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Snippets from Tippett Blog

The focus of Snippets is to educate and provide industry insight. Our promise is to enlighten and showcase market trends pertaining to mortgage lending, finance and the housing market.

 
 
 
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The LIE That Won't Die

There are two major inaccuracies the media has done a superb job of portraying since the financial collapse of 2008: First, that mortgage brokers were predominantly the reason the collapse happened & secondly, that poor & low income people were equally to blame. This article sheds light to the real reasons: greed, lax underwriting & factitously rated mortgage backed securities. Everyone is entitled to the TRUTH!

via Forbes

 

The Lie That Won't Die: 'Poor Borrowers Caused The Financial Crisis'

 

Erik Sherman , CONTRIBUTOR 

 

This Friday, Jan. 19, 2018 photo, shows one of multiple properties located in the Esperanza sector that are currently for sale, in Vieques, Puerto Rico. Hundreds of thousands of Puerto Ricans face losing their homes upon the expiration of a three-month moratorium on mortgage payments that banks offered after Hurricane Maria devastated the island. (AP Photo/Carlos Giusti)

This Friday, Jan. 19, 2018 photo, shows one of multiple properties located in the Esperanza sector that are currently for sale, in Vieques, Puerto Rico. Hundreds of thousands of Puerto Ricans face losing their homes upon the expiration of a three-month moratorium on mortgage payments that banks offered after Hurricane Maria devastated the island. (AP Photo/Carlos Giusti)

Banks have led the charge to change mortgage lending to the poor. They, and the current administration, want significant changes to the Community Reinvestment Act. The CRA helps combat redlining: the lender practice of marking entire minority neighborhoods as ineligible for mortgage lending. And a lie from the Great Recession is in use to help justify changes.

Redlining has been around since at least the 1930s, and ironically was the result of the New Deal. Lending maps, based on ethnic and racial composition, wrote off whole areas as being too risky for lending. It was institutionalized discrimination.

Banks don't like the CRA. They want the freedom to take any strategy they wish without control or consequences. That's why politicians in the 1990s ditched the 1930's era Glass-Steagall legislation that put hefty controls on what financial services companies could do. Glass-Steagall did so because the Great Depression was evidence of how reckless people will be if they think they can profit.

The CRA requires banking regulators to take mortgage lending in minority areas into account when banks want permission to grow through mergers and acquisitions. M&A is a must for banks, because power is all in financial bulk.

Banks and their favored elected officials, along with some fervent true believers in certain types of economic theories, have tried various arguments to push for changes in the CRA. One is to claim that banking is "different" now and that banks can't be held to geographic ties. Another is that banks and neighborhoods need flexibility in consideration of the types of loans banks provide.

A pernicious attempted excuse is that regulations are unnecessary because the banks and other financial institutions weren't the actual cause of the financial collapse not so long ago. Instead, it was all the CRA's fault because banks were somehow "forced" to lend to people who weren't honest about their incomes.

Oh please. Forget just for a moment that we have financial services scandals about every 10 to 15 years that result from institutions taking stupid risks. Forget the S&L crisis of the 80s and 90s, the dot com collapse of overhyped stocks in the late 90s and early 2000s, the big financial crisis, the housing market collapse, rigged foreign exchange rates from December 2007 to January 2013, the Libor lending rate fixing just a few years ago … you could go on and on, and that's ignoring everything that happened before. In fact, my 10-to-15 year estimate is overly conservative. Sometimes it seems more like every 10 to 15 months. Or days. Or minutes.

But we're forgetting for the moment how banking executives have proven how irresponsible they can be on a regular basis. We're just looking at the CRA, which has been around since 1977 and clearly hadn't driven the country into a crisis before the 2000s.

Somehow, supposedly, financial institutions suddenly were forced to make bad loans. Except they weren't. If you've ever read any of the CRA, which its critics generally haven't, you'll not see a word about providing more lenient lending standards. Banks aren't required to change their risk management and underwriting processes at all, which is why for decades there was no enormous problem that sprang up. Lenders weren't taking undue chances.

That started in the 2000s when, now free of Glass-Steagall, all the financial institutions could start getting into other profitable lines of business. As one former industry CEO once told me, banks scrambled to get into these other areas that they didn't really understand and they failed to undertake the necessary risk management.

In this case, though, the lenders did realize that they had thrown out underwriting prudence. They made all these loans, bundled them together into collateralized debt obligations (a form of bond in which payments from debtors creates cash flow), and then sold them to leave others holding the bag.

Everyone except the investors were in on it. The lenders and banks packaged them, the rating agencies provided ridiculously sunny evaluations, brokers pushed them, paperwork was frequently faked at some level, and banks even used other financial instruments to bet against their customers who bought the CDOs.

With all this known, even now there are those who promote the view that it was all the borrowers, as finance and regulation writer Francine McKenna noted. A speaker at a recent conference on fraud roughly said, "The financial crisis was caused by some fraud perpetrated by irresponsible borrowers in multiple ethnic clusters."

Research has shown — as noted by law professor and author Jennifer Taub — that only 6% of high-cost loans had any connection to CRA lending. In fact, loans from CRA-connected lenders were half as likely to default as those made in the same neighborhoods by other mortgage lenders that didn't come under the CRA.

However, when it comes to pushing regulation for the benefit of the few, don't expect inconvenient fact to play a prominent role. We're living at a time when major corporations pay actors to show up at city planning meetings and pretend to support a company's line. What's reconstructed history in comparison?

Brad Tippett