Sunday, March 14, 2010
The Subprime Cover-Up
...Jaffee tries to make the case that CRA loans pose no more risk than conventional loans. As proof, he claims that delinquency rates on CRA loans are "actually slightly lower." This flies in the face of studies showing the opposite holding true. CRA loans consistently bear higher delinquency rates than prime loans.
How did Jaffee come up with his supporting data? Very selectively. He took a slice of 2008 loans just above the subprime threshold and compared their average delinquency rate to those just below the threshold in CRA ZIP codes. The difference is statistically insignificant: 24.9% vs. 24.1%.
"Slightly" lower, yes, but still outrageously high — and hardly proof CRA loans are safe and sound. If anything, the analysis seems more a hair-splitting exercise to manufacture a conclusion "slightly" favorable to the CRA.
Jaffee also argues that only 6% of subprime mortgages in 2006 were made to CRA-qualified borrowers or neighborhoods by CRA-regulated banks. This stat, too, is misleading, since it doesn't include:
• Vintage subprime mortgages.
• Subprime loans made by mortgage subsidiaries or affiliates of banks indirectly affected by the CRA.
• Subprime mortgage-backed securities purchases, for which banks received "CRA credit."
• High-risk loans underwritten by Acorn Housing, Neighborhood Assistance Corp. of America and other CRA shakedown groups using the billions in commitments and other subsidies banks made to them to satisfy CRA "investment" tests....
..."That the GSE housing goals are consistent with high-risk mortgage activity does not imply that the housing goals caused the GSEs' high-risk activity," he maintained. "The housing goals were a distinctly secondary priority for GSE management compared to profits as a factor motivating their investments in high-risk mortgages."
Really? That's not what GSE managers say.
The higher goals "forced us to go into that (riskier subprime) market to serve the targeted (uncreditworthy) populations that HUD wanted us to serve," said Freddie Mac spokeswoman Sharon McHale....