It Ain’t CRA , Stupid

Here’s what the punditocracy has been saying about the cause of our large looming financial crisis:

Commentators say that’s what triggered the stock market meltdown and the freeze on credit. They’ve specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie’s and Freddie’s financial problems…

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.

And national news networks on the bandwagon. Recently, Neil Cavuto of Fox News said, “I don’t remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster,”  Or as a friend of mine recently said, lets just blame it on the brown people.

But the truth is out there. And here is the truth:

Federal housing data reveal that the charges aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

And further more, according to Federal Reserve data:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. 

   

• Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. 

   

• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics. 

That’s right folks, only one of those top 25 lending institutions was subject to CRA.  Personally, I am highly perturbed by the fact that folks on the Hill, particularly our conservative representatives and Senators continually use CRA has a target for any mortgage market turmoil that occurs. Under the Bush administration, the teeth of CRA has slowly been dismantled in the name of the “free unfettered market”.  I am tired of hearing people say that poor and moderate income AND minority homeowners brought the market to its knees.

If this was a card game of a certain name, I’d call bull.

First of all, mortgage brokers, investment banks and finance companies like now defunct New Century and Countrywide are not subject to CRA. Only banks and thrifts are required to follow CRA regulations.  These companies only have to follow state banking regulations, which vary by state.

I guess one could say there was a lack of oversight and consistent regulation, perhaps?

Second, lending institutions that have made it their business to lend to low and moderate income buyers like CDFI’s, community development credit unions, and community development banks, have proportionally, one-tenth the default rate of their larger competitors.  According to my own research, banks like ShoreBank in Chicago had a default rate of less than 5%  (proportionately) to  the number of mortgage defaults then larger banks and thrifts through out the nation–which was more than double at 17%.  

Less regulation?  Significantly greater default. More oversight, tighter underwriting standards? Significantly less default. Well, isn’t that funny? 

But what is even funnier is that two of soundest lending institutions in the nation–JP Morgan Chase and  Bank Of America (which, did not have liquidity problems until it started trying to work out the loans held by Countrywide–formerly a private lending institution), also had very high CRA ratings.

But the money quote of the day sums it all up:

“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.”

Huh. Perhaps, one can do good and make money…and find a sound market with those pesky brown folks after all.

The Not So Impervious New York Market

There has been a lot of weeping and nashing of the teeth about the current state of capital markets–rightfully so. And as we know, a lot of the blame can be spread around, lenders, investors, underwriters, brokers, and consumers all got a little to euphoric over the belief that the while the market might plateau, fall it would not. Of course, not the case.

District of Columbia. HOT! market from 2002-2007 now has significant condo inventory not moving and one of the highest declines in home values in the nation.

Same can be said for Miami.

San Diego

Los Angeles

But supposedly not for New York.

Ah, let me be one of those folks getting in line to say, yes New York too. Now don’t get me wrong NY by no means has the same level of problem as so many other markets in the US. Decline in NY is nominal. But any decline at all is telling of what means it ain’t getting better.  

Anecdotally, looking at apartment listing on Craigslist made me wonder if the New York market was springing a slow leak. I noticed words like “Negotiable” in lots of ads. Negotiable brokers fees, negotiable lease terms, even negotiable rent. A couple of people were even giving “$100 off” rent concessions. Never in my adult lifetime have I ever seen anything like that. So many times I have gone to look at a “cozy one bedroom” to find out it was a studio with an extra wall and then watched the apartment get snapped up while I am standing there trying to decide if I can live in a cave with a toaster oven next to a crack house for the low low price of $1200+.  Now, I am a smart saavy NY girl with technology in the palm of my hand, and I was surprised to see that many of these places were in fairly decent to nice neighborhoods.

What is really going on?

But statistically, the number of multi-family buildings and condominiums compared to second quarter 2007 has declined steadily because of capital market constraints. That means lots of folks are out of the market–even in New York where it seems like no matter what the cost, someone is always in.

And then, of course, there is the unsettling up tick in the number of foreclosures in Manhattan. (which will probably be saved by quick sell…of course)

Now, this might simply be a blip on the radar screen, but after the dismal mid-year meeting I just sat in, the news for some of the biggest banks continue to worsen. And as Mayor Bloomberg often says, New York is way to dependent on the presence of Wall Street.

Mr. Bush’s Train to Homeownership Goes Bust

Back in 2002, President Bush reiterated his goal to make America a “nation of Homeowners”. In a summer 2002 press conference, the President pushed the goal of 5.5 million homeowners by 2010. By 2006, homeownership rates reached a record high–68.5%–and the President’s dream was on the horizon.

But not today, my friends. That train has left the station, and the President is still wondering how the train switched tracks.  According to June 22’s NY Times:

The percentage of homes headed by homeowners dropped from 69.1% to 67.8% this year, which sounds modest, but is, in fact, the biggest decline in 20 years…By extension, the percentage of households headed by renters increased to 32.2 percent, from 30.9 percent.

Clearly, The goal failed. And perhaps, rightfully so. Not everyone wants to nor should be a homeowner. (One day I will get to this topic as well)

But why? 

In my opinion, speculation has the most to do with this mess. In 2002, the country began to recover from the economic downturn of 2001 fueled by 911. But, places like NYC, DC, and Southern California, began to realize an outrageous boom.  Some places, like Las Vegas and the Denver area saw appreciation of 80% in a 5 year period (2002-2007).  That boom fueled a manic race to by a home in these areas. The rate of appreciation gave way to the “get rich quick” model–as more people bought homes for back end gains than for the purpose of living the homeownership dream. 

For the last decade, House=Investment. House has not not equaled Home. Yield of cash invested. That’s what has been all about. Look at the popularity of shows like Flip this House. Everybody, thought they could get rich and fast. And what do we have to show for it?  Like I and many others have been saying for the past 6 years, just what was to be expected–a shredded real estate market, and a number of communities reeling from vacancies.

Yet it was not so long ago that a house was a home first, and a nest egg second. It seems that this sort of idea remained more or less the case in soft markets. Like my friend and mentor, John Schoeniger, says about soft markets ”the bubble passed [the soft markets] by… You take your 3% appreciation , you just pay down your mortgage to 0.” In these places like Cleveland, Detroit and Pittsburgh (foreclosure there has had a lot more to do with economy and less so with speculation though still a factor), the goal is to pay off your mortgage. Its a long term investment. You raise your kids there. You pass it on to someone when you pass. In most cases, your house is not your bank, unless its a last resort.  Perhaps, there is a little lesson to learn there–because more times than not the profit margin on your home won’t be a windfall.

Maybe it was a baby boomer and WWII thing to believe that house was a home.  After all it was the GI bill that steered many to homeownership post war. You were purchasing a home back then. Not a bank.

Maybe, now that the glamoritization of homeownership is coming to an end, people will see that owning real estate is a much more complicated undertaking than the latest Ditech or Countrywide commercial makes it. And that, in most cases you have to be willing to be in it for the long haul.