Paul Revere by Cyrus Dallin, North End, Boston



Thursday, December 10, 2009

The Domino Effect of our Banking System

As we know our Financial System took a major hit last year. Let’s take a little look see at how this played out, shall we…

The Community Reinvestment Act is a federal law that was passed in 1977 to “encourage” banks and savings associations to meet the needs of borrowers in ALL segments of their communities, which included low and moderate-income neighborhoods. Congress “felt” this law needed to be passed in order to prevent discrimination against low-income and minority borrowers.

There were Legislative changes made to the CRA over the years, but the most pertinent one, in my opinion, was the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which required Freddie Mac and Fannie Mae to devote a percentage of their lending to support affordable housing. Basically this Act instructed Freddie and Fannie to divide its business into three categories: low and moderate-income, underserved, and special affordable. The goal was to increase home-ownership among minorities and the poor in rural and urban areas.

In November of 1999, a part of the Glass-Steagall Act of 1933 was repealed with the Gramm-Leach-Bliley Act of 1993 which permitted commercial banks, investment banks and insurance companies to consolidate. While The Gramm-Leach-Bliley Act was a Republican backed bill, President Clinton said he would veto it unless it contained verbiage that would ensure banks wouldn’t cut back on mortgages to low income and minority borrowers.

Due to pressure from the Clinton Administration, in 1999 Fannie began issuing subprime loans, which increased the number of minority and low income home owners. The expansion of “easy credit” to home buyers with lesser ability to pay it back and then bundling them as securities made the CEO’s of Fannie and Freddie and many others on Wall Street a lot of money, but also made our market quite unstable.

In 2000 Fannie Mae launched the American Dream Commitment, a ten year pledge to provide $2 trillion dollars in low-income and minority home financing. By March 2003 Fannie and their lending partners had fulfilled over half of their goal. Other lending partners included: Bank of America; Bank One Corporation; Charter One Bank; Countrywide Financial Corporation; Doral Financial Corporation; First Horizon Home Loan Corporation; Fleet Boston Bank; Huntington Mortgage Company; Irwin Mortgage; J.P. Morgan Chase & Co.; and Standard Mortgage Corporation and they were “applauded” for surpassing the halfway mark so quickly. Together they led the market in narrowing the homeownership gaps, increasing the availability of affordable housing and serving Americans of color and low-income.

The 2000 plan included $420 billion to help minority home financing but in 2002 it was increased to $700 billion in an “effort” to help “advance” the Bush Administration’s minority homeownership proposals. Fannie also met or exceeded HUD’s affordable goals for 9 consecutive years which included 52% of their business derived from low-income families; 33% derived from underserved families; and over 21% derived from very low-income families.

Fannie and Freddie loaned at first because they were pressured from HUD (Department of Housing and Urban Development) who was under pressure from Congress. With repeal of part of the Glass-Steagall Act it gave financial institutions and insurance companies free reign without any over-sight to basically sell debt onto our market, and make large bonuses to boot, and now we Taxpayers are left holding the tab. In my opinion, the CRA and the Glass-Steagall Act were two big factors in the downfall of our financial system.

I am in NO way suggesting that any bank, investment company or insurance company discriminate due to skin color or ethnicity; however, I do NOT condone giving anyone a home loan, a credit card or a car loan if they are NOT able to pay it back. The desire to increase home ownership in low-income and minority neighborhoods is a noble cause, but it may not be a feasible one, considering the outcome of many of these “loans”. I believe everyone should have a place to live—a home; but I do NOT believe everyone is ENTITLED to OWN a house. The two are completely separate from one another.

I believe if Congress hadn’t pressured HUD and HUD hadn’t pressured the banking institutions and if the CRA wasn’t abused AND Glass-Steagall hadn’t repealed Gramm-Leach-Bliley we wouldn’t be sitting with this current banking mess. There is enough blame to go around, but I think it all began with Congress wanting to give something that wasn’t earned, i.e. the CRA.

A person must EARN a good credit score, regardless of skin color or ethnicity. Neither of which can be used against you on a credit application, by the way. HOWEVER your lack of a job; adequate funds; time with your employer; and past credit history MOST certainly do and those issues are NOT discriminatory. It’s time we stood on the facts and stopped being afraid of being called “prejudiced” when the FACTS prove otherwise; because as we can see, the results can be devastating.

I also don’t think that Government should be involved in every aspect of our lives, BUT over-sight IS important in certain areas, especially when large sums of money are involved. These Institutions, like AIG and JP Morgan should’ve had some kind of Clearing House. As it stands they did not and they got away with Billions.

And last, but certainly NOT least, when we Taxpayers bailed-out all these lame companies that placed us in this precarious situation there should’ve been stipulations on OUR money. It should NOT have been handed to them willy-nilly. As it stands we don’t know where it went and we don’t know why these banks aren’t lending. They SHOULD be lending and we should demand that they follow some rules. However, those decisions don’t seem to be up to us, although it’s our money.

Hopefully our Representatives on The Hill have LEARNED something! And they will begin to institute some REAL change. Change that will stop the corruption, not just on Wall Street and in Banking and Insurance Institutions, but in Congress, as well.


Jim said...

Great post!

rockync said...

"Due to pressure from the Clinton Administration, in 1999 Fannie began issuing subprime loans..."

Just a small clarification; Fannie Mae does not, in fact make loans.

"Fannie Mae operates in the U.S. secondary mortgage market. Rather than making home loans directly to consumers, we work with mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates. We fund our mortgage investments primarily by issuing debt securities in the domestic and international capital markets."

More accurately, they provide guarantees on loans made by banks and other financial institutions that meet their criteria. They also buy mortgage bundles on the secondary mortgage market along with Freddie Mac. While there are others who also buy these bundles, Fannie and Freddie are, by far, the largest participants in this process.

I do agree that no one is entitled to home ownership and in fact terrible loans were made over the last several years that should never have happened.
They were not due so much to various directives but rather to the lack of controls on the banking industry that allowed for wildly reckless practices such as 100% loans, loans made to high risk clients with poor credit scores and usuary level ARMs pawned on people without the necessary disclosure for them to make informed decisions.
It has been a free for all in the real estate industry which made me very uncomfortable and highly skeptical three years ago when I was closing deals on properties that I would have bet would fly.
My question then was how can financiers make loans to people who so obviously have not yet learned to handle their finances and why were they allowed to take loans with no money down?
It seemed crazy to me then and, of course, has proven to be as disasterous as I suspected it would be.
Then, as now, I still refuse to participate in any transaction where I feel the client doesn't have a full understanding of their obligations. It's always a balancing act, knowing you have to make enough money to live but also needing to be able to sleep at night.

Beyond the mortgage morass is the credit card crisis where banks are raising interest rates with wild abandon without regard for the card holder's credit worthiness or credit history. In fact, you are more likely to be unfairly dunned if you are a prudent consumer with an excellent credit score.

And while I know the battle cry is "no government interference!" the current situation further bolsters the argument that there needs to be some controls on an industry that has proven so unwilling to behave responsibly.

Pamela Zydel said...

Jim: Thank you!

Rocky: Aw! I read and reread this post and dang nab it if I didn’t mess it up! That’s what I get for being so OCD! Trying to write a post that gives enough information without making it too long…ugh…thanks for the clarification.

You are one of the few that actually has a conscience, Rocky! I remember about 10 years ago when my husband and I were looking to buy a bigger house. We were a 2 income family and our Realtor said we could “afford” a $300K home. I about fainted. Yes, our income “said” we “could” IF we didn’t want to do anything else. Then what if one of us lost a job! Pus I most certainly didn’t want to be “house poor”. In the end, we didn’t move. We are still in our 3 bedroom split entry. It’s small, but it works. Anyway, we are now a one income family, so thank goodness we didn’t do what the Realtor suggested! We KNEW what we could actually afford and how we wanted to live. Lesson of the story: THINK before you buy!

But there is another side of the coin. People who just don’t understand. They are told by their Realtor or a bank that they can afford it and they sign the dotted line. They signed interest only, ARM, no money down, etc., loans and didn’t realize what they were doing. The bank isn’t 100% responsible, but I do believe they should’ve explained the terms better because some people TRULY don’t comprehend. Just like with the credit cards you mentioned. Credit card companies will send out cards to people even if they already have 10. There should be more stringent rules or guidelines. Just because a person has excellent credit doesn’t mean he should have 15 credit cards with $10K limits. That’s just asking for trouble. If Credit Card companies take that kind of risk then they shouldn’t complain if they get stuck with bad debt. Oh and I agree that it’s the “good credit” people who are getting majorly screwed today. That’s one reason why I don’t have any credit cards. NONE. I think Congress is trying to pass laws to help consumers with predatory credit card companies, but we are still a long way off.

I think you know where I stand on “Govt. Interference”; however, I do think we need some over-sight when it comes to “other people’s” money. We have PROOF that that is needed.

Jim said...

The rise in property values in California totally blinded the consumer to what the financial instruments had in them. Even when told the average consumer was only interested in flipping the property in less than 12 months. 30, 40 even 50+% increases in less than a year made a whole lot of folks very very greedy.

I was a financial planner from 2003 to 2007. Had to get out. I once talked with a family whose combined income was near 75K and lived in a $500k+ home. New car for both, boat, Harley's for him and her, kid toys galore. They paid for groceries with credit cards. This family was the norm, not the exception.

My friend refinanced in one year 5 times. 5 times! He died last year. Not enough insurance to cover the bills. Tragic.

It's impossible to legislate against stupidity. I know of no country that has succeeded in doing that.

rockync said...

Pam - first,I think you did a great job with this post and what you see is MY OCD! LOL!
Your situation is the norm. Go to the lender, they crunch those numbers and say you can afford a mortgage at "X" dollars. Fortunately, you had the maturity and foresight to consider not only what you could afford but also what you were comfortable with.
I always tell people to do that very thing; the bank says you can afford this house but if one of you lost your job, would you still be able to pay for it?
People get caught up in the excitement of buying a property and I think it is my job to keep them grounded enough and informed enough to make good decisions.
The reason I'm probably the exception, Pam is because I practice what I preach and live well within my means so I'm not under a lot of pressure to make a boatload of money every month.
I'm not a wealthy woman, but I make a good living and sleep like a baby every night. :)

And I just want to give a shout out to Shaw in case she is able to read some of this now and again.
We're doing our best to keep thoughtful, lively discussions going and you are ever in our thoughts and prayers and I feel pretty confident I'm speaking for all the "regulars" around here. Sending you warm hugs and healing thoughts!

James' Muse said...

I like to say we need "intelligent" regulation, not overregulation. I think we do need the government to regulate enough to make sure that corporations don't tread on the rights of citizens, just as the government is responsible to make and enforce laws to keep others from infringing my rights and well being.

TAO said...

I love it how everything always goes back to the Community Reinvestment Act of 1977, God, how conservatives hate that bill!

Let me ask you one simple question...if you live in a neighborhood and you bank at a local bank/branch then don't you believe that that bank should keep your money in the community?

Home ownership hovered around 65% from 1970 to 1994...going up or down around 1.5% at most. So, the Community Reinvestment Act didn't do much except keep banks from sucking money out of communities where the money came from and funnel it in other areas.

Here is a real good link about homeownership and Fannie Mae and Freddie Mac:

Basically it concludes: "The data suggests that homeownership in the U.S. is affected by the economic conditions and demographic changes. Much less clear is whether government sponsorship of mortgage providing institutions has had a significant impact."

Yes, individuals have responsbilities but so do corporations and institutions; and the people who manage and work for these corporations and institutions.

Yes, we want to point the fingers at poor people, blacks, hispanics, and stupid people and claim that they should have known better...

Well, the crook on the other side of the desk, who made the commission and his company who made the killing should have known better too!

So the folks that lose their homes and their credit rating...and the boys making the big bucks cashed in and moved on and so did their companies...

Lots of speculators made big bucks, lots of land developers made big bucks and lots of investors made a killing buying these mortgages....

They got bailed out...

Susannah said...

Just here real quick to see if anyone knows how Shaw is doing?

Haven't had as much time to surf around, etc. this week, but she has been on my mind & in my prayers.

When you talk/email w/ her, do tell her I asked about her & that my prayers have been with her. Thanks.

libhom said...

"Subprime loans" is a euphemism for predatory loans. The loans that sparked the crisis were designed not to be paid back. The banksters deliberately designed them with huge interest rate escalations which were much, much higher in traditional ARMs.

The scam was to force people out of their homes in order for the banks to make money after selling them in foreclosure. What went wrong for the banksters? They got too greedy. They issued too many of these mortgages which all failed within a relatively short period of time. That caused housing prices to plummet, and the mortgage paper went bad.

Pamela Zydel said...

Tao: But the CRA is where it began, although that’s not where it ended. There were other issues that exasperated it, as I mentioned, like Glass-Steagall. The CRA was a noble cause, but some Institutions took major advantage of it to the benefit of THEIR pocket books and hurt the very people they were supposed to HELP. THAT was WRONG. That’s why I said that some regulation is needed. Not because I think underprivileged people don’t deserve, but because sometimes it backfires, as we have seen.

rockync said...

Pam - being in the real estate industry, I agree we need oversight and I like James' description of "intelligent" regulation.
In the past, if you were a white American with a decent job, you could save the downpayment money you would need and the bank would be happy to give you a loan.
But,like the segment of "It's a Wonderful Life", the lower income immigrants were stuck in the slums and ignored by the banking industry as poor risks.
Laws like the ones cited here were designed to give this lower income bracket a chance to obtain the American Dream.
Of course, as we all know, greed is a powerful corruptor and these laws were used instead to begin a wild feeding frenzy that would end up turning half this nation homeless or close to it.
While I want people to have an equal opportunity for home ownership, I also want to see a mechanism in place that ensures they have a grasp on money management and the ability to budget.

TAO said...


The community reinvestment act is a fine bill that of and by itself created nothing...

If you want to go to the SOURCE of the problem then you have to go to individuals and thier personal greed.

Laws are devised to PROTECT individuals, protect companies and protect countries from THEIR own stupidity...

Sadly what we are passing as laws now are to turbo charge the stupidity of individuals, companies, and systems...

Andrew Jackson was the first President who realized that capitalism could hurt its self bad if allowed to run unsupervised....

Dervish Sanders said...

No mention of derivatives, which were actually THE MAIN contributing factor in the meltdown?

The repeal of the Glass-Steagall Act was the other major contributing factor -- you did get that part right.

But as for blaming poor and middle class individuals who were scammed into signing up for subprime mortgages? And to suggest that big banks had to be "pressured" into accepting huge profits? I'm not buying it.

Why is this cross posted from a Conservative blog? I didn't know that progressives were buying into this BS, yet Tao's comments are the only serious challenge to this deceptive post? Does Shaw know what's going on in her absence?

dmarks said...
This comment has been removed by the author.
Pamela Zydel said...

W-Dervish: This is NOT a deceptive post. I take offense to that, especially considering I have NEVER been anything but RESPECTFUL to you.

However, if you will so kindly take off your blinders and get over the fact that …my goodness…a “Conservative” is posting on a Liberal blog-- Heaven forbid! You will see that I did NOT suggest that banks were “pressured” into “accepting” profits. FAR from it! Banks took ADVANTAGE of the CRA and Glass-Steagall Act. If you read the comments you will see where I wrote: The CRA was a noble cause, but some Institutions took major advantage of it to the benefit of THEIR pocket books and hurt the very people they were supposed to HELP. And I did make mention of how securities were “bundled and sold onto our market”. I apologize, however; I should have explained “derivatives” in greater detail. The old saying about “assuming” fits well for me in this situation. I knew what I wanted to get across, but I also didn’t want to write a book.

My main point, though, is that it ALL could’ve been avoided by over-sight. Or as James and Rocky mentioned: INTELLIGENT REGULATION.

I might also add that to say ALL poor people were “scammed” is a misconception. You can’t scam EVERYONE.

In closing, why is a Conservative posting on a Liberal blog? Because I was INVITED. While writing this post I took into consideration that it’s a Liberal blog, so I did my VERY best to be as FAIR as possible. I mentioned the Glass-Steagall Act and Bush’s contribution. I may have missed a few things, which were politely pointed out to me, by a very SERIOUS and WELL INFORMED Rocky, who by the way is in the real estate industry and is a Liberal, but all in all, I thought I did an okay job in pointing out that Republicans were at fault too.

So, I will ask YOU this: How many other Conservatives will ADMIT to the failings of the Republican Party? Hmmm?

Pamela Zydel said...

D-marks: THANK YOU!
I most definitely was NOT being deceptive or racist, as I am NEITHER. I wrote this post because I felt it was a good topic. It has hit everyone and the blame is on BOTH sides. As a Conservative I didn’t want to “hide” the fact that Republicans had a hand in this mess and I wasn’t going to exclude that Bush’s Administration pushed for more “minority” home ownership either. With all the “pushing” it’s no wonder Banks took advantage of the system. They saw the money they could make, so they did. “Easy Credit”, “No Money Down”, etc., it was a Mortgage Broker’s dream! Bundle those babies up and sell them onto the market—walk away with a big fat bonus and sit on the beach with a Bahama-Mama---life’s good. UNTIL---BAM! The whole house of cards falls apart and people start asking what the heck happened? Then the finger pointing began! And still, no one wants to take any blame! Makes me so mad. But what is even more enraging is the problem isn’t fixed yet. We know what happened, yet who is going to be the one to take the step to correct it?

(O)CT(O)PUS said...

w-dervish: “Why is this cross posted from a Conservative blog? I didn't know that progressives were buying into this BS, yet Tao's comments are the only serious challenge to this deceptive post? Does Shaw know what's going on in her absence?

WD, this is a liberal blog that has been entrusted to me during Shaw’s recovery, and I am the one responsible for inviting Pamela to contribute a post. Yes, Pamela has a conservative viewpoint but, in my opinion, there are considerations of friendship that far outweigh partisanship.

Despite partisan differences, Shaw and Pamela are also good friends, and both are good friends of mine. Although this is a liberal-leaning blog, Shaw also has conservative readers who enjoy a spirited conversation, and I felt it was my duty as caretaker to keep her following intact. From this perspective (and in friendship), I welcome Pamela’s participation.

I’ll return later and share my thoughts … the kind of leftist opinion that makes all you lefties cheer and makes all you righties hiss. Later, Gator.

dmarks said...
This comment has been removed by the author.
Dervish Sanders said...

Pamela D. Hart said... This is NOT a deceptive post. I take offense to that, especially considering I have NEVER been anything but RESPECTFUL to you.

Substitute "inaccurate" for "deceptive" then. And I didn't think your post was inaccurate on purpose. As for "taking offense", I really did not care for your attack on the CRA, which I consider a typical Conservative blame-the-victim tactic. So it would be a fine post for your blog, But Progressives don't subscribe to that kind of thinking... or so I thought.

Derivatives are not bundled mortgages BTW, so I stand by my claim that you didn't mention them. And I still believe that they were the largest contributing factor in the financial meltdown.

I'm working on a response I plan on posting to my blog. I've decided to break up my response into two parts, but the first part is up now. I do not mention the CRA because it wasn't a factor. You posed a number of questions and rest assured I'll answer them all - in the second part (including why the CRA wasn't a factor).

Susannah said...

Anyone care to answer my question?

I'm not here for debate; just to check on Shaw...

(O)CT(O)PUS said...

Susannah: Anyone care to answer my question? "

I have not heard yet. I understand Shaw is staying with a friend or relative while she recovers, and I have no way of contacting her until she contacts me. Check back often because you never know when she might send back word of her progress.

More later ...

(O)CT(O)PUS said...

Anyone who follows my posts at the Swash Zone knows that one of the constant themes I talk about is the concept of “victim blame” … the tendency to blame victims for their own misfortune.

In a criminal rape trial, for example, the lawyer for the perpetrator may try to characterize the victim as bringing the crime upon herself in her dress (“revealing”), in her behavior (“slutty”), in being in the wrong place at the wrong time (a bar, a dark street, a hotel room). This is victim blame.

Lets move to a more difficult example: Prostitutes and the abnormally high incidence of violent crime perpetrated against them. What most folks do not know: 89% of prostitutes are victims of sexual and physical abuse as children. A prostitute starts out as a runaway adolescent escaping abuse and torment at home. On the streets, unable to support themselves, they fall easy prey to pimps and johns who can abuse them with impunity.

Shall we talk about poverty? Illegal aliens? Not to belabor a point, our culture has a tendency to blame victims and turn them into scapegoats for every problem ... rather than face the root causes.

In no way am I accusing Pamela of engaging in victim blame or scapegoating. In fact, Pamela has been conscientious in spreading blame across party lines and administrations. Pamela has also acknowledged the worthiness of wanting to lift the living standards of people, i.e., an opportunity for a better home and pride of ownership.

What does concern me is the limited scope of this debate. I would prefer to talk about the pimps and johns of Wall Street who game the system for ill begotten gain, the cowboy loan sharpies who snookered naïve first-time buyers, the bundlers of sub prime derivatives, and those who created instruments known as credit default swaps that brought the whole system crashing down. What started out as a worthy attempt to raise the living standard of lower income families turned into an orgy of greed and corruption by the rich and powerful ... those who now want to absolve themselves of wrongdoing by engaging victim blame and scapegoating.

If you fail to examine this side of the economic meltdown, then you are compounding the injustice and failing to assign blame where it really belongs.

rockync said...

Very good points, 8pus. There is a far larger, more complex set of issues that caused the meltdown cascade.
The blame game is kind of a useless endeavor that gives one finger on one hand a lot of exercise but not much else.
Far more productive and American-like would be to identify the weaknesses in our current system that allowed these shysters and thieves to operate and then fix it.
Fix it, not only for ourselves but for our children and grandchildren.
Unless we have a way to punish the guilty, we need to move forward and at the very least, neutralize them.

Susannah said...

Thanks. I'll check back.

Dervish Sanders said...

First, a couple of typos I noticed which you may want to correct:

Typo #1: In November of 1999, a part of the Glass-Steagall Act of 1933 was repealed with the Gramm-Leach-Bliley Act of 1993.

Gramm-Leach-Bliley was 1999, not 1993.

Typo #2: In my opinion, the CRA and the Glass-Steagall Act were two big factors in the downfall of our financial system.

Obviously you intended to write "The CRA and the repeal of Glass-Steagall", OR "The CRA and the Gramm-Leach-Bliley Act".

BTW I've finally posted part two of my response, titled "The Ideology That Screwed The World, Part 2", which may also include a few typos. If anyone wants to point out what they are (and also give an opinion on my post), I'd appreciate it.

Also, I'm sorry I called Pamela's post "deceptive". It was not my intention to be disrespectful. I do, however, still believe blaming the CRA or implying that banks were "pressured" by Congress to make risky loans is incorrect. But I didn't then, nor do I now believe that it was Pamela's intention to deceive anyone.

I've seen claims that the CRA is to blame for the crisis on many conservative blogs and they make me angry -- because those accusations are flat out false.

In any case, I encourage "Progressive Eruptions" readers to check out my post, as I believe it offers the Progressive take on what really caused the financial crisis -- as such I am very interested in receiving some feedback from my fellow progressives. I am also open to constructive criticism from anyone, Progressive or Conservative.