Re: [asa] Deregulation Madness was Re: Ben Stein on Sub Prime Mortage Crisis...

From: Rich Blinne <>
Date: Mon Dec 08 2008 - 09:52:07 EST

On Dec 7, 2008, at 10:32 PM, Lynn Walker wrote:

> On Sun, Dec 7, 2008 at 11:17 PM, John Walley <>
> wrote:
> But wouldn't the Community Reinvestment Act (CRA) be an example of
> gov't regulation rather than the dreaded deregulation? Wouldn't the
> sub-prime issue been avoided if not for this gov't interference in
> the market?
> Thanks
> John
> "This was a HUGE step of deregulation by Clinton's
> administration." Read on:
> In 1994 Clinton put Carter's 1977 CRA on Steroids
> President Clinton also got HUD involved in the issue as they issued
> new rules for Fannie and Freddie. First, Fannie and Freddie could
> now buy huge amounts of subprime loans. In 1995, Fannie Mae bought
> an estimated $18.6 billion in subprime loans from banks and this
> number grew exponentially over time.
Non sequiter. There is little to no connection between subprime
mortgages and CRA.

1. More than 84 percent of the subprime mortgages in 2006 were issued
by private lending institutions.
2. Private firms, that is firms that are not eligible for CRA, made
nearly 83 percent of the subprime loans to low- and moderate-income
borrowers that year.
3. Only one of the top 25 subprime lenders in 2006 was directly
subject to CRA.

This much I'll grant you, the Clinton administration was also pro-
deregulation but that didn't immediately cause the crisis. Why?
Deregulation was the fuel but it needed a spark. The spark was supply-
side economics. John go back to the original video you posted and
watch before Ben Stein comes on. One of the economists is Arthur
Laffer of the Laffer curve. He was convinced there was no problem but
there was and it was of his theory's making.
Bush's tax cut for the wealthy came at a time when interests rates
were very low. Furthermore, since 98% of all small business owners --
these are the people who fuel most of the hiring in this country --
make less than $250,000 a year. The tax cut went to people who did not
own small businesses. Where did it go? Into hedge funds because there
was no real growth in the economy. It was all in the mirage of the
housing bubble. These hedge funds bought into collateralized debt
obligations and credit default swaps. On a side note, the value of all
the subprime mortgages is around 2 trillion dollars while the best
guess for CDSs is in the neighborhood of 60 trillion dollars. The
"wealth" that Art Laffer referred to in the video wasn't there and was
all on paper as correctly noted by Peter Schiff.

Here's what happened according to McClatchy (

> Fueled by low interest rates and cheap credit, home prices between
> 2001 and 2007 galloped beyond anything ever seen, and that fueled
> demand for mortgage-backed securities, the technical term for
> mortgages that are sold to a company, usually an investment bank,
> which then pools and sells them into the secondary mortgage market.
> [RDB Note:There was a lot of excess money at that time because of
> the aforementioned tax cuts along with an increase in sovereign
> wealth funds of oil rich countries. ]
> Between 2004 and 2006, when subprime lending was exploding, Fannie
> and Freddie went from holding a high of 48 percent of the subprime
> loans that were sold into the secondary market to holding about 24
> percent, according to data from Inside Mortgage Finance, a specialty
> publication. One reason is that Fannie and Freddie were subject to
> tougher standards than many of the unregulated players in the
> private sector who weakened lending standards, most of whom have
> gone bankrupt or are now in deep trouble.
> During those same explosive three years, private investment banks
> not Fannie and Freddie dominated the mortgage loans that were
> packaged and sold into the secondary mortgage market. In 2005 and
> 2006, the private sector securitized almost two thirds of all U.S.
> mortgages, supplanting Fannie and Freddie, according to a number of
> specialty publications that track this data.
> In 1999, the year many critics charge that the Clinton
> administration pressured Fannie and Freddie, the private sector sold
> into the secondary market just 18 percent of all mortgages.
> Fannie and Freddie, however, didn't pressure lenders to sell them
> more loans; they struggled to keep pace with their private sector
> competitors. In fact, their regulator, the Office of Federal Housing
> Enterprise Oversight, imposed new restrictions in 2006 that led to
> Fannie and Freddie losing even more market share in the booming
> subprime market.
> What's more, only commercial banks and thrifts must follow CRA
> rules. The investment banks don't, nor did the now-bankrupt non-bank
> lenders such as New Century Financial Corp. and Ameriquest that
> underwrote most of the subprime loans.
> These private non-bank lenders enjoyed a regulatory gap, allowing
> them to be regulated by 50 different state banking supervisors
> instead of the federal government. And mortgage brokers, who also
> weren't subject to federal regulation or the CRA, originated most of
> the subprime loans.
> In a speech last March, Janet Yellen, the president of the Federal
> Reserve Bank of San Francisco, debunked the notion that the push for
> affordable housing created today's problems.
> "Most of the loans made by depository institutions examined under
> the CRA have not been higher-priced loans," she said. "The CRA has
> increased the volume of responsible lending to low- and moderate-
> income households."
> In a book on the sub-prime lending collapse published in June 2007,
> the late Federal Reserve Governor Ed Gramlich wrote that only one-
> third of all CRA loans had interest rates high enough to be
> considered sub-prime and that to the pleasant surprise of commercial
> banks there were low default rates. Banks that participated in CRA
> lending had found, he wrote, "that this new lending is good business."

I am not really in the blame game so as long as the current players
are against deregulation and supply side economics then that's fine
with me. But of all the factors that made this mess the one that
doesn't belong is the CRA.

Rich Blinne

Member ASA

To unsubscribe, send a message to with
"unsubscribe asa" (no quotes) as the body of the message.
Received on Mon Dec 8 09:52:27 2008

This archive was generated by hypermail 2.1.8 : Mon Dec 08 2008 - 09:52:27 EST