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"I hear your complaints," Bloomberg said. "Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I'm not saying I'm sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn't have gotten them without that.
"But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it's one target, it's easy to blame them and congress certainly isn't going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for."
Hear it here. Scroll down (there)for the video.
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Putting the Fox in the Henhouse
17 hours ago
Though sadly it was not Congress that forced the banks to bundle several bad loans with one good loan, label the bundle with the highest rating, then sell that bundle to another bank that did not know it was mostly toxic.
ReplyDeleteThe mortgage crisis did not start or end with congress, or Clinton, pushing for universal home ownership. Bloomberg should know better than to simplify this problem in such a way.
I agree that it was not Congress alone that did it and the banks deserve the condemnation that they get. But I am also tired of hearing people like Barney Frank act like he had nothing to do with it and it is all the fault of the banks. He should know better too.
ReplyDeleteThe people who make the rules are more responsible for the results than the people who follow the rules to do badly.
I agree with Michael and Wayne that government alone was not the problem and that the banks deserve much (but not all) of the criticism they receive. Banks are regularly audited and given a CRA (Community Investment Act) rating. While banks are not and were not required to make high risk loans under the CRA it is true that banks that have a low CRA ratings are subject to difficulty (sanctions if you will) when reorganizing, merging, or making new acquisitions. Indeed any activity that falls under the rules of their charter (particularly a federal charter) can be put in jeopardy due to a low CRA score. And that includes the possibility for revocation of their FDIC insurance.
ReplyDeleteUnder those circumstances a banker will, if he wishes to stay in business, make some high risk (CRA) loans. If he then bundles those high risk loans and sells the bundle to mitigate his risk I would suggest that is a prudent business practice.
Having said that I do believe this process (derivates and all) got out of hand and the banks share part of the blame. Still I lay the root cause on federal regulations and an irresponsible failure to change the regulations when the system was obviously in trouble (Bush unsuccessfully tried twice) and that gets us back to Franks (as Wayne suggested) and Dodd.
Tom's description of the CRA sounds to me as though requiring banks to make high-risk loans is precisely what the federal government did. If a bank must make high-risk loans to stay in business, then it is required to make high-risk loans. That's axiomatic.
ReplyDeleteFurthermore, the banks did not bundle one good loan with several bad loans, give the bundle the highest rating, and then sell it to some unsuspecting bank that didn't know what it was buying. First, the ratings were assigned by the ratings agencies Standard & Poor's and Moody's, which are not banks. Second, the purchasers of these bundles (which consisted of thousands of mortgages) knew exactly what they were doing. Two-thirds of the mortgages were purchased by only two entities, Fannie Mae and Freddie Mac, the government-sponsored enterprises who, acting with an implicit federal guarantee, had the stated and mandated (by the federal government, of course) purpose of buying as many mortgage bundles as they could regardless of what was in the bundles and regardless of their own debt-to-equity ratios. Fannie Mae and Freddie Mac didn't care about the ratings -- they intentionally jettisoned the underwriting guidelines because the Fannie Mae and Freddie Mac's very purpose was to make home ownership available to certain types of people (read "poor credit risks") who had not previously been able to own homes. And with the federal guarantee, Fannie Mae and Freddie Mac did not have to worry about their own solvency anyway.
As for the other third of home mortgages, they were puchased by the large investment banks like Chase and Citi. Half of the mortgages were FHA loans, which means that the federal government acted as a co-signor. And if the federal government is on the hook as a cosignor, why would the investment banks care about the ratings, and why would the retail banks who sold the mortgages to the investment banks care about underwriting? I don't think you can blame any of the banks -- retail or investment -- for this.
Only about 1/6 of all mortgages at the time all of this started were truly "conventional" mortgages, i.e., not FHA and not purchased by Fannie or Freddie. Maybe here you can find some banks to blame. However, there is a difference between the retail banks who made the loans and the investment banks who purchased them. The retail banks only responded to government mandates and economic forces, as Tom described. But the investment banks were, along with Fannie Mae and Freddie Mac, part of the DC/NYC elite, the revolving door of corporate officers and high-ranking government officials, who rigged the rules to safeguard their positions and line their own wallets. The investment banks who bought the mortgages, like Citi and Chase, along with Fannie Mae and Freddie Mac, deserve to share in the blame with the federal government. But no way do the retail banks who made the mortgages and then sold them deserve to share in the blame.
And unlike Mayor Bloomberg, I'm not too chicken to say it: it was TERRIBLE policy. That policy caused the Great Recession, and if you have lost your job, suffered a downturn in business, seen your retirement savings plunge with the stock market, or spent more than you would have if you had known the value of your house was greatly inflated, this policy -- far more than any other factor -- is the reason why.
ReplyDeleteOh, and by the way, the people who the policy was designed to help? You know, all those people who got to purchase a home when they otherwise wouldn't have? They've been foreclosed upon, sold short, filed for bankruptcy, or at best are struggly to pay a mortgage that exceeds the value of their house. Like so many left-wing policies, the very people whom the policy was supposed to help are the ones who suffer the most.
When I bought my first home I had to have 10% down, I had to have a job, I had to have worked in the same profession for 3 – 5 years, they checked my credit rating, it was a negative if I was not married (and they did ask), they checked my wife’s work history, and even then the granting of a loan was iffy.
ReplyDeleteIn 1998 when the enforcement of the CRA requirements by the FDIC and DCA really got serious, bankers began to make risky loans to meet their CRA requirements; of necessity abandoning (perhaps reluctantly at first) many of the prudent business requirements that they applied to my first home loan.
After a couple of years, banks were not failing due to the CRA loans. Indeed, banks were making a lot of money on mortgage loans and I would argue that banks were now participating in the program with enthusiasm, that is where I think the Banks, at all levels, share some of the blame.
Bankers, generally, are good business men and knew that the explosion in mortgage loans and in particular risky loans was not a good business practice and that it could not last long term. The fact that the banks were making a lot of money on high risk loans, everyone was doing it, and they were following regulations does not excuse the industry from acting in a professional manner. The industry should have pushed back harder, much harder. Difficult to do when it impacts your revenue stream, still that is what we expect from true professionals.
Generally I am a greed fan. Greed gets people out of bed in the morning and makes them get out of the house and make a living, specifically a better living than they have today. I realize that my argument above gives ammunition to the “greed is bad” crowd. Still, in this case, I think greed had a deleterious impact on the industry’s professional ethics. Very disappointing.