Saturday, December 13, 2008

The New Villian? C.R.A.?


Surprisingly, or maybe not, there was an Op-Ed Opinion in the December 11, 2008 edition of the New York Times, blaming, to a large part the CRA (Community Reinvestment Act) for the current mortgage crisis. In fairness, in the 7th paragraph, the author states "One cannot say with any certainty whether the more important cause of the current housing crisis was affordable-housing mandates or the actions of investment banks and rating agencies."

The Community Reinvestment Act was passed in 1977 to stop banks from continuing a lending practice called "redlining". Simply put, this was a practice where lenders (almost all Banks at that time) would take maps of their marketplace(s) and draw a red line around the less desirable areas, predominately minority neighborhoods, and NOT grant loans to people in them. Was this aimed at minorities? In some cases yes; in many it was aimed at an economic issue. The fact that a disproportionate number of the people affected were minorities did not seem to matter.

The CRA did not mandate bad loans, but rather is forced Banks to go out into the community and figure out a way to make good loans more available to anyone in these "redlined" (circled) parts of town. Later, FannieMae and FreddieMac were supposed to grant a large percentage (approx. 25%-33%) of their loans to low and middle income potential homeowners. It DID NOT require that loans should be made to people who could not afford the monthly payments. Innovative lending programs and grant programs were encouraged. That DID NOT mean ARMs with initially artificially low (teaser) interest rates, but low fixed rates mortgages coupled with grants for long-term home ownership; and the use of available federal housing funds along with good lending policy to assist lower-income people to buy a home that they COULD AFFORD, basically substituting a mortgage payment, and insurance and tax payments, for paying a landlord rent.

There was nothing radical about the CRA except that it recognized that low and moderate income people, often minorities, were purposely or inadvertently excluded from home ownership. For 25 years all went well. The line of demarcation, when the mortgage business fell off of a cliff, was the point when mortgages were securitized. People and institutions buying these securities, backed by mortgages, relied on rating agencies to state whether there was risk, and if there was, how much. These companies that placed a grade on the securities backed by mortgages (MBSs), did fine at the start. HOWEVER, once the players, mortgage originators, mortgage brokers, mortgage lenders, and all of the others in the chain, realized that if the mortgages were sold to investors packaged in bundles of $300 million or $500million ... or more, and no one lender owned a mortgage, no one could lose if a mortgage failed and the property was sold at foreclosure. No one but the holder of the security - and, of course, the individual homeowner

Was this the fault of the CRA? NO!!! It was a failure of the rating agencies and others to recognize that once no one making the loans would lose anything, so that they would make any loan possible. REVERSE RED-LINING BEGAN. Rather than avoid certain areas, lenders, now primarily NOT banks, purposely went after people in those neighborhoods promising the American dream - Owning your own HOME. The practice of enticing people to buy a loan at a low initial rate, hiding the fact that the rate would JUMP, became commonplace. This practice WAS NOT confined to low and moderate income people. It became pervasive in the mortgage industry. Buy NOW, Pay later - or never if you can keep refinancing your home as values increase.

There are plenty of people and organizations and laws to blame. Most just didn't get it - many loved the big paychecks they received. People forgot the principle that whatever goes up, will and must come down. And yes, that applies to home prices. Further, once the teaser rate of 3% or 4% went away/expired and the real rate, of 8%,10%, or even 11% set in, the monthly payments WERE NOT affordable.

I have case after case where I am trying to save homes because of that very scenario. Do the buyers and mortgaged owners want to give up their homes? Did those folks know they wouldn't be able to pay? Do the majority of them not care and just give up the house and move-on? NO to all the the posed questions.

We all need a CRA, but a much broader one now - a National Reinvestment Act - programs to save housing and allow new buyers to do so.

Author's Copyright by Richard I Isacoff, Esq - December 2008

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