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Originally Posted by mcbear  NO, NO, NO. You are confusing several lending instruments and trying to clump them together at the end to make a point.
Here is the flow for loans to Fannie/Freddie. Banks, mortgage brokers, thrifts, credit unions, ALL lending institutions process the vast majority of their loans, Prime and SubPrime through Fannie/Freddie. Think of that flow of business as the Mississippi River of mortgage commerce. It goes on whether CRA exists or not. It flows fully and completely without CRA even being in the picture. Once loans are guaranteed by FM/FM the banks go out and make more loans, package the current loans into big bundles, sell the bundles to investors who then leverage the securities and resell them again and again. By the way, AIG is somewhere in the middle of this insuring institutions.
Now this little stream that flows into the Mississippi downstream is called CRA. It makes special loans and it makes regular loans [laws don't allow it to make "JUST" special loans. Those loans go to ONLY Depository banks [the big guys] who make the loans, usually at a extra point or two profit and have them also guaranteed by FM/FM [just like nearly every other loan they make]. As these loans are bundled up and sold to investors they merge into the system just like every other loan package in the big mortgage stream.
CRA accounts for just 8% of all loans and, as of late 2007 they had a 92% on time payment record. In other words, they were not defaulting at a rate higher than expected.
PUt as simply as possible CRA was brought into the National attention because some folks needed someone to blame for this and it seemed damned convenient to link ACORN and CRA and blacks and poor and assume that it had to be the cause. Surely those ten thousand Harvard MBAs couldn't have anything to do with it. Surely it couldn't be the unbridled Financial Sector that had been allowed to run free for several years. There had to be someone to blame and guess who was convenient.
So, even after it was proven to be completely incorrect that CRA was the culprit in the Financial Sector meltdown, the blogsphere still keeps it wound up because a good story is much more important that just admitting that they were wrong and pulling the stories from thousands of blogs. Hate makes folks stupid. |
Your analogy while explanatory of a great deal does not explain the simple fact that the CRA was the mechanism that allowed FM/FM to buy these bundles with wild abandon. True that the bundles were not all CRA loans in terms of CRA regulated institutions. That does not matter because there were some CRA loans in those bundles and that is why FM/FM bought the bundles of Sub Prime loans that were CRA and non CRA mixed together.
So to say that only 8% were CRA may be correct, it is not the whole truth. The institutions wanted to get rid of these sub prime loans because they knew they would not be paid back. They charged a higher interest rate and then sold the loans to another institution for bundling. They would be bundled with a couple of CRA loans and FM/FM would then buy the whole lot!
If FM/FM were not required to have a certain percentage of these CRA loans they probably would not have bought the bundles. But that is talking about what they shoulda, woulda, coulda done.
