PLS + $62.5 billion in Alt-A PLS.
- Whole loans (direct purchases): GSEs also bought significant volumes of Alt-A (low-doc, high LTV, etc.) and some subprime whole loans. These were often "goals-rich" (helped meet affordable housing targets) but not strictly required by the mandates. Critics like Edward Pinto (AEI, former Fannie credit officer) estimated GSE exposure to non-traditional mortgages (subprime + Alt-A by characteristics) at ~$1.8–2+ trillion by mid-2008, including guarantees.
- Context in market: Subprime/Alt-A originations exploded (from ~$171B combined in 2002 to $877B in 2005). Private-label securitization dominated the riskiest slices, but GSE demand for AAA tranches provided liquidity and helped fuel issuance. GSEs held a large share of the conforming market overall but ramped up risk-taking amid competition, accounting scandals, and pressure to maintain market share/profits
That absolutely creates market perceptions and expectations, regardless of intent.
@jdb isn't there a lot of evidence that poorer people defaulted at a much lower rate than McMansion people? It appears to me it was, "standards are lowered to help people buy their first home, so we will give a 125% ARM to a guy buying his 6th McMansion to flip it." Those aren't the same.
@jdb that's exactly what I wrote a couple of days ago, above.
FF actions were driven by their own profit desires. They had incredible ROE numbers through the 2000s, by being able to utilize their implied backstop as well as a direct borrowing capacity from Treasury. This had been in existence since their creation 1960s. But their leadership really put the pedal to the floor in the 2000s. Their investment portfolio ballooned, and the implied backstop subsidy did a lot to enrich shareholders during that period. They had huge lobbying clout on the Hill, and nobody was willing to step in and say they were getting out of control. So much of the economy was tied into housing by the 2nd Bush admin, nobody wanted to upset the apple cart.
All that said, if rating agencies had done a proper job, much of this would have been avoided. The underlying models didn't put in proper odds of a significant drop in value of residential real estate. Foreclosures don't matter as much, if the underlying asset maintains value. Once it started to crack in early 2007, things tightened from the lending side... Which led to the floor falling out within 12-15 months. And then contagion into everything else
@arthur-dent no data but I doubt that. From people I know working on foreclosure shit it was across the spectrum as people were stretching to buy McMansions when they couldn’t afford them. A lot of people just walked away from upside down properties. An associate at my firm. New construction in riviera beach. Put his keys in an envelope and left them in the mailbox
@jdb isn't there a lot of evidence that poorer people defaulted at a much lower rate than McMansion people? It appears to me it was, "standards are lowered to help people buy their first home, so we will give a 125% ARM to a guy buying his 6th McMansion to flip it." Those aren't the same.
No, where are you getting that from?
From Gemini:
Mortgage Performance Comparison
| Metric | Subprime Mortgages | Prime (Regular) Mortgages |
| Serious Delinquency (90+ days) | ~25% – 30% (reached 40%+ for ARMs) | ~4% – 7% |
| Foreclosure Rate | ~15% – 20% | ~1% – 2.5% |
| Market Share (approx.) | 15% | 80% |
-
Disproportionate Impact: In 2008, subprime loans accounted for only about 12–15% of the total mortgage market but were responsible for nearly 48% of all foreclosure starts
This thread has taken an odd, but informative turn.
@squeakyclean i'll also add that there are winners and losers too. mortgage/title companies etc. people who flipped houses. parasite jobs. my dad had his best years ever during all that time. he was making absolute bank as a construction worker. 12 hour days six days a week
@jdb subprime doesn't mean poor. It could well be an over leveraged speculator. It could be someone with decent income but terrible credit due to extravagant lifestyle. Think of the amount of people that were buying 2nd, 3rd 4th houses in Vegas and Phoenix markets and trying to flip for a quick buck. Remember this was the era when no money down real estate investment gurus were coming out of the woodwork.
This finance professor at Duke has an interesting perspective
https://www.fuqua.duke.edu/duke-fuqua-insights/adelino-subprime
Trump said that if I voted for Kamala that we would have more war, higher gas prices, higher food prices and higher inflation. I didn't listen.