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Al - You are quite correct, CRA does not require banks to make bad loans. Problems arose with the various mortgage products that allowed people to qualify under the narrowest of margins. You stated that you had to make a downpayment. Some of these mortgage products did not even require proof of employment or income, much less a downpayment. Many started as low fixed rate loans that reset after a time to higher variable rate. The people that took these loans were the most vulnerable to changes in the market, but because these borrowers were in traditionally underserved minority groups lenders were able to boost their own CRA ratings. As I said earlier, not all these loans were backed by Fannie and Freddie, but politicians shortsightedly applauded any lending program that furthered home ownership and that's why these marginal lending programs thrived. The incidence of fraud involved is massive and relatively little has been said about that. Very sad.

eeb
The world, made giddy by new found prosperity clambered for dollar denominated investment products ....... they wanted a piece of the rock, the super robust American real estate market. When the investment bankers ran out of quality real estate products they invented them. Sub prime loans were invented to give credibility to bogus investment grade paper to be sold world wide ..... and the Credit Swaps was invented to give the insurance industry a taste ....... and all they needed to get it rolling was a signature on a loan application from some poor SOB who wanted a nibble of the American Dream Cheese ....... They got their little bite .... it didn't last long ........ And the Rats got fat on the rest. And now it's our turn to buy some more cheese for the rats from our tax money. To make it look good I'm sure the rind will be served to the starving mice to make things look good.

Al

One thing for sure, the reformed global financial system will look like Canada's, which doesn't believe an "invisible hand" guides free markets beneficiently. Greenspan confessed he thought it would. The US recession is forecast to cause a quarter of "negative growth" here from the downdraft of our biggest trading partner. Thousands of jobs are being lost. The financial system, however, is strong---best of the G8. Prudent regulations kept things from going to hell. Something as simple as accountability and banks required to have money in their vaults.

If only banks had to have money in the vaults and money had to have some gold backing, things would be grounded. It is really simple. But with that old fashion mentality, you don't get to go on $440,000 junkets whilst your company just hit the crapper. I own a business and nobody is going to be there to bail me out if I don't make it. If someone in my company went on a $40,000 let alone a $440,000 junket they would face the company firing squad. Who OK's this???............ Um, we were a thinking, um, ya know, well, would it be too much to ask if we went on a junket? I know the business didn't do good, but we did try hard to screw everyone we could!...... Well what do you think it will cost?? .......Oh not much, maybe $440,000 but you won't have to get me a christmas gift.... Well as long as I don't have to get you a christmas gift, OK, but NOT ONE DIME MORE.

Al: I have been getting it off my chest on maybe the wrong Internet site. But I've also been researching some stocks using Yahoo Finance, and I find a surprising number of financial junkies are on my wavelength when it comes to what has happened of late to the stock market equity and credit liquidity. As I have said often above, I am amazed how this plays out. I feel like Rip Van Winkle coming awake in a whole new world that I can't believe exists. I know what it is like to buy with 100% leverage (or more) and with full recourse, but this happy situation usually accrues to those who don't need to borrow in the first place. Prudent lenders do not loan out their capital or depositors money as what are now called NINJA loans (No Income, No Job or Assets).

My off-double-gun-topic research has turned up something that should answer your question about the pressure on lenders to make bad loans:

http://finance.yahoo.com/expert/article/yourlife/115773#

Actually, the germ of the idea that Mr. Stein speaks of got started as early as the Community Reinvestment Act of 1977, when I was still doing mortgage lending work. But my end of it was new construction on large scale, not single family, so I just heard the rumors. It has been in the news of late that some of BHO's community activism was directed at litigation with Chicago banks to force lending in south side war zones to promote racial parity of color-coded debt, rather than sound loan portfolios.

But the current debacle traces largely to independent mortgage companies not regulated by CRA of 1977; it was expansion of the concept of adjusting social inequities by lending out money starting on Bill Clinton's watch that Stein speaks of.

What the social engineering did was remove from the lenders the hands-on exercise of good judgment that had prevailed from the beginning of time in banking circles: protect deposits and shareholder's equity. Once the Geni was out of the bottle, every rejected loan applicant had a civil rights lawsuit, some filed by BHO's group in Chicago. But, still, it was not the neighborhood banks that did the deed. Fannie and Freddie had to buy the bank's paper, but these bank-originated loans alone are not so infested with sub-standard loans to require a bailout. The banks may have been over-regulated into making a proportion of bad loans to avoid statistical scrutiny by regulators as to the shade of "color" of their loan portfolios, but this isn't the present problem as I see it.

The culpable banks were investment banks, not your local walk ins. In this context, I recall some problems my now-deceased aunt had as she started to get senile: she had a Merrill Lynch account, and would keep going into the local office to cash checks for spending money. She could not get it though her head that Merrill Lynch was not a bank, even though they gave her convenience checks as part of her Cash Management Account. Now Merrill Lynch has tanked, probably because they were not regulated like a bank. Anyway, read Stein's analysis and tell us what you think... EDM

EDM and others seem to have overlooked or to be unaware of the impact of loan servicing agreements on failed primary lenders. Companies like Countrywide and Indy Mac (Indy Mac spun off from Countrywide as a REIT and subprime lender, then got into consumer banking) made money on the front end through loan origination fees (points) and associated add-ons to the buyers (i.e., the borrowers), then shifted the loan risk to the secondary market by bundling the loans for securitization. These bundled loan sales invariably contained language that guaranteed a revenue stream to the originator of the loans (i.e., Countrywide and Indy Mac) through a loan servicing contract. As long as the loans were outstanding, the servicing companies took a piece of the cash flow. It became a low risk, fee-for-service business, until all the loans started to default. As EDM says, "investigation continues..." but now the FBI is involved in that investigation. It will be interesting to see how all this plays out on the criminal angle.

"The owners of this country know the truth; it's called the American Dream because you have to be asleep to believe it."

--George Carlin

"Why is it when I'm getting ready to count out, the owner always uses his toe to ID those double-stickered empties in the stack on the curb?"

--A. "Big Tiny" Schnook

jack

It's not unusual for someone who hasn't studied a situation to be confused. (1) By now there are ample poster inputs citing the legislation that gave activist groups the legal leverage to litigate every loan denial as a civil rights violation. And I suggest you double-click Mr. Stein's summary of what has transpired. It's complicated, but I believe correct.

(2) Just this evening they had a simplified version of the "insurance swaps' facts on 60 Minutes. It seems that the "meltdown" was precipitated by bad bets made in a newly invented insurance-type market that replicated the "bucket shops" of a century ago. These were betting parlors where persons could bet on the market ups and downs without taking a long or short position. Sixty Minutes explained it in the context of a ball game where the players, management, and owners have a stake in the game (with real $$$ to win or lose), while the fans could bet among themselves with no stake in the game. This kind of no-vested-interest "insurance" betting was outlawed in 1907, after a market crash. You cannot buy insurance on your neighbor's house and collect if it burns down, but thanks to Bill Clinton you could buy "insurance" betting that a home would go into foreclosure!

In the last days of Bill Clinton's presidency the congress abolished the Anti-Bucket-Shop law (the senate by a unanimous vote), and the repeal law went even further to prohibit the states from jumping into the lurch by enacting protective legislation.

(3) The die was cast during LBJ's Great Society for a great many of today's ills, including Bill Clinton, who keeps coming up like a bad case of heartburn. When Bush Jr. took over in January of 2001, he inherited quite few of Clinton's "poison pills," including the head of the CIA, who said, "Slam dunk!" on WMD's, as a prelude to war, and the recent repeal of "Anti-Bucket-Shop" legislation, which turned loose the investment bankers to bet on mortgage foreclosures where they didn't have an insurable interest.

While one would ordinarily associate reduced regulation with the republicans, I'd say that the current fiscal debacle can be can be laid at the democrats' doorstep. You should never forget that Bill Clinton signed the law that made it all possible...then likely...and now an accomplished fact. But don't hold your breath for the drive-by BHO-fan-club media to jump on this one...they, like you, are "great fans" of LBJ's Great Society, and all that has logically followed the liberal template. EDM

"While one would ordinarily associate reduced regulation with the republicans, I'd say that the current fiscal debacle can be can be laid at the democrats' doorstep"


http://oldbluewebdesigns.com/USSA.htm

and a well written article;

"Contrary to the Obama narrative, however, it is not free-market capitalism at the root of the current mortgage industry crisis, but rather the very socialism Obama hawks. The historical record makes this fact unmistakably clear."



http://www.americanthinker.com/2008/10/what_really_happened_in_the_mo.html

(1) EDM is not unaware of anything relevant except where we go on from here. The stock market is adjusting for an "over-bought" situation; most consumer products, especially housing, have been "over-bought" of late due to the easy financing of consumer lust to satisfy excessive "wants" rather than basic "needs."

(2) Back in a more commercially prudent time frame, when I was in the construction mortgage business (as the attorney who prepared the documents, but well aware of consumer finance), brokering mortgages was simply an outsourcing of manpower and a division of labor and had nothing to do with sub-prime lending.

(3) Points and loan service fees are endemic to the separation of available money sources from the matchmakers of the mortgage loan deal. When I bought my first real estate (a $26,500 two family in 1972) the closing costs were $7.00 to record the deed and mortgage; title insurance was paid by the seller. The loan was made in-house at the bank at a given rate of interest for a stated term which determined the monthly payment.

If my bank packaged my loan and sold it, I would never have known because the loan service agreement would have (A) provided that the bank kept part of the interest earned, and (B) the bank would have been compensated by a loan service fee to process payments and keep up with the paperwork. Meanwhile, the buyer of the packaged loan(s) had a pure investment security at a given bargained-for rate of return, minus a fee for handling.

(4) The financial world was at peace...and there was no shifting the risk because loans were essentially packaged and sold with "recourse," the composition of the loan package being such that one bad apple did not spoil the bushel. Given the low level of risk, I believe there as insurance, for which a cost was assessed, somewhat like banks being charged a premium for FDIC insurance on savings accounts. When mortgage loans were originated by banks the responsibility bad loans was "in house," and the culpable loan originator was an employee.

Separate the loan originator from the money and one would think the money lenders would be more careful. The idea of a "credit swap" between players at risk made sense; sort of like an bunch of apple sellers spreading the risk over a massive number of bushels so that one out-of-the-ordinary bad bushel did not severely impact any one seller.

(5) Then non-banks (Countrywide, et al) started grabbing a share of the action, which on the surface seemed to benefit consumers in the context of the American fixation with deregulated "competition." At first the mortgage brokers broadened the possibilities for home buyers who disdained doing business with the stuffy old banks and loan officers who asked tough questions. Getting a mortgage was like going to McDonalds, fast food, fast money, no questions about trans-fats or points or loan origination fees or closing costs or true rate of interest; satisfy the "want" appetite--instant gratification, no consideration of consequences.

(6) As to "...how this plays out from the criminal angle," check out "Willy & Ethel" in the comics today:

Willy says,"I told a bookie that old ten-dollar watch of mine is worth a hundred dollars and to bet it all on a horse."

Ethel says, "What if the horse loses? Won't he find out the watch is only worth ten dollars and want the other ninety?"

Willy's retort, as he opens a can of beer: "He's not worried...if I don't pay him the government will...it's complicated, but that's the way things work now..."

From the criminal angle, bookie bets are not legally enforceable, but the derivatives, called "credit default swaps," which became legal after congress and then president Bill Clinton repealed the "Anti-Bucket-Shop-law of 1907," are now legally binding bets that congress and the president are honoring by throwing massive amounts of money into the "Bucket Shops," whose side bets far exceeded the actual mortgages outstanding. In other words, bad loan insurance failed for two reasons: (1) The premiums and/or reserves for bad debts were insufficient; and (2) the insurance was being sold to persons without an insurable interest, mere bystanders who placed massive numbers of bets with Willy's bookie that loans would fail.

This bail-out is like if a state legalized and licensed casinos, which then became so large in relation to the state itself that the failure of the gambling establishments would severely impact the state's economy. What to do? Guaranteed the casinos' betting losses? A bankrupt casino can't pay the gamblers who made irrational bets, and by doing so, through pure luck of the draw, "broke the bank." You gotta read Ben Stein to truly understand the source and magnitude of the problem. His article "Why I'm Still Buying" is required reading at:

http://finance.yahoo.con/expert/article/yourlife/115733#

As a former bank auditor and a former mortgage company attorney, I am just now starting to fully comprehend the details of the problem. Somewhere there is one simple answer to where this all went wrong. If financial institutions had not been nit-picked by regulations forcing loans of a quality that would otherwise have been avoided...if non-bank mortgage brokers (not subject to banking regulations) had not gained a foothold...if packaged loans were sold with recourse...if credit default swaps ("insurance") had not got out of hand by repeal of the "bucket Shop Law"...and if the bets on defaults had not taken on a life of their own, independent of insurable interest...

Well, then there wouldn't be today's opportunity to buy the Dow, formerly above 14,000, and now at below 8,500. My posts on this thread have given me an opportunity to gather my thoughts in a sometimes hostile environment. There is a wealth of information on the Internet if one can only separate the wheat from the chaff. I believe we may be at a point where opportunity knocks. By low, sell high, and if it don't go up...don't buy. EDM