You raise an interesting point about the CRA. In a short article I could not deal with a number of issues relating to the financial crisis. I will be dealing with a few more in future articles and will discuss some of the points of the points you raise.

However, the Community Reinvestment Act was a limited project aimed at stopping banks from redlining — which means rejecting or charging a person, who qualifies as a prime mortgage applicant, a higher rate because they lived in an area considered Black or Latino. It had no effect on the subprime crisis. It is one of the rare issues on which even the most right wing conservative regulators agree.

In the website that you quote it says:” The Financial Crisis Inquiry Commission formed by the US Congress in 2009 to investigate the causes of the 2008 financial crisis, concluded “the CRA was not a significant factor in subprime lending or the crisis”.[127] Ben Bernanke, then Chairman of the Federal Reserve, wrote that experience and research contradict “the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties.”[128]

Government economists and officials, including Janet Yellen, then President and CEO of the Federal Reserve Bank of San Francisco,[129]FDIC Chair Sheila Bair,[130] Comptroller of the Currency John C. Dugan,[131] and Federal ReserveGovernor Randall Kroszner,[132] also hold that the CRA did not significantly contribute to the subprime crisis.”

The Government Sponsored Enterprises — Fannie Mae and siblings — never, never abandoned lending standards. Fannie Mae mortgages were not subprime mortgages. A prime mortgage is one that has high likelihood of being paid off. Since 1939 Fannie Mae low income mortgages proved to be prime mortgages. Her standards since 1939 required the common sense qualifications of a good job history, income three times the monthly mortgage payment but allowed a 5% down payment.

The FHA Is an insurance scheme. For an applicant to qualify for FHA insured mortgage, they need a FICO score above 580, for the low downpayment of 3.5%, if below, it’s 10%. But, that’s not all there is. It also depends on how much other debt they have(a low debt to income ratio, for example). These mortgages did not go into default with high frequency.

Because it is an insurance scheme, the lower the down payment the higher the insurance premium for the applicant. The FHA has empirical data going back to 1934 to be able to estimate the likelihood of default. The premiums are charged accordingly and set aside to cover these defaults.

However, in the absence of empirical data, it would appear that a low down payment is a very high risk mortgage. That misconception is what conservatives like to rely on to stop programs to help the working class afford homes.

As long as there is honesty at the bank and mortgage company level about the applicants’ true credit position, the system for lending to low income -low deposit applicants is successful.

The mortgage originators, probably around the year 2000 (perhaps earlier), started to fraudulently pass off subprime mortgages as if meeting FHA and Fannie Mae standards. So I believe it definitely was not the government policies to help low income people. That is a banker distraction to throw the blame on the government and away from themselves. I go into more evidence in my next article. Let me know, if I convince you.

Now that the corruption has been stopped in Fannie Mae (there were many sources)and it is back to accepting only qualified mortgages, it again produces surpluses. There’s a summary in this Wikipedia article:

“2013 — $59.39 billion dividend[edit]

In May 2013, Fannie Mae announced that it is going to pay a dividend of $59.4 billion to the United States Treasury.[55]

2014 — $134.5 billion dividend paid[edit]

  • $116 billion received from Treasury[56]
  • $134 billion paid to Treasury[57]

Fannie Mae 2014 financial results enabled them to pay $20.6 billion in dividends to Treasury for the year, resulting in a cumulative total of $134.5 billion in dividends through December 31, 2014 — approximately $18 billion more than Fannie Mae received in support. As of March 31, 2015, Fannie Mae expects to have paid a total of $136.4 billion in payments to Treasury.[58][59][60][61]

Do you agree there was massive fraud, mostly by mortgage lenders like Countrywide Financial and Ameriquest, in passing off subprimes as primes to the GSEs? If you don’t, I have work to do.

I’ll have look at the reference, thanks.

BTW: I am not an economist and am not writing about any economic theory or analysis of banking. Unfortunately, as leading economist of his day, Harvard professor John Kenneth Galbraith, accused his fellow economists of taking part in deception with bankers: “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it,”[1] this continues today. so be on your guard of analysis by economists. They are usually not taught correctly about banking.

I am ready as a lawyer who has acted for international banks and large accounting firms. Economists are invited to give one hour seminars at $10,000 a pop or to sit on boards of directors. Lawyers are invited into the back rooms. There is a very different perspective of bankers among the two professions.

[1] Money: Whence it came, where it went (1975).

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