CRA and the Meltdown Timeline

Ok... Let's start with a historical timeline before commenting, so we can make sure we're starting from (mostly) the same set of data (from several sources, including Wikipedia, which is hardly 'non-partisan'). Please correct me where I'm wrong or missed something hugely significant. Yeah, I highlighted a couple of entries - emphasis is mine (only the issues really that pushed my puttons). And, yes, there's a LOT more, I left many details out: Mea Culpa. And quite a few notes benefit from 20-20 hindsight (which means nothing, ultimately).

Note there are individuals and groups of all political stripes referenced.

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- 1977 - The Commuity Reinvestment Act (CRA) was enacted (Thank you Jimmy Carter!) The intent was to address historical discrimination in lending, driven (in part) by the practice of “Redlining”. The Act encourages commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.

- 1980 - The Depository Institutions and Deregulation and Monetary Control Act (DIDMCA) grants thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts and exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state unlimited interest rates limits.

- 1981 - Each of the 12 Federal reserve banks establishes a Community Affairs Office to offer public and private guidance in accordance with the CRA.

- 1982 - the Alternative Mortgage Transaction Parity Act (AMTPA) preempts state laws and allows lenders to originate mortgages with features such as adjustable-rate mortgages, balloon payments, and negative amortization all of which contribue to "allowing lenders to make loans with terms that may obscure the total cost of a loan".

- 1986 - The Tax Reform Act (TRA) denied taxpayers to deduct interest on consumer loans, such as credit cards and auto loans, while allowing them to deduct interest paid on mortgage loans, providing an incentive for homeowners to take out home equity loans to pay off consumer debt.

- 1985-1989 - The effects of the TRA, and imprudent lending during the late 1970's along with other causes, led to massive insolvency (e.g., the Savings and Loan Crisis). This caused the failure and/or closure of half of all federally insured savings and loans. The Resolution Trust Corporation (RTC) was created to handle the problem and the U.S. government ultimately appropriated 105 billion dollars to resolve the crisis. After banks repaid loans through various procedures, there was a net loss to taxpayers of 40 billion dollars by the end of 1999.

- 1990 - The 1990 ACORN convention in Chicago featured a squatting demonstration at an RTC location. Later, ACORN members demanded cooperation from banks about providing loan data on low- and moderate-income communities and compliance with the CRA.

- 1991 - ACORN fought legal moves to weaken the CRA, staging a two-day takeover of the House Banking Committee hearing room. It also established ACORN Housing Corporation to service people moving into homes under the housing campaign, rehabilitated hundreds of houses addressed by CRA.

- 1992 - The Federal Housing Enterprises Financial Safety and Soundness Act required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing increasing their pooling and selling of such loans as securities; the Office of Federal Housing Enterprise Oversight (OFHEO) created to oversee them. The ACORN convention in New York, called the “ACORN-Bank Summit”, was organized to make deals with giant banks. When Citibank, the nation’s largest bank, did not participate conventioneers protested at its downtown Manhattan headquarters, and won a meeting to negotiate for similar programs. BTW, I haven't confirmed the precise time period, but it might be relevant to note that President Barak Obama was a community organizer and part of the legal counsel team for ACORN in both Chicago and New York during the 1990's (but *perhaps* not on this specific issue).

-1995 - New Community Reinvestment Act regulations break down home-loan data by neighborhood, income, and race, enabling community groups to complain to banks and regulators about CRA compliance. Regulations also allows community groups that market loans to collect a broker's fee. Fannie Mae allowed to receive affordable housing credit for buying subprime securities. These changes were driven by a directive from President Clinton to revise the CRA regulations to make them more performance-based, and to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. This directive addressed criticisms that the regulations, and the agencies’ implementation of them through the examination process, were too process-oriented, burdensome, and not sufficiently focused on actual results. The agencies also changed the CRA examination process to incorporate these revisions. (All in the name of “Good Intentions”.) Also, Janet Reno and HUD used the force of law to pressure banks to make bad loans. President Clinton publicly touted the increase in the number of home loans to “the poor”.

- 1997 - Mortgage denial rate of 29 percent for conventional home purchase loans. Investors purchased more than $60 billion of sub-prime mortgage backed securities, six times more than 1991’s volume of $10 billion. (private label securities, not GSE backed) The Taxpayer Relief Act of 1997 expanded the capital-gains exclusion to $500,000 (per couple) from $125,000, encouraging people to invest in second homes and investment properties. In November, Freddie Mac helped First Union Capital Markets and Bear Stearns & Co launch the first publicly available securitization of CRA loans, issuing $384.6 million of such securities. All these securities carried a Freddie Mac guarantee as to timely interest and principal.

- 1998 - Housing bubble appears as inflation-adjusted home price appreciation exceeds 10% per year in most West Coast metropolitan areas. In May: Brooksley Born and the Commodity Futures Trading Commission release a report calling for regulation of Over the Counter Derivatives. Born says that non-transparent trading could severely harm the economy. Alan Greenspan, Robert Rubin, and Arthur Levitt of president Clinton's Working Group on Financial Markets, and Larry Summers, fight against her plan and convince congress and others to take no action. In July, it was revealed (Washington Post) that Rep. Barney Frank, D-Mass, who is openly gay, had a personal relationship with Herb Moses, a high-level executive for Fannie Mae. While the relationship had reportedly ended, Frank was serving on the House Banking Committee - charged with oversight of Fannie Mae and Freddie Mac - for the entire 10 years they were together. When questioned, Rep Frank assured everyone there was no conflict interest. In October: "Financial Services Modernization Act" was killed in the Senate, primarily because of no restrictions on CRA-related community groups. Federal Reserve Bank of New York rescues Long-Term Capital Management hedge fund in 1998, which a GAO critic said encouraged risky loans on assumption government will bail out "too big to fail" banks and companies.

- 1998-2008 - With increase in sales of mortgage-backed securities, companies buy more credit default swaps, unregulated insurance contracts used to protect debt holders; these increased 100-fold, with estimates of the debt covered by such contracts, as of November 2008, ranging from $33 to $47 trillion.

- 1999 - Fannie Mae eases the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans. In November, The Gramm-Leach-Bliley Act is signed by president Bill Clinton, repealing the Glass-Steagall Act of 1933. It deregulates banking, insurance, securities, and the financial services industry, allowing financial institutions to grow very large. It also limits Community Reinvestment Coverage of smaller banks and makes community groups report certain financial relationships with banks. Congressmen key to the effort include Phil Gramm, Jim Leach, Thomas J. Bliley, Jr., Chuck Schumer, and Chris Dodd.

- 2000 - Lenders originate $160 billion worth of sub-prime, up from $40 billion in 1994. Fannie Mae buys $600 million of sub-prime mortgages, primarily on a flow basis. Freddie Mac, in that same year, purchases $18.6 billion worth of sub-prime loans, mostly Alt A and A- mortgages. Freddie Mac guarantees another $7.7 billion worth of sub-prime mortgages in structured transactions. In October, Fannie Mae commits to purchase and securitize $2 billion of CRA eligible loans. In November, Fannie Mae announces HUD will soon require it to dedicate 50% of its business to low- and moderate-income families" and its goal is to finance over $500 billion in CRA related business by 2010. In December, the Commodity Futures Modernization Act of 2000 defines interest rates, currency prices, and stock indexes as "excluded commodities," allowing trade of credit-default swaps by hedge funds, investment banks or insurance companies with minimal oversight, and contributing to 2008 crisis in Bear Stearns & Co, Lehman Brothers, and AIG.

- 2000–2001 - US Federal Reserve lowers Federal funds rate 11 times, from 6.5% (May 2000) to 1.75% (December 2001),creating an easy-credit environment that fueled the growth of US sub-prime mortgages.

- 2002-2006: Fannie Mae and Freddie Mac combined purchases of incorrectly rated AAA sub-prime mortgage-backed securities rise from $38 billion to $90 billion per year. Lenders are aggressively “encouraged” by Fannie Mae and Freddie Mac to offer loans to higher-risk borrowers, including illegal immigrants. Sub-prime mortgages amounted to $600 billion (20%) by 2006. Speculation in residential real estate rose. During 2005, 28% of homes purchased were for investment purposes, with an additional 12% purchased as vacation homes. During 2006, these figures were 22% and 14%, respectively. As many as 85% of condominium properties purchased in Miami were for investment purposes which the owners resold ("flipped") without the seller ever having lived in them.

- 2002–2003 - Mortgage denial rate of 14 percent for conventional home purchase loans, half the rate of denials in 1997.

- 2002 - Annual home price appreciation of 10% or more in California, Florida, and most Northeastern states. In June, President G.W. Bush sets goal of increasing minority home owners by at least 5.5 million by 2010 through billions of dollars in tax credits, subsidies and a Fannie Mae commitment of $440 billion to establish NeighborWorks America with faith based organizations.

- 2003 - Federal Reserve Chair Alan Greenspan lowers federal reserve’s key interest rate to 1%, the lowest in 45 years. In August: Borio and White of Bank of International Settlements speak at the Jackson Hole Economic Symposium, referencing BIS's "Credit Risk Transfer" 2003 report which warned about problems with collateralized debt obligations and rating agencies. Their arguments are rejected or ignored by attendees, including Alan Greenspan. IN September: Bush administration recommends moving governmental supervision of Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. The changes are blocked by Congress.

- 2003-2007 - U.S. sub-prime mortgages increased 292%, from $332 billion to $1.3 trillion, due primarily to the private sector entering the mortgage bond market, once an almost exclusive domain of government sponsored enterprises like Freddie Mac. The Federal Reserve fails to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability), emphasizing instead lender's ability to securitize and repackage sub-prime loans.

- 2004-2007 - Many financial institutions issued large amounts of debt and invested in mortgage-backed securities (MBS), believing that house prices would continue to rise and that households would keep up on mortgage payments.

- 2004 - U.S. homeownership rate peaks with an all time high of 69.2 percent. Following example of Countrywide Financial, the largest U.S. mortgage lender, many lenders adopt automated loan approvals that critics argued were not subjected to appropriate review and documentation according to good mortgage underwriting standards. In 2007, 40% of all subprime loans resulted from automated underwriting. Mortgage fraud by borrowers increases, in many cases as supported by CRA-related community groups. HUD ratchets up Fannie Mae and Freddie Mac affordable-housing goals for next four years, from 50 percent to 56 percent, stating they lagged behind the private market; they purchased $175 billion in 2004—44 percent of the market; from 2004 to 2006, they purchased $434 billion in securities backed by sub-prime loans. In October, SEC effectively suspends net capital rule for five firms—Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley. Freed from government imposed limits on the debt they can assume, they leveraged up 20, 30 and even 40 to 1, buying massive amounts of mortgage-backed securities and other risky investments.

- 2005 - The SEC halts an investigation of Bear Stearns "pricing, valuation, and analysis" of mortgage-backed collateralized debt obligations. No action is taken against Bear. Robert Shiller gives talks warning about a housing bubble to the Office of the Comptroller of the Currency and the FDIC. He is ignored, and would later call it an incidence of Groupthink. That same year, his second edition of "Irrational Exhuberance" warns that the housing bubble might lead to a worldwide recession. In January, Federal Reserve Governor Edward Gramlich raises concerns over sub-prime lending practices, says mortgage brokers might not have incentives for careful underwriting and that that portion of the sub-prime industry was veering close to a breakdown, that it's possible that it is a bubble but that the housing market did not qualify for specific monetary policy treatment at this point. The Bank of International Settlements warns about the problems with structured financial products, and points out the conflict of interest of credit rating agencies - that they are being payed by the same companies they are supposed to be objectively evaluating. In February, the Office of Thrift Supervision implements new rules that allow savings and loans with over $1 billion in assets to meet their CRA obligations without investing in local communities, cutting availability of sub-prime loans. In June: The International Swaps and Derivatives Association enables credit default swaps (quasi-insurance contracts) to be taken out against asset-backed-security collateralized debt obligations (including ones backed by sub-prime mortgages). In August: Raghuram Rajan warns about credit default swaps, at the Jackson Hole Economic Symposium. His arguments are rejected by attendees, including Alan Greenspan, Donald Kohn, and Lawrence Summers. In September, the Mortgage Insurance Companies of America send a letter to the Federal Reserve, warning about 'risky lending practices' in US real estate. In the Fall 2005, the booming housing market halts abruptly; from the fourth quarter of 2005 to the first quarter of 2006, median prices nationwide drop 3.3 percent.

- 2006 - In May: The sub-prime lender Ameriquest announces it will cut 3,800 Jobs, close its 229 retail branches and rely instead on the Web. Merit Financial Inc, based in Kirkland, Washington, files for bankruptcy and closes its doors, firing all but 80 of its 410 employees; Merit’s marketplace decline about 40% and sales are not bringing in enough revenue to support overhead. In August: U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier. In September, Nouriel Roubini warns the IMF about a coming US housing bust, mortgage-backed securities failures, bank failures, and a recession. His work was based partly on his study of recent economic crises in Russia (1998), Argentina (2000), Mexico (1994), and Asia (1997).

- 2007 - Home sales continue to fall. The plunge in existing-home sales is the steepest since 1989. In Q1/2007, S&P/Case-Shiller house price index records first year-over-year decline in nationwide house prices since 1991. The sub-prime mortgage industry collapses, and a surge of foreclosure activity with rising interest rates threaten to depress prices further as problems in the sub-prime markets spread to the near-prime and prime mortgage markets. In January, Ownit Mortgage Solutions Inc. files for Chapter 11. Records show that Ownit Mortgage Solutions owed Merrill Lynch around $93 million at the time of filing. In February, Mortgage Lenders Network USA Inc., the country's 15th largest sub-prime lender with $3.3 billion in loans funded in third quarter 2006, files for Chapter 11. Several sub-prime lenders declare bankruptcy, announcing significant losses, or putting themselves up for sale.These include Accredited Home Lenders Holding, New Century Financial, DR Horton and Countrywide Financial. In March, the value of USA sub-prime mortgages was estimated at $1.3 trillion as of March 2007. Ben Bernanke, quoting Alan Greenspan, warns that the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, were a source of "systemic risk" and suggest legislation to head off a possible crisis. In April, New Century Financial, largest U.S. sub-prime lender, files for chapter 11 bankruptcy. Business sources report lenders made $640 billion in sub-prime loans in 2006, nearly twice the level 3 years earlier; sub-prime loans amounted to about 20 percent of the nation's mortgage lending and about 17 percent of home purchases; financial firms and hedge funds likely own more than $1 trillion in securities backed by sub-prime mortgage; about 13 percent of sub-prime loans are now delinquent, more than five times the delinquency rate for home loans to borrowers with top credit; more than 2 percent of sub-prime loans had foreclosure proceedings start in the fourth quarter. Freddie Mac is fined $3.8 million by the Federal Election Commission as a result of illegal campaign contributions, much of it to members of the United States House Committee on Financial Services which oversees Freddie Mac. In June, FDIC Chair Shelia Bair cautioned against the more flexible risk management standards of the Basel II international accord and lowering bank capital requirements generally: "There are strong reasons for believing that banks left to their own devices would maintain less capital -- not more -- than would be prudent. The fact is, banks do benefit from implicit and explicit government safety nets...In short, regulators can't leave capital decisions totally to the banks.". In August, worldwide "credit crunch" as sub-prime mortgage backed securities are discovered in portfolios of banks and hedge funds around the world, from BNP Paribas to Bank of China. Many lenders stop offering home equity loans and "stated income" loans. Numerous quantitative long/short equity hedge funds suddenly begin experiencing unprecedented losses as a result of what is believed to be liquidations by some managers eager to access cash during the liquidity crisis. It highlights one of the first examples of the contagion effect of the sub-prime crisis spilling over into a radically different business area. Central banks coordinate efforts to increase liquidity for first time since the aftermath of the September 11, 2001 terrorist attacks. The United States Federal Reserve (Fed) injects a combined 43 billion USD, the European Central Bank (ECB) 156 billion euros (214.6 billion USD), and the Bank of Japan 1 trillion Yen (8.4 billion USD). Smaller amounts come from the central banks of Australia, and Canada. The stock of Countrywide Financial, which is the largest mortgage lender in the United States, falls around 13% on the NYSE after Countrywide says foreclosures and mortgage delinquencies have risen to their highest levels since early 2002. Countrywide narrowly avoids bankruptcy by taking out an emergency loan of $11 billion from a group of banks. In September, TV finance personality Jim Cramer warns Americans on The Today Show, "don't you dare buy a home—you'll lose money," causing a furor among Realtors (one of the few times he actually gave good advice, IMHO). In October, a consortium of U.S. banks backed by the U.S. government announces a "super fund" of $100 billion to purchase mortgage-backed securities whose mark-to-market value plummeted in the sub-prime collapse. Both Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson express alarm about the dangers posed by the bursting housing bubble. In December, President Bush announces a plan to voluntarily and temporarily freeze the mortgages of a limited number of mortgage debtors holding adjustable rate mortgages. He also asked Members Of Congress to: 1. pass legislation to modernize the FHA. 2. temporarily reform the tax code to help homeowners refinance during this time of housing market stress. 3. pass funding to support mortgage counseling. 4. pass legislation to reform Government Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae. A consortium of banks officially abandons the U.S. government-supported "super-SIV" mortgage crisis bail-out plan announced in mid-October, citing a lack of demand for the risky mortgage products on which the plan was based, and widespread criticism that the fund was a flawed idea that would have been difficult to execute.

- 2007-2008 - Starting in late 2007, and throughout 2008, the 'monoline' municipal bond insurance companies, such as AMBAC, MBIA, and ACA, have their credit ratings downgraded by the credit rating agencies because they had also gotten 'insurance' policies (via credit default swaps) on mortgage-based CDOs. Since the entire 'municipal bond insurance' business model depends on the insurer having a very high credit rating, these companies begin to collapse, and the value of many of the bonds they insured also falls. Financial crisis escalates with collapse of major lenders and investors.

- 2008 - In March, Bear Stearns is acquired for $2 a share by JPMorgan Chase in a fire sale avoiding bankruptcy. The deal is backed by the Federal Reserve, providing up to $30B to cover possible Bear Stearn losses. In June, the chairman of the Senate Banking Committee Connecticut's Christopher Dodd proposes a housing bailout to the Senate floor that would assist troubled sub-prime mortgage lenders such as Countrywide Bank, Dodd admitted that he received special treatment, perks, and campaign donations from Countrywide, who regarded Dodd as a "special" customer and a "Friend of Angelo." Dodd received a $75,000 reduction in mortgage payments from Countrywide. The Chairman of the Senate Finance Committee Kent Conrad and the head of head of Fannie Mae Jim Johnson also received mortgages on favorable terms due to their association with Countrywide CEO Angelo R. Mozilo. In July, major banks and financial institutions had borrowed and invested heavily in mortgage backed securities and reported losses of approximately $435 billion as of 17 July 2008. President Bush signs into law the Housing and Economic Recovery Act of 2008, which authorizes the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed rate mortgages for sub-prime borrowers if lenders write-down principal loan balances to 90 percent of current appraisal value. In September, there is a Federal takeover of Fannie Mae and Freddie Mac, which at that point owned or guaranteed about half of the U.S.'s $12 trillion mortgage market, effectively nationalizing them. This causes panic because almost every home mortgage lender and Wall Street bank relied on them to facilitate the mortgage market and investors worldwide owned $5.2 trillion of debt securities backed by them. The US Federal Reserve lends $85 billion to American International Group (AIG) to avoid bankruptcy. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke meet with key legislators to propose a $700 billion emergency bailout through the purchase of toxic assets. Bernanke tells them: "If we don't do this, we may not have an economy on Monday." The FBI discloses that it had been investigating the possibility of fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group, bringing to 26 the number of corporate lenders under investigation. The Emergency Economic Stabilization Act is defeated 228-205 in the United States House of Representatives. US Treasury changes tax law to allow a bank acquiring another to write off all of the acquired bank's losses for tax purposes. In October, the U.S. Senate passes HR1424, their version of the $700 billion bailout bill. President Bush signs the Emergency Economic Stabilization Act, creating a $700 billion Troubled Assets Relief Program (TARP) to purchase failing bank assets. It contains easing of the accounting rules that forced companies to collapse because of the existence of toxic mortgage-related investments. Key to winning GOP support was a decision by the Securities and Exchange Commission to ease mark-to-market accounting rules that require financial institutions to show the deflated value of assets on their balance sheets." The US taps into the $700 billion available from TARP and announces the injection of $250 billion of public money into the US banking system. The form of the rescue will include the US government taking an equity position in banks that choose to participate in the program in exchange for certain restrictions such as executive compensation. Nine banks agreed to participate in the program and will receive half of the total funds: 1) Bank of America, 2) JPMorgan Chase, 3) Wells Fargo, 4) Citigroup, 5) Merrill Lynch, 6) Goldman Sachs, 7) Morgan Stanley, 8) Bank of New York Mellon and 9) State Street. In November, Treasury Secretary Paulson abandons plan to buy toxic assets under the $700 billion TARP, saying the remaining $410 billion in the fund would be better spent on recapitalizing financial companies. The US Federal Reserve pledges $800 billion more to help revive the financial system. $600 billion will be used to buy mortgage bonds issued or guaranteed by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

- 2009 - In April, the SEC sues Goldman Sachs for fraud, for allegedly having failed to disclose vital information to investors in one of it's "Abacus" mortgage-backed CDOs in 2007. The CDO was allegedly 'designed to fail' by the hedge fund of John Paulson, so that Paulson could make large profits by betting against it. Allegedly this was not disclosed to investors by Goldman, and they lost roughly a billion dollars, while Paulson & Co profited.

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Whew... that's enough: my blood pressure will take long enough to come down...

Can we at least agree this covers a bit more than just the basics, with a LOT of the details (not *all*, but a LOT) concerning who did what, to whom, and what the end results were at least up until the early part of 2009?

- Steve


P.S. I'm not pointing fingers (yet); and its clear there's plenty of blame to go around, if that is what we wish to focus on - I don't, at least not too far beyond understanding how all those Good Intentions got us into this mess. Complicating matters is both sides of the aisle are currently playing spin games and appear more concerned with scoring political points instead of trying to solve the problem. That said, finding a practical (and workable) solution to this mess will be much more difficult, especially since it appears the principals currently involved are predominately the same folks that got us to where we are. I have a vision in which they are nothing but ticks who demand we feed the dog more.

P.P.S. I must say this - I find it curious that *no one* is talking about the actions of the CREDIT RATING AGENCIES during this process. They were obviously a key player in this whole mess. Where was *their* oversight? Or were they just doing as instructed? Inquiring minds want to know...

- SG