Lil White Lies: No Way CRA Redux

Bryan White published a hurried response to my “Lil White Lies: No Way CRA” by, first off, plaintively demanding why I am calling him a liar. That’s been dealt with in another post. This post is only to respond to his CRA “argumentum ad nauseum”.

Along with that, he spent nearly half the piece going on about why John Carney could not be so conservative because he “attacked the content” of books by Mark Levin and Sean Hannity. Well, Carney may attack their books, but there’s one point they are all mostly in agreement on, which is the subject of this blog post: The CRA and its “significant” role in the subprime crisis. Levin and Hannity’s names both link to articles attesting to that.  I will admit I don't have anything on Glenn Beck in this regard, because he's gone more in the conspiratorial direction of the CRA's connections to ACORN.

Bryan finally makes his move with a laundry list of my purported logical fallacies...

• Non sequitor (twice!)
• Argumentum “MXC”
• Frankensteinian Straw Man

…combined with allegations of plagiarism, and of course, even with all my numerous citations, the usual spurious accusation of “Street offers no reasonable evidence to refute Carney's argument (or mine[Bryan’s], for that matter)” for which of course, he offers no reasonable evidence to refute Ritholtz’s (or MY) argument either.

Bryan’s co-called premise now (and Carney’s) is “the long term nature of the growing subprime market as well as Carney's bond sales argument.” But the CRA is the premise of that premise of “the long-term nature of the growing subprime market”, because without the CRA, there'd supposedly be very little to no subprime loans "growing."

So, what particular “evidence” did John Carney have of the CRA-instigated long-term spread of the subprime market?

“… His first big blog entry on the subject, yesterday, declared that “the evidence is unequivocal” — without actually presenting any such evidence at all. His second attempt finds something concrete: an OCC pamphlet from 1996 — a good decade before the fullest flowering of the subprime bubble. The pamphlet praises banks for working with local housing authorities to help low- and moderate-income individuals buy affordable housing.

Carney’s third entry on the subject is the most obnoxious. His headline is “Government Pamphlet Taught Banks How To Finance A $70,000 Home With A $500 Downpayment”. Again, the pamphlet dates from before the housing bubble — 2000, in this case. Carney hones in on a table showing how banks can work with local authorities to help borrowers own their own home and end up saving money in the process. The borrower needs $1,200 in cash: $500 downpayment, and $700 for making minor repairs.

--The bank loan is for $45,000 — a loan-to-value ratio of just 64%.
--The bank loan is a sensible product: a 30-year fixed-rate mortgage at 7.5%.  Nothing explodes.
--The bank loan is carefully underwritten with full knowledge of the borrower’s income and financial  affairs.
--The borrower is taking advantage of many local assistance programs, including 0% mortgages and a waiver of permit fees.
--The borrower’s current monthly rent payment is $750.  The new monthly housing expenses — not only mortgage payments but also taxes and insurance — are $550, which will rise to $613 in five years’ time.
--The borrower has participated in extensive pre-purchase education and counseling.

There is nothing dangerous about this loan — it’s safer, and has a lower LTV, than most prime mortgages. If this is the kind of product which lenders pushed during the subprime boom, there would have been no problem at all. Instead, predatory lenders started pushing unsuitable mortgages which had no chance of being repaid as opposed to prepaid or refinanced. Yes, some of those products involved low or no down payments. But that wasn’t the main reason why they were so toxic.

The fact is that the CRA did not encourage banks to extend the kind of toxic loans which ended up being such an important component of the financial crisis. Indeed, most of those loans weren’t made by banks at all — they were made by unregulated subprime lenders who had no CRA responsibilities whatsoever. But don’t take my word for it: ask Fed governor Randall Kroszner, who comprehensively demolished these meme in a speech last December. Why Carney is looking to resuscitate it I have no idea.”

In other words, Carney’s evidence just wasn’t there. Randall Kroszner’s speech "demolishing" Carney’s position used a lot of same information I had in my initial blog, from detailed studies done by the Board of Governors of the Federal Reserve.

As for the CRA bonds, I guess Bryan did not read my full blog. One more time.  According to Neil Bhutta and Glenn B. Canner, two Federal Reserve Economists:

“…In 2006, only about 9 percent of independent mortgage company loan sales were to banking institutions. …And among these transactions, only 15 percent involved higher-priced loans to lower-income borrowers or neighborhoods. In other words, less than 2 percent of the mortgage originations sold by independent mortgage companies in 2006 were higher-priced, CRA-credit-eligible, and purchased by CRA-covered banking institutions.”

Let me spell it out.  There was very little, if any, demand for these CRA bonds.

I’m supposed to believe I have no evidence and my arguments fallacious; I’m supposed to believe Bryan has evidence and his arguments to be sound and reasonable. Here, I methodically presented evidence to the contrary. I presented substantial evidence to the contrary in my initial blog, for which all he could do was say it was the same as having “Japanese people covered in velcro rope-swing at a velcro-covered wall and hope one of them sticks.”

So who’s the liar again?