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This is from my perspective - 10 years in the mortgage business.
I don't know all the back-end working of how the CRA system works so I will only deal with how the rubber meets the road.
Effectively, the CRA is a reporting system by where the larger institutions have to make loans to "low to moderate income (LMI)" borrowers or to borrowers buying in "low to moderate income (LMI) areas" to justify their existence and avoid the charges of red-lining. Since the larger banks, like Citibank or Chase, need to justify their existence under the act, they pay a premium to brokers to steer business to them they wouldn't normally get through their retail operations. It's a sneaky way for them to not put a branch in a poor neighborhood but still generate loans there. This premium would be 1-1.5% of the loan amount to the broker so it can be especially lucrative to brokers, like me, operating in a gentrifying city like Chicago.
THESE LOANS WERE IN NO WAY OUTSIDE THE LENDER'S (or fannie/freddie) NORMAL GUIDELINES.
The CRA system essentially boils down to two categories:
1....Mortgage brokers/lenders getting paid a premium to deliver loans, to the larger institutions, that qualified by either income of the borrower or property location being by located in a "low to moderate income" neighborhood as designated by the government geo-coding website. The larger institutions, like CitiBank for example, relied on this stream of loans to justify their existence under the CRA act. First of all, it was always a bit of a joke to be getting paid extra money to deliver a loan made to a high income borrower that qualified ONLY based on the property address (these were usually in gentrifying areas and based on outdated census information). Second, the people qualifying under the "low to moderate" income standard could earn as much as $58k so they weren't, for the most part, "poor people".
2....Fannie Mae/Freddie Mac programs (such as Fannie's "My Community" or Freddie's "Affordable Gold") for low to moderate income borrowers and/or borrowers purchasing in low to moderate income neighborhoods. These loans were ALL conventional "full documentation" loan programs - meaning they were, for the mort part, fixed rate loans underwritten to conventional standards (sometimes more stringent) AND had the added benefit of reduced mortgage insurance premiums and prior credit counseling. My understanding is these loans have a below average default rate.
NONE OF THESE LOANS WERE SUB-PRIME, INTEREST ONLY, OPTION ARMS, STATED INCOME OR NEGATIVE AMORTIZATION LOANS THAT ARE CAUSING MOST OF THE PROBLEMS.
The real trouble loans were made by lenders that HAD NO obligation to justify their existence under the CRA. ..... mostly sub-prime and "ALT-A" lenders like "Green Point Mortgage" or "Option One Mortgage" OR CRA obligated lenders such as 'WAMU' dabbling in the sub-prime/ALT-A sphere. These were the lenders making loans to no-income-proof borrowers with bad credit scores and zero down-payment. Toward the end of the bubble, I remember a lender's representative passing out flyers for "no income verification, 100% financing, 580 FICO score, investment property" and I thought to myself, how the fuck do they justify THAT loan?...........
..........thanks to the wonderful work of DUer Hamdenrice, I understand it. It was all done by smoke and mirrors - a.k.a. over collateralizing and derivatives.
As a side note: I'll never forget the Citibank V.P. standing in our office in front of all our loan officers teaching how to lie about a customer's income for a stated income loan. To make it reasonable, he said, go on some income website that gives average incomes for different jobs and concoct your lie based on that number.
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