Is the Community Re-investment Act the cause of the financial meltdown?

No. 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks.

You can start with the CRA and go step by step through the entire process of creating a mortgage loan and you will see that nobody did their job. Our politicians started the ball rolling by mandating that lenders make more high risk loans to people who wanted to buy houses. Many of those loans were bad from the start because of zero down, negative amortization and low introductory teaser rates. Our politicians forced lenders to put low income borrowers into the real estate speculation business. It was quite apparent that many of those borrowers had to flip their homes because they couldn’t afford to pay for them. When the housing bubble burst, they couldn’t sell their houses and they defaulted. A number of pundits predicted this problem more than 10 years ago.

Barney Frank (D-MA) and Mel Watt (D-NC) resisted calls for increased oversight of Fannie Mae and Freddie Mac because such oversight would have made it more difficult for their lower-income constituents to get mortgage loans. Their philosophy was that if the only way a person could repay a loan was to waive the requirement that he/she repay it, waive the repayment requirement and make the damn loan!

This is not really an issue of regulation or deregulation. Our politicians do not understand many of the industries they try to regulate, and the mortgage industry is one they certainly did not understand. The industry was rife with conflicts of interest. Why were lenders allowed to delegate loan approval authority to mortgage brokers who were paid a commission on each loan they approved and got funded? Why were lenders paying the fees of the agencies that rated their loan bundles so they could be sold to investors as mortgage-backed securities?

Regulations and oversight are useless unless the regulators understand the industries they are supposed to regulate. And the clowns in Washington clearly did not understand the mortgage industry.

Our current mess cannot be attributed solely to Democrats or Republicans. This is a bi-partisan screw-up and there is plenty of blame to go around. But what we need to do right now is fix the problem. We can allow future historians to assign the blame.

The CRA itself is not the problem as it was originally written. The subprime addition that was then shoved down the lenders throats by the Clinton administration is the problem. Finally, once investors got involved due to the money being made on these bad investments things began to spiral out of control.

I don't have the link readily available at the moment but the NY Times ran an article in 1999 where officials were already talking about how a bailout was going to be needed when the market crashed. You can find it online with a little help from Google.

The Failure to Regulate Freddie & Fanny triggered to meltdown.

CRA increased the demands for housing which helped increase housing prices with false demand.

ECONOMIC COLAPSE DEMOCRATS TO BLAME NANCY PELOSI OBAMA

http://www.youtube.com/watch?v=3EyKiOE78yU&NR=1

All the Clinton appointees reward him!

Struggling Banks Paid President Clinton $2.1 million for ‘Speeches’

http://www.cnsnews.com/public/content/article.aspx...

Edit:

Where do you get Obama trying to solve the Freddie, Fanny mess???

Corporate contributions to Obama:

http://www.opensecrets.org/pres08/contrib.php?cycl...

About 3-4 times the contributions to McCain:

http://www.opensecrets.org/pres08/contrib.php?cycl...

Obama was on their "Payroll"!!

Edit:

Your article shows they are STILL making these cheap loans to people that may not qualify - which means MORE of THE SAME THING that ADDS TO BANKRUPTCYS. A little gasoline on the economic fire?!?

Yes this mess was spread Worldwide as Guaranteed by US gov. property equities packages assembled by Freddie & Fanny. These 'toxic debts' even bankrupted the big 3 banks in Iceland. Now riots seem to be happening there.

http://www.france24.com/en/20081123-protests-geir-...

NO

That bill did not force banks to give bad loans. Anyone who says it does is either very misinformed, or a bold-faced liar.

What it did do is force banks to not discriminate based on location of the property for giving out loans, if the person requesting the loan could prove their ability to repay it.

Prior to the CR-IA, banks were declining loans to most middle and lower class neighborhoods, while reserving capital for only big industrial investments by the rich, making it impossible for many Americans to get loans from anywhere but small local mortgage lenders, because they weren't living in a rich residential neighborhood, or an industrial area. The CR-IA put an end to this practice allowing many Americans, that could prove the ability to repay their loans, to get them.

It was this act that caused most of the problem by allowing banks to consolidate investment and financial services under one roof, making huge trusts that invested in other trust, effectively like tying them together like boat on a lake. Guess what happens when you have 5 boats tied together and you sink the biggest heaviest one... that is right, you have the same effect as if you wrote a bill like the one below, for boats.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Ac...

Yes. Yes it did. The over-regulation was in fact Congress dictating to lenders what lenders ought to do. Therefore, interfering with the market place in a way that required reckless actions.

By encouraging that reckless lending, they encouraged lenders to lend even more money to people who could not pay it back. The lenders profited enormously until one day the bubble popped.

Now you see the beginning of the oil and food bubbles as the investors fled mortgages and went to commodities like oil and food futures.

Had there been no subprime mortgage meltdown, there likely would not have had a major shift in oil prices the way that happened.

And of course with the twin horns of this dilemma hurting us, you can see where its going.

The financial meltodwn was caused by power hungry, greedy corporations coupled with Government officials using the poorest among us for gain. All at the expense of the middle class.

Yes, and our idiotic fellow Americans put the same people in charge to fix this mess. Help us all.

This is probably a little more heady than most of the knee-jerk armchair economists can handle here, but here is how it lays out… (and all of this is vetted through my father, retired VP in charge of the mortgage finance at Bank of America)

The Community Reinvestment Act was passed in 1977 under Carter as a way to make banks provide affordable loans to the “less desirable” or “lowest profit margin/highest risk.” This included first time home buyers, those with “sub-prime” credit, or those looking to purchase homes in areas with the least value growth at the time (inner cities). True and true, it was a Democratic bill that supported their base.

The CRA was a minimum requirement, and at times the feds denied mergers because the two banks had low CRA scores. But fulfillment of the CRA obligations is not the root of the current financial crisis. From what I hear on the radio and have seen on a couple of TV shows, it certainly seems to be a growing and inaccurate drum beat of the right. That surprises me a little since the CRA fuels an “ownership society,” something advocated by Republicans. It also helped to keep taxes lower through reduced infrastructure costs in building new suburbs. It also maintained a tax base for bigger cities. The long term impact of the CRA was to increase ownership, which increased demand, which contributed to the continuing rise of home values since the Act was passed.

Because of the Depression-Era low lending rates from the Federal Reserve during first half of this decade, more people qualified for loans since the interest component of the loan was so cheap. The explosion fuelled a housing boom due to high demand. That then created a ton of small businesses, from real estate brokers to mortgage brokers. The economy grew on the basis of credit. However, greed, short-sightedness, and poor criteria by lending groups failed to account for what happened when interest rates rose. The securitization of risk provided a false sense of safety if some loans went bad. You may recall that the first corporations to sink were investment firms.

So, your question about regulation being the cause of the current problem… Again, a little heady… Investment firms were the first to sink, but deregulation of the banking sector allowed traditionally conservative and sound banks to become “investment-banks.” This used to be prohibited by federal law through two old laws collectively the Glass-Steagall Act, the result of lessons learned during the Great Depression. The repeal of the portion of the two bills occurred in 1999 under the Gramm-Leach-Bliley Act (GLBA). The Depository Institutions Deregulation and Monetary Control Act (1980) also chipped away at portions of the Act, which began allowing the super-mergers of banks and consolidation of capital.

The GLBA was the more far-reaching banking deregulation to date, undoing the separation between Wall Street and banks… a link that precipitated the Great Depression. The GLBA was necessary to make the merger of Citibank and Travellers Insurance legal. Citigroup had been formed more than a year earlier under temporary waiver. The GLBA allowed for unprecedented growth of the financial sector through mergers and development of investment branches within banks. These super-banks helped underwrite the sub-prime loans, which helped fuel the November 2007 peak in the stock market.

But since many of these adjustable sub-prime mortgages re-set to the rapidly increasing interest rate (to hedge inflation), many people could no longer afford to pay and families lost their house after paying in for several years. Foreclosures and short sales increases, driving down the value of homes, and non-subprime families suddenly found themselves upside-down on their mortgage because they took out a home equity line of credit for... credit cards, home improvements, college, etc. With rates higher and the late realization by the industry that qualification terms needed to change, demand dropped very quickly. Panic.

Mortgage securitization wasn’t as secure as believed. The new investment banks invested in the mortgage-backed securities since traditionally they were the most reliable and secure investments… but not with the GLBA deregulation and not with the massive swing in the prime rate. Everything started to drop in November 2007 as a critical threshold was reached and margins were called.

So, in reality, deregulation allowed for massive profits and uncontrolled growth. Uncontrolled markets are much more volatile as greed make people pull out money when it is at risk, which then precipitates further declines, which then has deeper and broader impacts on the entire economy.

But really, all you need to do is listen to former Fed Chairman Greenspan’s testimony from Congress to realize that this wasn’t the CRA, it was “a catastrophic failure of the financial sector to self-regulate.” Greed, as always, it the cause. That is why the

No, de-regulation, which allowed the invention of exotic derivitives like credit default swaps is the real culprit.