The Community Reinvestment Ac tis a federal law that requires banks and savings and loan associations to make loans throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services. The Act was passed in 1977 under the Carter administration. That would be a democrat administration with democrats controlling both houses.

In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities. The new rules went into effect on January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks. Prior to the CRA expansion authorization under President Clinton and the Democrats, home prices increased with inflation, but after the CRA expansion authorization, home prices became unhinged from inflation. The CRA caused home prices to rise too fast as economicfundamentals did not support the “wedge” or spread between the Consumer Price Index (CPI) and the price of homes. What supported the high home prices was regulation motivated credit.

Banks were forced to loan to consumers who were not credit worthy with “no verification of income or assets; little consideration of the applicant’s ability to make payments. The people losing their homes are victims not of ‘predatory lenders,’ but of government-sponsored — in fact government-mandated — political correctness. The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved.” Activist organizations such as ACORN get shakedown payments, community influence and stature from being a reliable source for loan money and get what amount to “broker’s commissions” for doing so. Lending decisions were removed from bankers and handed over to activists as the activists were given a powerful seat at the table. ACORN in part, not banks alone, now controlled who got CRA mandated loans.

As the amount of subprime loans went up, and home prices increased, the country’s overall mortgage portfolio began to deteriorate and become inherently more risky. Bankers began making loans that were 90 percent, or even 100 percent of the value of the property. Appraisal firms were pressured to over-value properties, justifying a loan amount that would give the borrower the money he or she needed. Whether the borrower could afford the payments, or whether the real underlying value of the property justified the loan, were completely different matters. “Stated income” loans were made that merely required the borrower to tell the bank how much he or she made—no supporting documentation needed. Adjustable Rate Mortgages (ARMs) that initially required interest only payments enabled borrowers to qualify for bigger mortgages. Of course, when payments were adjusted upwards at a later date to provide for principal repayments or higher interest rates, they often became too high for the borrower, leading to payment defaults. And finally, so-called “Ninja” loans were made to borrowers with “no income, no jobs, and no assets.”

Because bankers could sell off loans to Fannie Mae, Freddie Mac or Wall Street underwriters anxious to underwrite MBS and CDOs, the bankers no longer had to live with the loans they had made. They could simply make the loans, collect the associated origination fees (the higher-risk loans typically carried the highest fees), and then pass on the responsibility for the future performance of the loans to others. By bundling a group of mortgages together, the risk of any one loan going bad was reduced, or so the theory went.

With so many risky new loans being made, though, it was only a matter of time before delinquency rates began to increase and real estate values to crack.

In 2003, the Bush Administration proposed a new agency to oversee and regulate Freddie Mac and Fanie Mae, (the government sponsored companies that are the two largest players in the mortgage lending industry) This would have been the most significant regulatory overhaul in the housing finance industry since the S and L crisis a decade ago.

The Democrats stopped it…supporters of Freddie Mac and Fannie Mae said efforts to regulate the lenders tightly under the proposed agency might diminish their ability to finance loans for lower-income families.

Barney Frank (D-MA)

“The more people exaggerate these problems, the more pressure there is on these companies (Freddie and Fannie), the less we will see in terms of “affordable housing.”

Melvin Watt (D-NC)

“…and in the process weakening the bargaining power of poorer families and their ability to get “affordable housing.”

In 2005, John McCain warned of the pending mortgage collapse. He co-sponsored a bill…The Housing Enterprise Regulatory Act of 2005.

(Google it at http://www.govtrack.usBillS-190)

The bill would have regulated Fannie May and Freddie Mac, but again the Democrats blocked it and it never became law.

This is a democrat party problem pure and simple.

bestweather on October 6, 2008 at 4:05 PM