2 comments

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  frit

  8 months ago

  Buyers buy the CDO based on an understanding that the credit rating or history of the low income borrowers were checked and approved by the mortgage lenders.
  
  Malpractice may occur if lending less subprime loans are "illegal and discriminatory", which may cause mortgage lenders to take higher risk to comply with the powerful lawmakers' request.
  
  When bank managers were harrassed to make loans to a low income borrowers, and were "harrassed" by a community organization group which have strong connection to the community, and the lawmakers, most of them would surrender to their request to avoid clash with lawmakers, and the persons behind such a powerful group.
  Can the police and the top management protect these poor bank managers. May be they did not want to lose their jobs because their knew senior management of the banks had very close relationship with the lawmakers.
  
  Is this corruption. Don't mention it.
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• 

  frit

  8 months ago

  To clarify whether CRA led to this subprime mess, the following questions should be asked and answered.
  1. Did the practice of CRA punish the banks which had less exposure to subprime loans, by charges of "discrimination", or "predatory lending" for charging higer interest rates or fees for low income persons which conservative bankers thought to have higher risk, and hence demand higher interest rates or fees to cover their risk.
  
  2. Did the court cases against Citi in 1995, Household International (now HSBC) in 2002 paved the way for their rapid expansion in subprime loans business.
  
  3. How many big names finanical institutions in subprime loans mess were seduced and had close work relationship with community organization groups to make subprime loans. JP Morgan Chase Q3 reported that charged off rate of subprime loan was 7.5% in Q3, 2008, while charged off rate of prime mortgage was 1.5%. i.e. if interest rate for prime loan is 5.8%, the interest rate for subprime loan should be at least 11.8% (=5.8% + 7.5%-1.5%) to cover the additional risk. Would a bank which charged 12% interest rate for high risk low income persons be charged with "predatory lending" under the present laws and enforcement team of some community orgnaization groups?
  
  4. If Countrywide made large values of subprime loans, would other banks which made less subprime loans in their mortgage portfolior being the target of "descriminatory practices" and be sued for predatory lending for charging shocking "12% or more" for high risk low income persons. (Based on JPMC Q3 2008 financial report, 12% or higher interest rate should be required to justify the risk in subprime loans.
  
  5. Based on the default rate of prime mortgages in 1980s S&L crisis, what would be the reasonable estimate of default rate of subprime mortgages in the down cycle of property maket. Remember, there will be a down cycle of property market every 5-10 years. Were the interest rate charged by Citi 1995 or Household International 2002 to low income persons were "predatory", in terms of the risk exposure discovered in this financial crisis. Remember, the court cases against these 2 banks had Obama and Acorn on mount.
  
  If the practice of CRA did not impose negative inflence on bank management's decision to expand their subprime loans, then the blame on the practice of CRA was wrong.
  
  Failure to mention the loopholes in CRA which were manipulated by some community organization groups to drive so many participants to this subprime loans is not good analysis.
  
  Besides, international investors who bought CDO had no idea that there were so many frauds in the practice of financial industry, so many politicians' push of subprime loans for their own political interest. They count on rating from S&P and reputatble rating agencies to value the financial instruments. There were not full disclosure of such risks in sale of CDO.
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