Republican Rep. Joe Walsh held a townhall at Uno Bar and Grill in Gurnee, Illinois last month and things got a little heated. Walsh is wrong for the most part, spewing the oft-repeated Wall Street-backed nonsense that the financial crisis was caused by government regulations, the CRA, etc. We are not fans of government, not by any stretch of the imagination, but this argument is old, tired, and false. The banks did it to themselves, and unchecked leverage on Wall Street and in European banks turned a housing crisis into a global meltdown.
Barry Ritholtz at the Big Picture wrote the definitive piece shooting down this argument:
Excerpt:
Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:
• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?
• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?
• What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?
• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?
• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?
• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?
• How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?
• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?
• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)
• Did the GSEs require banks to not check credit scores? Assets? Income?
• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood.
• What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?
“It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.”