Ted, > Because you and Harris don't understand real estate, you have come to conclusions that only demonstrate your lack of understanding.
Explain to me how the promotion of lending in low-to-moderate-income areas doesn't inherently encourage high-risk lending or poor underwriting.
It wasn't to encourage lending in low and moderate income areas. It was to stop redlining. Back in the middle part of the last century, many neighborhoods, including middle income ones, were considered ethnically 'undesirable' and were redlined. Banks didn't provide mortgages in those areas. Consequently, they experienced a great deal of absentee landlords and became increasingly rundown. There was no "pride of ownership". That meant the first Koreans in Koreatown were redlined as well as middle class blacks in Baldwin Hills where homes now cost $700-800K. The CRA provision changed all of that but very slowly.
The fact that income is low is a big risk in itself. The underwriting should have been actively backed up by the Feds.
If I don't understand real estate, then here's your chance to "educate" me.
What happened in the earlier part of this decade had nothing to do with the CRA provision. In its early years, the boom was legitimate. However, as demand began to wane, bankers made it easier to get a loan. They came up with modified, sub prime mortgages which resulted in a low down and low initial payments, permitting people with low incomes to qualify. In addition, the banks encouraged appraisers 'to juice' their appraisals so that the property had enough value to qualify for the loan needed. The playing with appraisals had been done before by a few down low mortgage brokers but rarely had a credible bank encouraged such practices. That all changed in the roaring first decade of the 21st century. The modified mortgages the banks created were totally new and extreme in their approach. Millions who normally would never have qualified for a house were able to buy one.....often in flashy new suburbs like those in Riverside/San Bernardino. And if a person or family still didn't qualify even with a modified mortgage, the banks fudged their income supporting documents to make sure they qualified.
And so that you fully understand how this scam went. During this time, say a person bought a $240K house. With no money down and a 6% interest rate, a typical mortgage mo. mort. payment [P&I] would have been $1200 per month. But say the person's income wouldn't justify a payment of that amount, they [the bank] would come up with a mortgage payment that the customer could afford for a set period of time....an amount say like $600 per month. After the set period was up....usually two years.....the payment would then be bumped up to the $1200 per month normal payment plus the amount of the mortgage payment they didn't pay for two years which was then reamortized over the remaining life of the mortgage. To be successful, this lending approach presumes that the mortgage recipient would be able to double their income in two years. Since most of the people in question tended to be lower middle class, frequently non English speaking people, there was no way their incomes would double in two years and so when the two years were up, they defaulted. If you remember, the defaults come in waves and those in the housing industry knew when the worst of the defaults would be over......two years after the last of the sub prime loans had been inked.
In the meantime all these toxic loans were getting generated all over the country. The way our housing system is set up....once a bank has issued a mortgage or a housing loan, they sell many of those loans to a secondary lender....in order to free up their cash so they can provide more mortgages to new customers. Two of the biggest secondary lenders are/were Fannie and Freddie. Often, Wall Street firms act as intermediaries....packaging the loans and selling them to Fannie. Well as it became apparent that the banks were generating a great deal of toxic loans, Wall Street got creative and came up with new financial derivatives like CDOs to cover the bad loans. I don't know how they work specifically but their intent was to bury the toxic loans so deep in a multi loan package amid very good loans that it was nearly impossible to locate the bad loans. To this day, Fannie and Freddie do not know the extent of the damage.
So what you had was two ticking bombs ready to go off....the toxic loans pressed on Fannie and Freddie and the toxic loans the banks chose to keep. As the bombs when off, Fannie and Freddie were all but destroyed and have become just shells of their former selves, and nearly a 1000 banks have gone under and many big banks are still on life support. Its been an unmitigated disaster that had nothing to do with the CRA provision that Harris loves to bring up.
What the CRA provision has done is opened up neighborhoods that formerly were off limits to lending. Many of those neighborhoods are the ones that started gentrifying in the 1980s going forwards. The Koreans in Koreatown overcame the redlining by bringing in money directly from Korea.
Please feel free to ask any questions. I know this garbage can get complicated. |
