Wednesday, June 17, 2009

It Keeps Coming Back

It's not only myth, it's urban myth; not only urban myth, but literally urban myth. And in the hands, or at the microphones, of demagogues, it doesn't quite die.

And so Rush Limbaugh threw it onto the public airwaves yet again Wednesday:

Those are worthless loans! They were made to people that couldn't pay 'em back and the banks that were forced to make the loans tried to come up with a scheme to make them worth something. So they packaged them as securities or... These are the things that became the toxic assets, essentially. And people did start buying this stuff, figuring that something would happen to it to give it value. But all of this happened because Democrats from Bill Clinton forward, Barney Frank and Chris Dodd demanded -- and ACORN demanded -- that people that could not ever pay a loan back or even qualify for one be given one, essentially be given a house! They were threatened by Janet Reno and others and regulators who tried to stop this were in turn threaten by people like Barney Frank and Chris Dodd.

Let's go over the facts:

-The Community Reinvestment Act, of which Limbaugh speaks, was enacted in 1977. Sub-prime lending increased in 2004, after the Bush Administration began to weaken enforcement of the law.

-The CRA applies only to banks and thrifts regulated by the FDIC. It does not apply to independent mortgage companies, which made at least 50% of the bad loans. Another 30 percent were originated by affiliates of banks or thrifts not subject to routine examination or supervision, and the remainder by banks subject to the CRA. According to the January, 2008 study "The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis," 84.3% of housing loans in the 15 most populous metropolitan areas were made by banks not subject to the CRA.

-Borrowers with similar profiles are significantly less likely to default with CRA loans than borrowers who have taken out other loans and the default rate on CRA loans is significantly lower than on other subprime loans. Not surprising, because "a typical CRA loan is a 30-year amortizing, fixed-rate mortgage, while non-prime mortgages carry higher rates and fees, prepayment penalties and/or adjustable payments that could double overnight."

-CRA banks were less likely to make a high cost loan than the other lenders in their geographic area. As Janet Yellin, President and CEO of the Federal Reserve Bank of San Francisco, has stated, "Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans." And banks subject to the CRA "were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio."

In retrospect, the mortgage meltdown was spurred largely when

Wall Street investment firms set up special investment units, bought the sub-prime mortgages from the lenders, bundled them into "mortgage-backed securities," and for a fat fee sold them to wealthy investors around the world.... These investors, who bought the collateralized securities, were happy as long as they got paid their higher interest on the bonds or other investments.

A pretty sweet deal for these Wall Street investment loans, issuing loans which carried for them no risk because they were able to sell them off across the globe (not to shortchange the role of the ratings agencies, paid by the same firms whose securities they were rating). This, of course, is something the corporate shills masquerading as talk show hosts won't talk about- it kind of cuts into their meme of the federal government as the root of all evil.

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