Larry Kudlow is Dead Wrong: CRA Didn't Start the Meltdown

Larry Kudlow earlier this month stated during an interview with David Walker that the Community Reinvestment Act "created subprime loans". Larry Kudlow in this interview is really pushing the agenda attempting to help minority groups get their piece of the American Dream "caused" the subprime meltdown.

In this post-Bear Stearns (BSC) bail out interview, David Walker made the connection those who originated and funded the subprime loans where not the ones taking the risk in the future. Those getting the fees are not now taking the risk - the Fed is.

Kudlow is clearly concerned the federal government will take steps to regulate Wall Street since the Fed opened the discount window to investment banks for the first to facilitate the Bears Stearns deal and this is a preemptive salvo to stave off government regulation of his Wall Street pals. This far-reaching attempt to link previous government regulation - the Community Reinvestment Act - as the cause of the subprime meltdown doesn't even pass the smell test.

It's laughable. It's ridiculous. It's borderline racist.

Kudlow glosses over Walker's point since it is moving to attack the Wall Street traders who profited most from subprime (like Bear Stearns) swinging the blame back onto minority groups who wanted to own a home.

Kudlow says:

CRA which essentially created subprime loans…the original subprime loan…all came out of the CRA….that ought to be repealed.

Becky, his co-host chimes in to clarify by asking, "What is the connection between CRA and subprime?" She clearly doesn't buy his line of thought either.

Kudlow answers:

CRA created subprime loans…that's where it began…that's exactly where it began. Nobody wants to look at this.

Kudlow admits the CRA was passed to outlaw redlining "bad" neighborhoods but says amendments in 1997 laid the groundwork for the subprime meltdown.

I have never heard such tripe… I can't believe even Kudlow believes this line of thinking.

Who or What Really Started the Subprime Meltdown?

In a word, Wall Street. And Kudlow knows it. He just doesn't want you to know it…or any potential Federal regulators.

Bloomberg News reporter Mark Pittman did a 5 part series of on the subprime mortgage crisis chronicling the Wall Street cowboys creation of subprime mortgage derivatives.

Pittman's article as it appeared on seattlepi.com says:

Representatives of five of Wall Street's dominant investment banks gathered around a blond-wood conference table on a February night almost three years ago. Their talks over take-out Chinese food led to the perfect formula for a U.S. housing collapse.

The host was Greg Lippmann, then 36, a fast-talking Deutsche Bank AG trader who aspired to make mortgage securities as big a cash cow for Wall Street as the $12 trillion corporate credit market.

His allies included 34-year-old Rajiv Kamilla, a trader at Goldman Sachs Group Inc. with a background in nuclear physics, and 32-year-old Todd Kushman, who led a contingent from Bear Stearns Cos. Representatives from Citigroup Inc. and JPMorgan Chase & Co. also were invited. Almost 50 traders and lawyers showed up for the first meeting at Deutsche Bank's Wall Street office to help set the trading rules and design the new product.

"To tell you the truth, it's not very glamorous," Lippmann says. "Just a bunch of guys eating Chinese discussing legal arcana."

Those meetings of the "group of five," as the traders called themselves, became a turning point in the history of Wall Street and the global economy.

As a mortgage broker for the past 15 years, I can say in all honesty I didn't sell subprime loans since I knew they were a bad deal for everyone involved. After all what good is it to put a borrower in a home and a loan they will eventually lose?

However, doing the relatively few minority loans the Community Reinvestment Act called for to bring equity to minorities didn't bring down the system…greedy traders like the "group of five" did.

Kudlow would have us believe minority home owners were responsible for a worldwide credit collapse instead of what Pittman describes about these Wall Street created subprime derivatives, as being able to,

…magnified losses so much that a small number of defaulting subprime borrowers could devastate securities held by banks and pension funds globally, freeze corporate lending and bring the world's credit markets to a standstill.

Walker's point that the those earning the profits are not now taking on the risks is correct. Walker's second point concerning not knowing the extent of the derivatives multiplied negative effects is the cooling force behind the frozen credit markets.

Kudlow also forgets that upwards of 35% of all subprime lending went to housing speculators. Speculators who expected rising values to continue indefinitely. Once again not the purview of the Community Reinvestment Act, more the purview of greedy house traders.

So whether you trade in homes or mortgage derivatives, you got the profits but didn't take on the losses. And those losses are still mounting. If there was ever an example of market players in dire need of regulation…this is it.

Comments

[sliman]

You are the fool. Wall Street only creates the vehicles that full fill the demand of the public. Did Wall Street "create" over priced IPO's? Only after the public was willing to buy them. Wall Street is like a store. It takes customer demand to create products. People wanted no down payment loans to get in on the housing boom. CRA helped to allow the creation of sub prime loans.

[ArtfulDodger]

Kudlow is partially right. The Clinton Justice Department sued banks across the nation to force them to put aside money to lend to "minorities."...

The banks did and this along with later legislation created sub-primes.

Those two things started the sub-prime mess, but after lending institutions informed Janet Rhino's Justice Dpt. that most "minorities" could not meet the standards the government laid down for lenders after the S&L crack up, they got a wink and a nod.

A few years later and sub-prime became an industry. Selling mostly worthless sub-primes became a bigger one, and this is where WSt. sinned.

But indeed it was the government that force started sub-prime loans.

Rebeldog

[User 136152]

Well guys, why is no one mentioning the 3 year no refinance lockup and the 2 year teaser period? That's the fingerprints of criminal intent my friends! There's nothing about a couple who qualified for a fixed rate, but the broker would get a full 3% of the whole loan to push a much more expensive "exploading" loan that is remotely "market forces". That's criminal and so far I don't hear of 1000's of brokers being charged with fraud.

Yes this practice and industry _does_ need regulation.

curt

[russ]

I never watch Kudlow. He is arrogant and always seems to have an ideological bias. He is not where I want to get thoughtful insight.

[User 130076]

Finally the truth starts to come out. Those that started this mess should go to jail. Larry Kudlow is a total liar, and a pawn of the crooks on Wall Street. They care little of the country.

[dectra]

Larry Kudlow is a putz. He's a well known 'water carrier' for the GOP, and he constantly supports their insane policy of never ever calling for any regulations on anything.

Free markets are awesome, but lets face it, the lack of accountablity in the last 6 years is exactly why we are in this mess.

[leh]

While I agree that Kudlow is a complete ass on this and many other issues, I have to agree with Curt above that the main culprits here were the many unscrupulous brokers who preyed upon the underclass with easy, money-out variable rate refi's and the like. I'm guessing laws may have been mightily stretched but not technically broken, or at least nothing provable--though not being in the industry, this is just a guess on my part. Much stricter lending standards are obviously needed, period, along with very strong disclosure laws so that people know exactly what they're signing and what kind of fees are being imposed.

The real estate speculators OTOH clearly gamed the system and ought to eat their losses as they knew exactly what they were getting into; they are a different story entirely. The real crime is that there were a huge number of low income, less sophisticated folks who were clearly snookered by the mortgage brokers; they are the true victims here and deserving of help by both the govt and the banks in keeping their homes. The foreclosure maps in my area (NY/CT) clearly show that the poorest neighborhoods were victimized by these sleazy easy-money salesmen who were no doubt charging huge fees for refis and the like: Rochester, NY and Bridgeport, CT are ranked among the highest in foreclosure rates.

[tcornelison]

CRA is flawed but the intent was to make sure banks offered loans wherever they were willing to take deposits. CRA did not cause our mortgage problems but may have been a minor contributing factor. Most CRA inspired bank lending programs did not have teaser rates and pre-payment penalties, in fact I have never seen one that did.
What CRA did was create an environment where the banks were forced to ignore sound credit policies in order to meet government quotas for lending in certain areas. The vast majority of Sub-prime loans were originated by firms who are not even subject to CRA. Everyone wants to place blame for what happened. The sad fact is that it belongs to the traders, the originators, the underwriters, the policy makers, the borrowers, the realtors, the builders, the GSE's, Congress, the Fed, the regulators, the States but mostly the individuals who signed loans they could not afford.

[sliman]

Please! I refinanced 3 times in the last 6 years. Each time I compared deals. It is always buyer beware. No amount of regulation can be a substitute for common sense. There are already tons of laws that define fraud.

[spragus]

Well, well the PC'ers are at it again. Minorities = "correct", poor is not. Race doesn't matter if you're poor. Poor people are "fiscally challenged". Fiscally challenged people who have mortgages are more likely to default than those folk who are not so fiscally challenged. Hence default rates on so called subprime mortgages will be higher than prime mortgages. It therefore follows that something that encourages greater use of subprime mortgages can be seen as "causing" the current mess, whether it be the CRA, greedy mortgage brokers etc, etc etc. But clearly the CRA is in as an early cause of the subprime quagmire as it encouraged the creation of subprime mortgages.

[CM in MA]

Chicken and egg analysis. The government asked, Wall Street delivered, the public responded. See White House press release below. President Bush correctly identified many potential problems associated with his goal of increasing home ownership. Unfortunately, his administration then went to sleep and ignored the very problems they anticipated, and to no small degree, brought about. With such leadership, more regulation won't change this type of outcome.

Source: www.whitehouse.gov/new...

For Immediate Release
Office of the Press Secretary
June 18, 2002

President Reiterates Goal on Homeownership
Remarks by the President on Homeownership
Department of Housing and Urban Development
Washington, D.C.

.................We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. (Applause.) Five-and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it's going to mean we're going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.

And so I want to, one, encourage you to do everything you can to work in a realistic, smart way to get this done. I repeat, we're here for a reason. And part of the reason is to make this dream extend everywhere.

I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector. (Applause.)

And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)

We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year -- 40,000 families a year -- will be able to realize the dream we want them to be able to realize, and that's owning their own home. (Applause.)

The second barrier to ownership is the lack of affordable housing. There are neighborhoods in America where you just can't find a house that's affordable to purchase, and we need to deal with that problem. The best way to do so, I think, is to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America. (Applause.)

The third problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. (Laughter.) There's too many pitfalls. So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership.

It is essential that we make it easier for people to buy a home, not harder. And in order to do so, we've got to educate folks. Some of us take homeownership for granted, but there are people -- obviously, the home purchase is a significant, significant decision by our fellow Americans. We've got people who have newly arrived to our country, don't know the customs. We've got people in certain neighborhoods that just aren't really sure what it means to buy a home. And it seems like to us that it makes sense to have a outreach program, an education program that explains the whys and wherefores of buying a house, to make it easier for people to not only understand the legal implications and ramifications, but to make it easier to understand how to get a good loan.

There's some people out there that can fall prey to unscrupulous lenders, and we have an obligation to educate and to use our resource base to help people understand how to purchase a home and what -- where the good opportunities might exist for home purchasing..........

______________________...

[brooklyn91941]

Larry Kudlow is an ass. It was just plain greed that created this mess. How could banks give 100+ per cent mortgages to anybody? If housing prices continue to go down 20 + million homeowners will be upside down in their mortgages, and might walk away. Sure Wall Street creates products to meet consumer demand, but in many cases they also create the demand. Profits on these securities made many along the chain wealthy including people like Angelo Mozillo and the other crooks in the chain. This isn't only a sub prime problem. The levels of debt in the US is over whelming and since the Reagan administrations attacks on the dismanteling of regulations that affect the financial services ending with the death of Glass Steagle. This brought us the S & LO debacle and now the worst credit crises in decades. Its typical of Larry Kudlow and his republican ideological buddies to deny any responsibility for any of the disaters brought about by this administration. He should be fired.

[kirkpepm]

Charles, I generally agree with you that it’s chicken and egg. Having been a CRA lender, Kudlow’s CRA argument is exaggerated in that it’s not one law, but the entire regulatory and legal environment that encourages price distortion. CRA is harmless without FNMA, FRE, the GSE's, the environmental lobby seeking land use restrictions, the local counsels who bend to create building codes that increase scarcity and the city's and states who subsidize.

All the “group of five wall streeters” did was exploit an opportunity created by government overreach. All the unscrupulous brokers are again doing is taking advantage of government regulations which force markets to price incorrectly and allow them to sell assets to people not equipped to manage the risk.

When we get over the need to use the government as a tool to manage pricing we will move beyond this mess. There will be a buyers market (and, I know this is a bad word but renters) at all levels of demand, with prices that are accurate for those markets.

[pedsr]

I have tried to watch Larry Kudrow for some time and find it very unsettling. He has a "bloody pulpit" in hand thanks to CNBC and misuses it regularly.  Looking like he knows what he's talking about  (you know, that aging preppy boy, Wall Street facade) and sounding like a free- marketeer gone awry is what we get from him and his tirades. Looks are deceiving and extremism is not defensible in the pursuit of truth. I think that the abuse of credit started with its uncontrolled availability--namely the Greenspan Fed's lowering rates and holding them down for much too long. The "boys" of the Street just were doing what boys will do even if they were as immoral as hell.  But trying to lay it on the Community Reinvestment Act?? Oh brother!

[surgcare]

DAH The democrats pass a law requiring "subprime loans " to poor people and or minorities who by nature do not have the money to buy these expensive homes . This is a perfect example of how "dumb " people like the author and those who suport his point of view .This is why this country is in such bad shape as common sense does not exist .The next thing coming from the democrats will be high taxes , more regulation and abolishing free trade .When this crushes the economy and the rest of the world passes us by , idiots like the author will blame anyone but themselves having put the democrats in office .

[hamzzz]

Kudlow is a right wing republican capitalist who wants complete freedom to carry on their misdeeds (no government interference!)
Capitalists are great people - they are the people who make things happen - they create the wealth of the nation BUT they need to be regulated or they will tear the country apart in their greed.

see - novan.com/capitlist.ht...

[Growin $$]

1. I'd like stats to see the % of homes in the fragile reset condition that extends past mid-summer '09 are CRA type lending. My own contact with people in the mortgage business would suggest this is utter nonsense!
2.I don't indulge in Dem vs. Rep - after the ethanol bill and now the "keep the builders happy bill" I share the viewpoint of a friend who asked "How could 535 people be so collectively stupid?"
3. Mortage brokers were going gangbusters in 2002;Wall St. merely poured gasoline on the fire - and the banks and mortgage guarantee agencies had already abdicated quality discipline. Certainly no one expected Wall St. to do anything but push deteriorating ethics and business practices downhill; that's what they seem trained to do.
4.This took crooks at every level, wink-wink at every level (Confucius or someone said "when 2 men wink, both men are blind." Banks were so anxious to cut costs and merge they had inadequate loan departments who I am sure were egged on into approvals. I'm also sure some bank officer said, "If you do this for a CRA loan, why not for a 750,000 up-and-comer?" That doesn't make CRA the cause.
5.We have to have regulation because $$$ have run over ethics and responsibility,not because of socialism or freemarkets. Under the socialism that Larry fears, everyone cheats to survive;under free markets as practiced today, some cheat but they get great leverage.

[surgcare]

This suprime mess is not nearly as complicated as everyone wants to make . Its simple .If you want to buy something ,you do whats called "due diligence " which means you figure your assets compared to that which you want to buy .To blame the lenders for making people take loans they can't pay is "LUDICROUS" .If you buy something you can't afford ,its "YOUR FAULT " not the person from who you bought it .

[brooklyn91941]

Its interesting that many of the posts keep trying to blame the CRA as the cause of this problem. Did the CRA force Bear to lever its balance sheet 30 times? Did CRA force the Investment banks to take on structures from MBIA and AMBAC? Did somebody put a gun to the rating agencies to rate these structures AAA? Are the assets written off in the hundreds of Billions all sub-prime? Only idiots would conclude that. Allowing banks and brokers to lever their balance sheets with little oversight and then blame the borrower is just the same revisionist history this group always put forth. Does anyone know Kudlow used to be chief economist at Bear and was fired. Its interesting insane profits are capitalistic, but losses are always socialistic.

[holman]

"The Community Reinvestment Act is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses. The CRA was passed into law by the U.S. Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community."

The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions.

This is what rocketed the crisis wildly:

In 1995, as a result of interest from President Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for five years. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997.

As Stan Liebowitz, a University of Texas economist, has pointed out, a Fannie Mae Foundation report enthusiastically singled out one mortgage lender that followed "the most flexible underwriting criteria permitted." That lender's loans to low-income people had grown to $600 billion by 2003. Its name? Countrywide, the largest U.S. mortgage lender and one of the lenders in the most trouble for its lax lending practices.

The rest is history.

Banks were forced to loan money to borrowers they never would have, had government regulation not forced them to. Then, additional government regulation allowed Wall Street to package the loans that never should have been made into negotiable securities and sold, and resold. This made these high risk securities backed by the loans that never should have been made in the first place popular with the hedge funds and investment banks worldwide - because they had a high yield. This created tremendous demand back down the pipe for more of these securities, which accelerated even further the building of homes that never should have been built, and sold to buyers who could not afford, nor had the ability to borrow, which overbuilt the entire housing market and deflated the value of all houses. The genesis of the entire mess is GOVERNMENT wrongly demanding a solution to so-called “affordable housing”, adopting the attitude that Banks were racist for "wink & nod" redlining, then ordering banks to loan money to people NOT based upon credit standards that protected the bank. It was in the mid-1990s when our vaunted statesmen decided the CRA - the Community Reinvestment Act (nice name, kinda like the Patriot Act) allowed CRA loans to be "securitized"... or allowed Wall Street to slice and dice the loans so that they would be popular with institutional investors, resulting in more money available to loan money to people who never should have borrowed in the first place.

Rescind the CRA and its authority to allow the securitization of loans made as a result of its passage.

[Dr. Steve]

I'm afraid my deep pocketed colleague is wrong again on this one. While it is true that, "If you buy something you can't afford ,its "YOUR FAULT " not the person from who you bought it"; it is equally true that if you repeatedly lend money to people who can't repay it, you don't deserve that big annual bonus. And if you engage in irresponsible lending practices which place investor's dollars at undue risk, then you are guilty of negligence and/or incompetence and are begging for additional oversight. If you are a corporate leader then that means government oversight.

[leh]

Dr. Steve is spot on. Furthermore, some of the foreclosure maps clearly reveal that unscrupulous lenders targeted the poorest neighborhoods in the poorest cities and went to town like aluminum siding salesmen, selling rotten mortgages to those least likely to read--or understand--the fine print. These banks and brokers clearly gamed the system for all it was worth, and many of the worst are already out of business.

Re that ass Kudlow, he loves to crow about the wonders of free markets--until Wall Street needs a handout. Suddenly, then, the markets need the Fed to act like a wealthy uncle to underwrite sonny boy's latest misadventure. Free markets indeed!

[bowlmar]

Spare your words - Kudlow is an ideologue, and a dogmatist. In other words, he's an idiot. CNBC uses him to get some Fox viewers.

[degreenodal]

There were many participants in the subprime mess all equally culpable. At root, our culture of greed and consumerism is the prime impetus.

"Heaven forfends trees from growing to the sky"

[Sanity]

If the mortgage brokers had their commissions at risk for failed mortgages, we sure would not have had a melt down.

[holman]

Government should not force lenders to loan money to individuals who do not clearly demonstrate an ability to pay the loan back. PERIOD.

Regulating lenders (the CRA scoring system) is what started this whole mess.

And all the obfuscation only adds to the problem.

[johngonole]

Free markets are great and the answer to almost every social ailment in society if only people would excercise more personal responsibility. In addition a safety net is also good to encourage the risk takers that start businesses.

That said most of what people can't stand are the...the back alley deals....scaming investors....using mutual fund money to fund outrageous IPO's.....self dealing CEO's with a hand picked recipicated board of directors....lyers, theives, and monopolist.

None of those things have anything to do with a free market. They are thieves and should be tried in the criminal and civil court systems. No need for regulations just put these white collar crooks in jail and throw away the key. Do the same to the politicians who give them pardons for campaign donations like clinton did. Heck Bush will probably do the same right before he leaves office too.

Regulation is not what we need. Regulation just places more power in the hands of the crooks. The line of seperation between wall street crooks and our REGULATING politicians is almost zero. They will regulate to themselve more stolen money. Then when it all crashes down they will retire to their mansions and bail out their own businesses with the MIDDLE class taxpayer money. The poor will vote for them for the peanut shells the rich toss down to them.

Cynical in Florida,

John

[eyeswideopen]

First of all, CRA loans are not and never have been subprime loans. These loans, to me basically benefited the broker, as the lenders paid an addl incentive for the broker to submit the loan to them. Maybe some of that incentive was passed along to the borrower, maybe not, but the intention is to have it passed to the buyer/borrower. Also, it only works in certain census tracts, identified by the lender. It has nothing to do with teaser rates, negative arms, etc. The subprime mess is a Wall Street issue, and everyone is to blame. The main reason? GREED, plain and simple.

[RobertTrudeau]

Kudlow is a wall street cheerleader. All that is missing is a skirt and pom poms. Free market believer that he is, the investment banks had nothing to do with it. It was the governments fault. A fierce supply sider and pseudo economist, Kudlow believes the working class idiots should bear the burden of their mistakes, and not the Harvard educated Wall Street geniuses who created these ridiculus mortgage derivatives. There are a lot of villans in this mess; politicians, regulators, the Fed, investment banks, commercial banks, mortgage brokers, real estate agents, and people who bought a home while hoping that real estate prices would keep going up.