Dept of Justice gives away BoA settlement to liberal activist groups

chanson78 said:

I think you mistake poor loan credit requirements with forced loan generation. You make it seem as if the poor banks HAD to make bad loans. The only reason the banks had all of these loans is because the system allowed it. Greed on the part of mortgage companies allowed them sign up many people for loans they knew couldn't be paid back, but they didn't care because they took their profit upfront in origination knowing thy could sell them. When Fannie and Freddie no longer were buying they began bundling to hide the risk.

You make it seem like these poor banks had no choice. There most definitely was a chance they could have avoided leveraging themselves so badly. They chose not to because everyone else was doing it and the market was punishing those who didn't.

And before you blame deregulation, isn't it conservatives who believe we need as little as possible? The banks have owned the White House and Congress for a long time. They had a get out of jail free card and the taxpayer picked up the tab.

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Actually, the banks did have to make a bunch of loans that didn't meet underwriting standards that were normal and prudent only a few years prior. There's this little thing called the Community Reinvestment Act (CRA, which I call CRAp) that requires federally regulated financial institutions (essentially all banks, S&Ls, Credit Unions, etc.) to make every effort to lend into all parts of the community. Strange as it may sound, that includes parts that can't pay. Here's how that works:

If you held all home mortgage applicants to the lending standards of, say, the 1990s, it's true that a lot of people who got loans in the 2004-2008 time frame wouldn't have qualified. And the percentages that fell into federally-protected classes would have been disproportional to those classes' representation in the population as a whole. Which brings the tag, "disparate impact" into the discussion.

If you have a business practice that has disparate impact on a federally-protected class, and you can't prove that the public is endangered by the distinction (e.g., blind people can't be Air Traffic Controllers, the Americans with Disabilities Act notwithstanding), you have to abolish the practice or face the full wrath of the federal regulatory industry.

The problem there is that there is no due process in the regulation of financial institutions. Quite literally, a federal regulator can make any demand whatsoever on an institution or the industry as a whole, and there is no recourse short of a federal statute specifically prohibiting that demand. Wait, there's more. There is no effective appeal. You'd have to make the case that the regulator was acting in an unconstitutional manner, and good luck with that.

But I digress. Yes, the federal government did effectively force lenders to make loans that were below normal underwriting standards. The lenders knew these weren't of the quality of other loans, but in the years leading up to the bust, a bunch of lenders got fined, otherwise sanctioned, and held up in the public pillory for denying credit to the masses. When the fact of the matter is that they were upholding prudent lending practices.

It helps to review the context. Except for localized busts driven by local economics (the Texas / Louisiana / Oklahoma oil bust of the late '80s, the California bust of the '90s), housing values had been climbing for decades. The public viewed a home as a magic asset class. Politicians brayed to an uninformed public about lenders denying poor people the American Dream. The cacophony overwhelmed the benighted beancounters prattling on about little things like ability to pay, down payments, skin in the game, etc. So lenders, now with the figurative .45 pointed at their heads by the regulators, acquiesced.

So yes, the feds DID force an unsound environment.

Now, that doesn't mean the bankers were innocent. Where they misrepresented the circumstances under which bundled loans were underwritten, that's fraud and deserves to be punished harshly. But if the loans were accurately represented, your blame goes to Fannie Mae and Freddie Mac (that would be the federal government, for anyone not familiar with the real structure of those organizations) who bought the bundles knowing full well what was in them.

One interesting thing is that for a while, the housing boom, being driven by new entrants into the buying public who had never before been able to qualify for a mortgage, was self-sustaining. More buyers paid more money, driving up the very appraisals on which the loans were based. It was an upward spiral that seemed never to end, so the fact that appraisals must necessarily look back in time got lost. Until, like Dutch tulip bulbs and Beanie Babies, the upward spiral did end, and you know the rest.

Now here's a question for those who blame only the lenders for shoving loans down the throats of an unsuspecting public. Who applied for the loan? Who signed the papers? Who put themselves in the position? Borrowers.

Nobody forced any borrower to ask to borrow a stinkin' dime. So people who give those people a pass because, "The didn't understand what they were doing," open themselves to some uncomfortable questions:

-- If you're so financially naiive that you can't be held responsible for your debts, why should any of your contracts be enforceable? Before you answer, think of what you contract for every day without thinking. Utilities. A checking account. An ATM card that draws on the checking account. If you can't understand how much you can afford to pay for a house, why should you have any contracting power at all?

-- If you're so uninformed that you can't understand basic personal finance, and your financial contracts are therefore unenforceable, how is it that you are knowledgeable enough to vote?

One last thing: This is just one example, and not even the biggest one, of the feds regulating the profit out of the banking industry. There's a reason bank stocks trade at about a third of what they did in the mid-2000s, and it's not because of the loan losses of 2008-2011. It's because they've had multiple major revenue streams regulated down to a much lesser degree of profitability, or out of existence altogether.

Now, you might say, "So what? I don't give a rip about those arrogant suits. Serves them right. No skin off my nose anyway."

But it IS skin off your nose. If you have a pension (whether from a private sector or government sponsor) or a 401k, or a mutual fund investment of almost any kind, you have a beneficial interest in a bank stock. Essentially, you participate in the fluctuations in its value whether you know it or not.

So when the feds reduce the profitability of an entire industry through regulatory fiat, you my liberal brethren, suffer with the rest of us.

Rant over. Back to our regular programming.

chanson78 said:

This bears further research. I knew about CRA but I didn't realize there was a sliding scale with regards to the representative population of the protected classes clause.

I know bush actually tried to get congress to reel in the lending practices and that his administration was stonewalled but I figured that was based upon bank lobbyists enjoying their ride on the gravy train.

Two questions. Was the CRA requirements what spurred the creation of the ARM financial instrument as a way to justify debt to income ratio solvency for loan generation?

If all banks were subject to the regulatory requirements why was it primarily the largest that took such a hit with regards to the risky loans? Was their exposure that much larger that their sheer size made them easier targets for regulatory actions?

Thank you for the reasoned and well thought out response. I'm still not sure that I buy the fact that they HAD to make the loan but will definitely investigate. If that is in fact true you will have changed my perception of the 2008 crash.

Edit: As an aside, I get your point regarding revenue streams, but are you referring to the requirement of a higher capitalized reserve for their investments not being able to utilize member deposits for speculation? If I understand some of the problem correctly one of the reasons banks got soooo upside down was that they were utilizing standard deposits for their trading activity which was partly why the government had to bail them out due to FDIC.

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The CRA doesn't have a sliding scale. Its interpretation by regulators is that disparate impact violates it. And disparate impact is in the eye of the beholder.

The wide availability of ARMs and the CRA were about contemporaneous, though I believe ARMs existed before the CRA. So while they might have had some impact on qualifying borrowers on the edges, that wasn't their original intent.

The largest banks took the largest hits because they were the largest lenders. There were bazillions of smaller banks that went under, or into forced acquisitions. They just didn't hit the press.

Regarding revenue streams, I'm talking about true top-line revenue, not additional reserves (which are expenses anyway). An example is the exchange fees on debit cards, and there are many others.

All banks use deposits to lend. That's the whole purpose of having them in the first place. So the issue wasn't using deposits for bundling mortgages. It was the loan losses which caused the banks to fail. Depositors would have been paid via the FDIC insurance. So it's two issues with the same core cause -- crappy loans.

While I can't say the CRA is the sole cause of the problem, it definitely started the dominoes falling if by nothing other than creating expectations of an uninformed public and the politicians they elect. But banks wouldn't have made the loans in the first place without a market for selling them, which was Fannie Mae and Freddie Mac either buying the bundles directly or insuring them.

I've never thought bankers were totally innocent. There was a lot of greed in places you wouldn't imagine. But if the government hadn't artificially jiggered the marketplace, that greed would have had to find another outlet.

Forgot to mention, the big banks also lost a lot of money because they bought a lot of the bundles for their investment portfolios. So when the underlying mortgages soured, they lost on both the loans they originated and kept, as well as the ones they bought.

Those are the CMBS securities you may have heard about -- Collateralized Mortgage Backed Securities.

Small banks don't typically invest like that, so they lost on only what they originated and kept...which was a gracious plenty.