Arnold Kling  

Government Failure

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Afternoon Commentary... More on Recalculation and Asym...

In Washington, "affordable housing" equates to cheap, lenient mortgage credit. Ed Pinto keeps trying to explain the consequences of this to Congress. His September 16 testimony is on the Community Reinvestment Act and affordable housing goals for Freddie and Fannie.


The GSEs' delinquency rate on their $1.5 trillion in high risk loans, 85% of which are goals rich AH loans, is 15.5%. at 6.30.09 This is about 6.5 times the 2.4% delinquency rate on the GSEs' traditionally underwritten loans

His testimony is very data-rich, and it successfully revives the charge that CRA and affordable housing goals were at the heart of the crisis. Read the whole thing.

His testimony for October 8 more or less says that FHA lending has picked up where CRA left off.


The combination of an increasing default rate, a soaring non-cure rate, and an extraordinarily high re-default rate on loan modifications is proof that FHA is merely postponing much of its expected losses, and is likely adding to its ultimate level of losses.


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COMMENTS (5 to date)
kingstu writes:

Here's my formula for “affordable housing.”

(Annual Income * 25%)/12 = Affordable Monthly Payment

If Affordable Monthly Payment > Actual Monthly Payment then

Take someone else’s money to make up the difference.

Eric H writes:

Empiricism is lining up with gut instinct. ACORN and the CRA were hot topics across the conservative web zone one year ago.

q writes:

> The GSEs' delinquency rate on their $1.5 trillion in high risk loans, 85% of which are goals rich AH loans, is 15.5%. at 6.30.09 This is about 6.5 times the 2.4% delinquency rate on the GSEs' traditionally underwritten loans


what are comparable ratios for prime / subprime loans for non-GSEs?

also, what do the losses look like? say the default rate ends at 15% with 60% recovery. this is 1.5T * 0.15 * (1-0.6) = 135B. not a small number, and enough to give the GSEs trouble, but less than 5% of the total lending losses in this cycle.

also, i trust you've looked at john hempton's (brontecapital) writeup on the GSE balance sheets?

bettywu writes:

What Mr. Pinto doesn't say is that what brough Fannie and Freddie down was their decision to get into the sub-prime, NON CRA regulated market. They had been buying CRA loans for decades without incident.

He does not define "AH rich" and does not tell the whole story. The sub-prime loans they were not eligible loans to meet the affordable housing goals set out for Fannie and Freddie (i.e. not CRA loans). So they went and got a specific waiver from HUD to count them towards their goals.

Throughout his research and his testimony he conflates 'sub-prime' with 'CRA' when they are not the same. Sub-prime by definition has a higher interest rate. Mr. Pinto then lumps all CRA and true sub-prime lending together and says "Look, CRA loans have poor performance." This is dishonest. When CRA only loans are looked at, they have a significantly lower delinquency rate than true sub-prime and delinquency rates similar to non-CRA A paper.

Of the billions of good CRA lending that has occurred over the past 30 years, Mr. Pinto was able to find one CRA lending program that went bad. Not such bad odds.

Figures lie and liars figure.

Steve Sailer writes:

The CRA vs. non-CRA distinction is a red herring because the Clinton Administration warned independent mortgage firms such as Countrywide that the CRA would be extended to them, with all its expensive reporting, if they didn't start acting like they were covered by the CRA. So, Angelo Mozilo flew to DC in 1994 and signed a deal with HUD secretary Henry Cisneros to lend more to "underserved" communities. Countrywide kept announcing pledges for lending to minority and low income borrowers identical in form to CRA pledges -- such as Mozilo's $600,000,000,000 pledge in 2003 and $1,000,000,000,000 in January 2005. In the latter, Mozilo specifically stated that Countrywide director Henry Cisneros would be helping hand it out.

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