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Robyn Blumner
You would think that regulating Wall Street -- after what bankers put our country through -- would be the one
thing that Republicans in
It's time to take on those myths.
Republicans and conservative commentators lay blame for the financial meltdown almost entirely on a push by do-gooders in government
(read Democrats) to help lower-income people buy homes. Their prime culprits are
Now I won't quibble that Fannie and Freddie were seriously mismanaged entities, possibly even corrupt. But the loans that Fannie and Freddie were willing to buy on the secondary mortgage market (GSEs don't originate loans) did not precipitate the crisis. Neither did the CRA.
Fannie and Freddie bought home loans that met certain underwriting standards (referred to as conforming mortgages), to free up credit so banks could lend to other borrowers. Many of these loans were packaged into bonds (referred to as agency mortgage-backed securities), and then sold. But Fannie and Freddie kept much of the risk on their own books by guaranteeing the underlying mortgages against default.
Since about 1995, Wall Street started encroaching on this business, but with a key difference.
After Wall Street bought the mortgages, securitized and sold them, it did not guarantee them against default. Wall Street banks had no skin in the game, and, not surprisingly, had less interest in making sure they were buying sound mortgages.
That is why the inflated market for really bad subprime lending was due to Wall Street's insatiable appetite, not Fannie and Freddie's. In fact, the GSEs wouldn't buy subprime loans until the mid-2000s, and even then Fannie and Freddie refused to purchase the worst junk out there, the so-called 2/28s and 3/27s, that would adjust upward quickly so they had to be regularly refinanced or the borrower would likely default.
Why then did we have to take over Fannie and Freddie, and why are they still in serious financial trouble today? Largely because
they are on the hook for the mortgages that did go bad, and, given the depths of the foreclosure crisis, even some of their prime
mortgages are now failing. But the mortgages in the GSEs' securities were much less likely to default than those in the securities
Wall Street was peddling, according to Kathleen Day of the nonpartisan
Now let's talk about the other Republican scapegoat, the Community Reinvestment Act. The Republican line is that the CRA forced banks to lend to people in inner-city and minority neighborhoods who couldn't afford a home. The facts tell a different story. The CRA specifically required banks to seek credit-worthy borrowers, individuals and businesses. Just look at the subprime loans that caused the crisis -- 94 out of 100 were not CRA loans, Day says.
Financial expert and author of "Bailout Nation" Barry Ritholtz puts it another way.
He writes that if the CRA caused the crisis then foreclosures in CRA regions should be the highest in the country, but in fact it's the "sand states," non-CRA regions such as southern California, Las Vegas, Arizona and South Florida that have the worst rates. Ritholtz says the banks making CRA mortgages should be disproportionately failing. But again, Ritholtz notes, that's not happening. CRA banks have been relatively healthy. Compared with other factors, Ritholtz says, "the CRA impact is all but irrelevant."
There are three reasons that Republicans in
Available at Amazon.com:
Were You Born on the Wrong Continent?: How the European Model Can Help You Get a Life
The Disappearing Center: Engaged Citizens, Polarization, and American Democracy
The Virtues of Mendacity: On Lying in Politics
Bush on the Home Front: Domestic Policy Triumphs and Setbacks
The Political Fix: Changing the Game of American Democracy, from the Grassroots to the White House
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Republicans' Aversion to Financial Reform Misguided