Blumner Explains: Errors of the GOP on the financial crisis!

Robyn "Blumñata" Blumner returned last weekend with yet another senseless screed.

Blumner's column, perhaps once again inspired by a book from a liberal author, attempts to explain why Republicans are wrong to pin the financial crisis on the Community Reinvestment Act along with Fannie Mae and Freddie Mac.

But there's a problem. Blumner's column largely disagrees with the take on the subprime mortgage crisis published by her own paper, the St. Petersburg Times, back on Oct. 12, 2008. See my review and (relatively!) effusive praise of that story here.

A few of the juicier tidbits from Blumner's column:

Fannie and Freddie bought home loans that met certain underwriting standards to free up credit so banks could lend to other borrowers. Many of these loans were packaged into bonds (known as agency mortgage-backed securities) and then sold. But Fannie and Freddie kept much of the risk on its own books by guaranteeing the underlying mortgages against default.

Fannie and Freddie's buying allowed banks to profit from writing the loan and then selling the risk to American taxpayers!  How does Blumner not figure that out even if her nose is buried in an ideologically tilted fairy-tale account of the crisis?  The Washington Post explains:

The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.

The government made subprime mortgages profitable with its actions.

Another tidbit:

Since about 1995 Wall Street started encroaching on this business, but with a key difference. After Wall Street bought the mortgages, securitized and sold them, it did not guarantee them against default. Wall Street banks had no skin in the game and not surprisingly had less interest in making sure they were buying sound mortgages.

Wall Street still had a good amount of skin the the game, but they were able to peddle off quite a bit to taxpayers (through Fannie and Freddie) as well as to foreign investors.  But the system was enabled and originally forced on the banks by the government.

Blumner again:

Financial expert and author of Bailout Nation Barry Ritholtz puts it another way. He writes that if the CRA caused the crisis, then foreclosures in CRA regions should be the highest in the country, but in fact it's the "sand states" — non-CRA regions such as Southern California, Las Vegas, Arizona and South Florida — that have the worst rates. Ritholtz says the banks making CRA mortgages should be disproportionately failing. But again, Ritholtz notes, that's not what has happened. CRA banks have been relatively healthy. Compared with other factors, Ritholtz says, "the CRA impact is all but irrelevant." 

Ritholtz's logic is faulty, and Blumner shares the criticism for buying it.

1)  The government regulated banks by making the percentage of risky loans a key criterion for things like bank mergers.  The number of "CRA loans" is a red herring.  The risky loans didn't have to be CRA loans.  Banks simply had to use a certain amount of money on such loans to remain in compliance with government standards.

2)  The point above pretty much negates the point Blumner cites from Ritholtz about the prediction of banks with CRA mortgages failing disproportionately.  John Carney at Business Insider goes into greater detail and specifically debunks Ritholtz's objection, using the Countrywide mortgage company as an example.

Carney makes a comprehensive and fair case in "Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending," which contains abundant links to his more detailed arguments.