NPMA Legislative Day: A Few Thoughts

By Rich Kozlovich

This year was tough on an old man with two new knees.  Although the weather was beautiful on Tuesday when everyone went to the Capitol, the lines into the Senate offices were around the block, and that was brutal on my knees.  It is good to have understanding friends in that kind of situation…..thanks to all who helped me.  I clearly should have stayed home this year, but in spite of it all, I enjoyed this event, and the food was really good. 

What I enjoy most are the talks by prominent politicos or news commentators, since I generally try to make some point or at the very least ask pointed questions.  On Monday we saw a debate between former Democratic Senator from North Dakota Byron Dorgan   and Grover Norquist, founder and president of Americans for Tax Reform.

There were a number of things that really stood out to me.  Dorgan was making political speeches and Norquist was making critical points, clearly following a line of logic and presenting information that outlined his views.  In Byron’s case; he sounded like someone who took all the one liners he could think of and formed them into 15 minute presentations.

If you eliminated the non-sequiturs and other logical fallacies it was obvious that he said nothing and had no logical line of thought.  Mostly it was a kumbaya - we just gotta come together and stop gridlock - followed by how he loves America, the audience loves America, foreigners love America, jokes and more kumbaya about ending gridlock for the good of the nation.  Perhaps he didn’t understand that some people in that audience feel that the only time the nation is safe is when Congress is gridlocked and Justice Ruth Bader Ginsburg is fast asleep on the bench.   In short he said nothing.  That kind of thing really isn’t acceptable.  I really like it when someone takes a position or at least says, “I don’t know”.   

However, there was one thing that stuck in my mind he didn’t say.  At the beginning of Dorgan’s first 15 minute presentation he discussed a series of economic swings but he didn’t mention the one that brought the nation and the world to its economic knees; the Community Reinvestment Act (CRA); so I asked him why he left that out.  The CRA was responsible for the housing bubble and the housing collapse that created a cascade effect costing trillions in investment dollars.  What was Dorgan’s answer?  He said he didn’t believe that had a thing to do with it.  It was hard to keep from laughing.  

But that wasn’t what I found most interesting. What I found most interesting was that fact that there were those in the audience that thought Dorgan actually said something.  That is scary.  So in order to dispel any foolish thoughts that this man is worth listening to, or that he had anything worthwhile to offer I would like to explain what the CRA did. 

On Februry 2, 2012 I posted this article; Zone of Reality: CRA Meltdown.  Below is the article for those who may not have known about the CRA on Monday.

Over the last two years I keep being amazed at how this story is being twisted. No matter how hard you try you just can't get people to openly exclaim that this economic crisis is a direct result of the sub-prime mortgage crisis. The sub-prime mortgage crisis is a direct result of the Community Reinvestment Act. In a article I wrote some time back I noted the following about this Sub-Prime Mortgage Crisis!

In 1977 the media discovered the word “redlining” and they used it like a whip. Redlining was supposed to be a racist action by the banks who wanted to prevent poor people and minorities, primarily black, from owning houses. Sounds insane doesn’t it? It is! Especially when a study came out showing that there was no redlining, that in fact these people were denied these loans because they were bad credit risks.

Yet redlining is what they had everyone believing, so in 1977 Congress, under the Carter administration, demanded that lending institutions pay attention to the “credit need” of the community and not on their ability to repay the loan and passing the Community Reinvestment Act of 1977. Under this act the banks would be graded on how many of these bad loans they gave out. If they did business in this manner they received a high score. The score was directly proportionate to how easy it was to do a merger or an acquisition or even open a new branch and as I understand it…their ability to borrow money from the government. All of which the government controlled! Under this act if some community activists, like the group ACORN, didn’t like the way you did business could cause all sorts of problems.

Stan J. Liebowitz, economics professor at the University of Texas at Dallas writes; "Home mortgages have been a political piñata for many decades. Greedy lenders aren’t the real reason for this mess. “In a nutshell, Liebowitz contends that the federal government over the last 20 years pushed the mortgage industry so hard to get minority homeownership up, that it undermined the country's financial foundation to achieve its goal."

Everyone was happy; everyone basked in the blaze of self congratulations. All of these bad loans were now declared to be “innovation lending” and they were praised by the regulators, academics and activists and because so much pressure was put on the lending institutions in the 90’s by the Clinton administration homeownership among minorities surged. The media called this “one of the hidden success stories” of that administration. At one point the Federal Reserve Bank of Boston is supposed to have “produced a manual in the early '90s that warned mortgage lenders were to no longer deny urban and lower-income minority applicants on such "outdated" criteria as credit history, down payment or employment income.”

Jack Cashill wrote; "Now, they could pat themselves on the head for helping make the home-owning class "look more like America" and still get a smart return on their investment. With housing prices on the rise, private investment groups actively began to buy and bundle non-traditional loans and sell them to investors on the private market. As the demand surged in key areas, and fresh capital flooded the market, lenders came up with innovative new ways to attract sub-prime borrowers, most notably the interest-only, adjustable-rate mortgage (IO ARM)." 

It was a real catch-22. If they continued giving out these bad loans, they would go out of business. If they didn’t comply there were real financial penalties and if they raised interested rates they were accused of “predatory lending”.

Unfortunately this was undermining an entire economic system and the inevitable happened.

Jeff Jacoby notes;“Trapped in a no-win situation entirely of the government's making, lenders could only hope that home prices would continue to rise, staving off the inevitable collapse. But once the housing bubble burst, there was no escape. Mortgage lenders have been bankrupted, thousands of subprime homeowners have been foreclosed on, and countless would-be borrowers can no longer get credit. The financial fallout has hurt investors around the world. And all of it thanks to the government, which was sure it understood the credit industry better than the free market did, and confidently created the conditions that made disaster unavoidable.”

I expaned on this subject in an article entitled, Methodologies! What are they? noting that;

These loans would move from a “mortgage originator” to a “mortgage investor”. “Smaller mortgage originators will often sell their mortgages to large scale originators or aggregators, which pool mortgages together and securitize them into mortgage-backed securities (MBS) through Fannie Mae, Freddie Mac or as private-label securities.” The idea was to make sure that you could create a Triple A rating for that bundle of mortgages. Once they got a Triple A rating they would then sell them all over the world; usually to investors with large amounts of capital but very little understanding of what they were buying. However, this lack of understanding wasn’t exclusive to unsophisticated buyers. Alan Greenspan himself stated in the show that he didn’t understand the complexities of the CDO mortgage market either, and that he just didn’t understand the numbers. (follow the link to the article to follow what a CDO is)

The greed involved permeated all levels of the financial world. Although many knew that this couldn’t go on and some made an effort to make this clear to some of the biggest players in the field they continued to cling to the idea that the mortgage market would appreciate six to eight percentage points every year to infinity. Clearly that was insane.

Alan Greenspan was asked; why didn’t they just get out? He claimed that they knew the dangers but thought they were smart enough to get out when it was the right time. Baloney! Greenspan, the moderator and all the people interviewed left out the reason they didn’t get out. They couldn’t. Once they bought into the Community Reinvestment Act it became a Catch 22 situation; in for a dime in for a dollar, and in forever.

Since they were in so deep and in forever they refused to see anything else except the potential profits for today. The government forced them into this situation and the government was going to back them through Fannie Mae and Freddie Mac, so they went after the short term rewards without any concern for the long term consequences; after all, they were making tons of money and they had no choice. When you dance with the Devil you won’t call the tune, you won’t choose the dance, you won’t lead, you can’t change partners and you may not be allowed to leave the dance.

An article entitled, Analysis: Reckless Mortgages Brought Financial Market to Its Knees the author says; Surprisingly, research done by economists a decade ago in 1998, particularly by Professors Ted Day and Stan Liebowitz at the University of Texas at Dallas, predicted the current problems and tried to warn people of a different cause. Starting during the early 1990s, mortgage-underwriting standards have been consistently weakened. Many of the names involved in the forefront of those changes, Freddie Mac and Fannie Mae as well as Countrywide and Bear Stearns, have been the most prominent financial entities to become insolvent."

So why couldn't anyone change? The Community Reinvestment Act was imposed by the government and those who attempted to step in to fix it were rebuffed. By whom? Below is part of that answer!

Defenders of the Community Reinvestment Act have tried to maintain that the law didn't require lenders to adopt lax lending standards that characterized the boom years.

Unfortunately, that's just not true. The CRA led directly to lending practices that included extremely low to nonexistent down payments, outrageous loan to value ratios and other "innovations" that later became some of the best predictors of defaults and foreclosures.  Editors Note: Please go to the originals for further links. RK

One last point. I really do think that when we get to the Q and A periods Bob should say: "Before we have any other questions; Rich, do you have any questions?"  That way we can get right to the meat.