TIP OF THE HAT TO MEDIA MATTERS
The suggestion that the financial crisis was caused by banks lending irresponsibly to comply with the CRA is widely discredited. According to housing experts, a large number of sub prime loans were not made under the CRA, which applies only to depository institutions. A study released earlier this year by a law firm specializing in CRA compliance estimated that in the 15 most populous metropolitan areas, 84.3 percent of sub prime loans in 2006 were made by financial institutions not governed by the CRA. Moreover, Janet Yellen, president and CEO of the Federal Reserve Bank of San Francisco, stated in a March 2008 speech that "studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households".
In testimony before the House Financial Services Committee, University of Michigan law professor Michael Barr stated: "Despite the fact that CRA appears to have increased bank and thrift lending in low- and moderate-income communities, such institutions are not the only ones operating in these areas. In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, sub prime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of sub prime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such origination's were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts."
Investment banks created a demand for sub prime loans because they saw it as a new asset class that they could dominate. They made sub prime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them-frequently using borrowed capital.
No comments:
Post a Comment