Wednesday, October 15, 2008

Financial Crisis has nothing to do with Democrats and the Community Reinvestment Act

In an only slightly more sophisticated ploy then saying poor minorities caused the financial crisis by buying homes, the latest right propaganda video blames the Democrats and the Community Reinvestment Act for forcing banks to make risky loans.

Ha, ha, ha.

Except unsophisticated idiots fall for this.

Here is what the Houston Chronicle business writer Shannon Buggs wrote about that email and video that has been going around.
Crisis has nothing to do with Reinvestment Act

CRA-motivated loans tend to be the opposite of subprime loans, most of which were issued by mortgage brokers and mortgage companies and financed by investment banks, none of which were covered by the CRA.

• The CRA has been around for three decades and the financial instruments that allowed the subprime mortgage industry to rise and crash came into existence within the past five years.

• Investment banks, not the federal government, had the appetite for risky loans.

The Wall Street-based market for reselling subprime created the demand for riskier loans. Because the debt would be sold into the market and not kept on the lender's books, many lenders did not bother to verify a borrower's income or assess ability to repay the loan.

So the next time you get an e-mail instigating class warfare, don't go for the okey-doke. Hit delete and send it straight to the electronic trash can where it belongs.

The real root causes of this economic crisis are an unregulated "shadow banking system" that fostered unmanageable risks, extreme corporate avarice and consumer excess.
You got that? I say blame more Wall Street that incentivized bad loans, dishonest real estate agents that pushed them, financial institutions that bundled them up, others that "rated" and insured the bundles as AAA quality, and big corporations that sold them around the world.

UPDATE - The Chronicle followed with an editorial:
It is true that many people — including those of moderate means and the well-to-do — signed on to mortgage and refinancing terms that they should have known were beyond their ability to repay. They must share some culpability for the subprime disaster.

But as many more thoughtful commentators already have pointed out, most subprime mortgages were financed by lenders that are not depository banks and therefore not regulated by the act. What's more, there is no federal edict or statute that mandates that unregulated lenders create loan products requiring no documentation of income or assets and for amounts well above the realistic value of the purchase property. And no law pushed lenders to aggressively market their wares to clearly unqualified borrowers.

Nor did the CRA call on investment banking firms to package and repackage those risky loans into complicated investment vehicles and sell them to investors as highly rated securities.

Meanwhile, it's important to note that not all subprime borrowers were low-income minorities. The majority were white, and many were well-off.

Many lessons will be learned as we work through this global financial crisis. Those lessons should not include the notion that the working poor are bad credit risks as long as they have access to appropriate and tightly underwritten loans.

And no one should come away with the idea that home ownership is not a good plan for most responsible people in this country. It's a bedrock of the American dream that's as sound an ideal today as it was before the bottom fell out.
Smart editorial.

No comments: