Banks that wanted to make an aquisition, merge or be aquired by another banks had to have a green light on CRA rating to move forward with any of that. Thats the force part of the equation.
Force? LOL! That was Clinton swagger. There is nothing in CRA that says anything at all about enforcement or about acquisitions or interstate operations. Even under deregulation, the latter did require a federal checkoff, so Clinton implied that banks with intentions in those areas better have an acceptable CRA rating if they expected their applications to be acted on expeditiously. There are no penalties of any sort included in CRA. There are no means of enforcing anything. What prompted expanded operations in previously underserved communities was the carrot of proven nice profits, not the stick of anything the feds could actually have done.
Really? The financial crisis we are discussing says otherwise. Of course they performed better in the 90s. No one really knew about how much money could be made and the streamlined underwriting to the GSEs wasnt in place. After it was, in about 2000, the process gathered steam and GSE involvement increased.
More aimless staggering. The LMI cat was well out of the bag by 1997 and more than just CRA-covered institutions were getting their feet wet in that new market. LMI and subprime are of course not synonymous, but as for non-conforming loans, Fannie Mae began experimenting with credit models in 1999. The conforming model of course defined the credit instruments that ruled in prime markets, and the GSE's expected that the same would come to be he case in subprime markets. The instrument they were designing and testing was 30-year fixed-rate loan with front-loaded fees that a borrower could earn his way out of with consistent performance. But smelling profit, Wall Street had other ideas, and they and their private broker henchmen pulled an end-around. Before the GSE model could be fine-tuned and rolled out to originators, the
Big Bypass had been built out and brokers were writing and pushing all sorts of exotic instruments that generated a lot of short-term profit and a lot of long-term risk. It was unfortunatley these low-doc, adjustable-rate, teaser-loans that came to dominate even in some prime tiers as sucker borrowers were lured into signing paper that they really shouldn't have.
If by "streamlined underwriting" at the GSE's, you are referring to
Desktop Underwriter, a new version was indeed rolled out in 2000, but it was version 5.0. We are currently on version 9.0. This was not a new thing, but DU (and Freddie's LP equivalent) were much used to get quick purchase decisions for qualified loans. Some of those crooked storefront brokers would try to resubmit a rejected loan five or six times, hoping for a different outcome, but mostly the stuff that DU spat out simply got sent off to Wall Street. They didn't care about standards.
I think you need to scroll back and see the GSE involvement of the market rising and rising. Thats the risk release valve for the finance companies--insuring losses through AIG or repackaging and selling to GSEs. They had over half the market and in 2006 they were the only ones doing any volume of underwriting and buying.
The GSE's have had mortgage market involvement for 75 years, and as the population and market grew, guess what else did. You are perhaps meanwhile confusing "finance companies" with "investment banks"? The GSE's one-time 70% share of the primary market had sunk to below 25% by late 2006. And while AIG made quite the dunce of itself playing around in MBS markets, that was their own private party. They eventually got themselves pinched in the twin vises of CDS's that they hadn't hedged a nickel on, and short-term assets swapped for longer-term notes that were suddenly non-marketable. They owed cash to everybody, everybody wanted their money back, and the company didn't have a dime. Their abject stupid behavior made them a house of straw in a forest fire alright, but AIG didn't create the forest fire. That was Wall Street.
You are buying the greed line entirely too much. The greed was in part because the belief was firmly placed that real estate could not go down appreciably. Government bought up and backed the market for the same reasons.
You are making me laugh. No one in the Wall Street loop thought they were doing the right thing. They all knew they were cheating by creating and selling notes that would fail. I'll be gone, you'll be gone. It will all be somebody else's problem. Strip off the profit, sell off the risk. The one thing they failed to anticipate was how long the opaque tentacles of systemic risk they were creating would turn out to be. When it all started to go wrong, the smart boys were left holding the short end of their own stick.
Ive got to ask, do you feel this is all due to Wall Street greed? I think there is plenty of blame to go around but you seem to be overly apologetic about government involvement in this whole mess and it seems to color your views on who shares the blame. I think its pretty much everyone. You seem to think its just the banks and wall street. Thanks in advance for clarification.
Blame belongs with those who earned it, and this blanket, well, we all contributed in some way or other is a big bunch of baloney. Tax cuts for the rich were a disaster. These were an automatic decrease in aggregate demand. The Fed announcing that it was freezing interest rates in the long-term was a disaster. Interest rates and asset prices are inversely related. What did anyone think would happen to housing prices? The Fed and SEC doing nothing as Wall Street started sopping up and passing on all that hopped-up paper from Countrywide et al. was a disaster. By late 2003, articles in scholarly and trade journals were already warning of a crisis when interest rates rose which of course they did between 2004 and 2006. Nobody paid any attention. Bush took leverage limits off of Wall Street and raised affordable housing targets again. What was he thinking? Greenspan said he was keeping a close eye on particularly the subprime situation and would take any appropriate action. Hah! They all stood around and encouraged the whole mess, and you wonder why analysts blame them?
The people who left their fingerprints on this mess were the Bushies who created the conditions for it, those who took knowing advantage of those conditions -- including brokers, the Wall Street Big Five, a bunch of appraisers who rightly felt they had to go along to get along if they were ever going to get work again, and the stupid bond rating agencies whose response to escalating demand was escalating shortcuts that provided no actual rating of securities at all. And then there were those in front of whom all this played out, and yet they did nothing. That would be the Bushies yet again.
Not responsible at all meanhwile were homeowners, homebuyers (including speculators), Carter, Clinton, Dodd, Frank, Pelosi, CRA, GLB, or CFMA. The GSE's we can point to a little bit, though late in the game and long after the horses were already out of the barn.