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A complex interplay of risky behaviours by lenders, borrowers, and investors led to the current financial storm, FDIC Chairman Sheila Bair said. To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: NOT guilty.
Only about one-in-four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending, The FDIC chairman said. The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.
Instead, lending to borrowers under terms they can not afford to repay is not consistent with the safe and sound operations, she said. Modifying troubled mortgages to make them affordable is necessary to end the housing crisis, she underlined.
"While there are no magic bullets, and a multi-prong effort is indeed needed, the core issue is lowering borrowers' monthly payments to an affordable and sustainable level," Bair said. “Using a combination of interest rate reductions capped at a prime, conforming rate, amortization extensions, and in some cases, principal deferment produces modifications that will last and, we believe, dramatically lower the re-default rate."
By 2010, we'll be seeing the light at the end of the tunnel, Bair predicted.