Free fall: How government policies brought down the housing market
...Nevertheless, there are plentiful data on commitments by large banks to make CRA-type loans in connection with applications to the Fed for permission to merge with small and medium-sized institutions between 1997 and 2007. In a 2007 report, for example, the National Community Reinvestment Coalition (NCRC) reported that in this ten-year period its member organizations had induced banks that were seeking merger approvals from the Fed and other agencies to commit almost $4.5 trillion in CRA-type lending. Press releases at the time these mergers were approved (available online) backed up this claim. After this report received publicity, it was pulled from NCRC’s website, though it is now available elsewhere on the web.[13] These report loans totaling $1.3 trillion made to fulfill prior commitments,[14] but determining the delinquency rates on these loans is impossible; banks have generally refused to make these data available, and the Financial Crisis Inquiry Commission (FCIC)—established by Congress to investigate the causes of the 2008 financial crisis—did not seriously attempt to investigate this issue....
...In a market where prices are rising quickly, homeowners who cannot meet their mortgage obligations can often refinance or sell their homes without a loss. In the midst of a housing bubble, therefore, subprime loans can look like excellent risk-adjusted investments. For this reason, by 2004, private investors had become interested in PMBS backed by subprime loans; these securities were offering high yields but not showing losses commensurate with their risk. This phenomenon was helped along by the fact that the low interest rates in the early 2000s had produced a vast number of refinanced and unseasoned mortgages, which in their early years characteristically have low rates of delinquency and default. ...
THE TRUE STORY OF THE FINANCIAL CRISIS — RESPONDING TO CRITICISM
Let's consider what Min is saying here. He's arguing that Pinto's definitions of subprime and Alt-A loans are not consistent with the definitions others have used for data collection and analysis. In other words, Pinto has used his own definitions to analyze the data in a new way. What Pinto did, that no one had done before, is show that loans made to people with FICO credit scores lower than 660 (which he called "subprime") had substantially higher rates of delinquency and default than loans to people with credit scores above 660 (which he called "prime"). In addition, Pinto found that loans with various deficiencies such as interest only, no documentation, no or low downpayments, or were investment properties (not owner occupied) -- which Pinto called, collectively, "Alt-A" -- also had much higher rates of default than loans that were not subject to these deficiencies. Pinto then found that these kinds of loans began to increase substantially after 1992, when affordable housing requirements were imposed on Fannie Mae and Freddie Mac, and began to default in unprecedented numbers when the 1997-2007 housing bubble started to deflate. In my dissent from the majority report of the Financial Crisis Inquiry Commission, using data from Fannie Mae (Table 5, p.61), I show that both subprime and Alt-A mortgages were necessary for meeting the affordable housing goals.
In reality, then, Min is simply complaining that Pinto discovered the sources of the huge mortgage losses that caused the financial crisis. The way the data had been looked at before -- and the way Fannie and Freddie reported that data -- obscured the fact that half of all outstanding mortgages were either subprime or Alt-A just before the bubble deflated and the financial crisis began. ...
Pinto 'Trigger' memo (warning, PDF)
