Of course the CRA played a role. Reading the papers during the initial Fannie Mae crisis, the use of derivatives to smooth profits, and the ensuing hearings(2003), it was clear the Democrats interest was not in driving proper regulation but in extracting commitments from Fannie to make additional loans to the underserved (i.e., the poor, the high risk, call them what you will.) This is a typical Washington compromise, to extort policy changes in lieu of compliance. Both sides do it and the result is lack of enforcement coupled with tainted policies.
A better analysis: There is no entity capable of deciding the value of houses or mortgages, or when they are "sufficiently underwater". Nor any one capable of deciding if the owner, the lender, or other circumstances caused the problem or who deserves to benefit from the solution. The best solution: The home owner has the option now of mailing in the keys -- they should determine if that is in their interest and do it, rather than throwing good money after bad. The government should allow them (via guarantees), on the same basis as anyone else, to get loans for new housing if they have enough income, when they have a down payment, and if they are a good risk (ignoring for this purpose the fact that they defaulted on their previous mortgage.) This will have the effect of putting more homes on the market, but also more buyers. The banks will be faced with well deserved losses on the loans they never should have made -- the more risky the loan, the bigger their loss. The homeowners will lose also, but in proportion to the excess size of the house they "bought" -- in short they may well wind up in a smaller house, or renting. The banks will have the opportunity to lend wisely to the new buyers in the market. Note this plan requires no voluntary action by the bankers, only the homeowners and the government need to act. The worthy public policy objective is to put folks in a home they can afford, if they can afford one. It should not be to keep everyone in the specific home they were in when the "music stopped". If most of the homeowners that are underwater mail in their keys, many will wind up in a very similar home across the street or down the block from the home they currently occupy. And the market will have cleared.
The proposed transition to "full recourse loans" is a trick, a trap. It will be the final nail in the coffin for the middle class, ensuring that homeowners pay the full cost of the whole fiasco. If there is a movement to full-recourse, you can bet it will be followed by a long gradual deflation, squeezing every ounce of savings out of the middle class.
The proposed formula for exceptions to the limit on deficits, namely “natural catastrophes and serious emergency situations”, is essentially the same as President Bush's "recession, war, or national emergency" Remember how happy he was when he "hit the trifecta"? As long as the politicians have a loophole it will be exploited. Why else suppose the difference between structural and cyclical deficients is a real one? Why else suppose higher borrowing costs during inflation are less real than otherwise? Any excuse to borrow will be validated and the borrowing will never stop.
Financial Reform’s Breakthrough Year
If this book, as its preface seems to promise, actually untangles the knots of loose definitions and bad logic, then maybe it will make a difference!
Did the Bankers Do It?
Of course the CRA played a role. Reading the papers during the initial Fannie Mae crisis, the use of derivatives to smooth profits, and the ensuing hearings(2003), it was clear the Democrats interest was not in driving proper regulation but in extracting commitments from Fannie to make additional loans to the underserved (i.e., the poor, the high risk, call them what you will.)
This is a typical Washington compromise, to extort policy changes in lieu of compliance. Both sides do it and the result is lack of enforcement coupled with tainted policies.
Occupy the Mortgage Lenders
A better analysis: There is no entity capable of deciding the value of houses or mortgages, or when they are "sufficiently underwater". Nor any one capable of deciding if the owner, the lender, or other circumstances caused the problem or who deserves to benefit from the solution.
The best solution: The home owner has the option now of mailing in the keys -- they should determine if that is in their interest and do it, rather than throwing good money after bad. The government should allow them (via guarantees), on the same basis as anyone else, to get loans for new housing if they have enough income, when they have a down payment, and if they are a good risk (ignoring for this purpose the fact that they defaulted on their previous mortgage.)
This will have the effect of putting more homes on the market, but also more buyers. The banks will be faced with well deserved losses on the loans they never should have made -- the more risky the loan, the bigger their loss. The homeowners will lose also, but in proportion to the excess size of the house they "bought" -- in short they may well wind up in a smaller house, or renting. The banks will have the opportunity to lend wisely to the new buyers in the market.
Note this plan requires no voluntary action by the bankers, only the homeowners and the government need to act.
The worthy public policy objective is to put folks in a home they can afford, if they can afford one. It should not be to keep everyone in the specific home they were in when the "music stopped". If most of the homeowners that are underwater mail in their keys, many will wind up in a very similar home across the street or down the block from the home they currently occupy.
And the market will have cleared.
The proposed transition to "full recourse loans" is a trick, a trap. It will be the final nail in the coffin for the middle class, ensuring that homeowners pay the full cost of the whole fiasco. If there is a movement to full-recourse, you can bet it will be followed by a long gradual deflation, squeezing every ounce of savings out of the middle class.
How to Create a Depression
The proposed formula for exceptions to the limit on deficits, namely “natural catastrophes and serious emergency situations”, is essentially the same as President Bush's "recession, war, or national emergency" Remember how happy he was when he "hit the trifecta"?
As long as the politicians have a loophole it will be exploited. Why else suppose the difference between structural and cyclical deficients is a real one? Why else suppose higher borrowing costs during inflation are less real than otherwise? Any excuse to borrow will be validated and the borrowing will never stop.