Monday, January 31, 2011

The FCIC Report II - Voices Of Dissent From Pluto

The FCIC final report was not unanimous. The four Republican-appointed members dissented from the majority report. Three of them wrote a 29 page dissent. Among their complaints was the majority was restricting the size of any dissenting reports. That's funny, because the fourth dissenter, Peter Wallison - who uses his own dissenting report's title page for purposes of self promotion as ARTHUR F. BURN FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE, and helpfully appends his email address to the bottom of the page - wrote 98 page, all on his own!

Right away, Wallison's dissent seems to contradict, in a fundamental way, the conclusion of the majority. Specifically, he places the onus of responsibility for the financial collapse not upon the myriad of factors sited by the majority, but to a single cause - the Community Reinvestment Act of 1977.
To avoid the next fi nancial crisis, we must understand what caused the one from which we are now slowly emerging, and take action to avoid the same mistakes in the future. If there is doubt that these lessons are important, consider the ongoing eff orts to amend the Community Reinvestment Act of 1977 (CRA). Late in the last session of the 111th Congress, a group of Democratic congressmembers introduced HR 6334. Th is bill, which was lauded by House Financial Services Committee Chairman Barney Frank as his “top priority” in the lame duck session of that Congress, would have extended the CRA to all “U.S. nonbank fi nancial companies,” and thus would apply, to even more of the national economy, the same government social policy mandates responsible for the mortgage meltdown and the financial crisis. Fortunately, the bill was not acted upon. Because of the recent election, it is unlikely that supporters of H.R. 6334 will have the power to adopt similar legislation in the next Congress, but in the future other lawmakers with views similar to Barney Frank’s may seek to mandate similar requirements. At that time, the only real bulwark against the government’s use of private entities for social policy purposes will be a full understanding of how these policies were connected to the financial crisis of 2008.
The majority, on the other hand, took a different view of the role of CRA in the financial meltdown:
In conducting our inquiry, we took a careful look at HUD's affordable housing goals, as noted above, and the Community Reinvestment Act (CRA). The CRA was enacted in 1977 to combat "redlining" by banks - the practice of denying credit to individuals and businesses in certain neighborhoods without regard to their creditworthiness. The CRA requires banks and savings and loans to lend, invest, and provide services to the community from which they take deposits, consistent with bank safety and soundness.

The Commission concludes the CRA was not a significant factor in subprime lending or the crisis.Many subprime lenders were not subject to the CRA. Research indicates that only 6% of high cost loans - a proxy for subprime loans - had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods where they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.(emphasis added)
Hm. On the one hand, CRA is at fault. On the other hand, CRA-regulated loans were only half as likely to default; only six percent of the subprime market was covered by CRA anyway, so its overall impact on the much larger mortgage marketplace was negligible. Seems someone has some explaining to do.

I believe that the sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans - half of all mortgages in the United States - which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path - fostering the growth of a bubble od unprecedented size and an equally unprecedented number of weak and high risk residential mortgages - the great financial crisis of 2008 would never have happened.
Yet, the majority addressed the issue of federal housing policy, in a paragraph immediately following their assessment of the role of CRA-regulated loans and the end of the housing boom:
Nonetheless, we make the following observations about government housing policies-they failed in this respect: As a nation, we set aggressive homeownership goals with the desire to extend credit to families previously denied access to the financial markets. Yet the government failed to ensure the philosophy of opportunity was being matched by the practical realities on the ground. Witness again the failure of the Federal Reserve and other regulators to rein in irresponsible lending. Homeownership peaked in the spring of 2004 and then began to decline. From that point on, the talk of opportunity was tragically at odds with the reality of a financial disaster in the making.(emphasis added)
So, the majority agrees with Wallison that housing policy was far too aggressive in its pursuit of ever-greater home ownership. Yet, this in and of itself hardly could have led to the other causes the majority noted as contributing causes - everything from lax corporate oversight to outright illegality, predatory lending practices, and the dismal failure of what little financial regulation was left. In this regard, citing federal housing policy, and in particular the Community Reinvestment Act as the prime, or perhaps even sole source, of the financial crisis disregards the rampant risk-taking, disregard for financial solvency and fiduciary responsibility, and outright criminality that is a part of the public record.

For this reason alone, the notion that, absent an aggressive federal housing policy - which, Wallison notes, was a bipartisan goal, pursued by Congresses and Presidents of both parties - the financial crisis was avoidable simply disregards far too many facts to be believable.

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