By every measure, CRA loans are not as profitable as non-CRA loans.

No institution reported that CRA lending was more profitable than non-CRA lending for home mortgage, refinance, home improvement, or small business loans.

For home purchase and refinance lending, three times as many institutions reported their CRA-related loans not profitable as compared to non-CRA-related loans.

One out of three large institutions report that CRA lending in the home mortgage and refinance markets is not profitable.

Three times the value of CRA home improvement loans are not profitable as compared to non-CRA loans.

Delinquency rates for CRA loans in the home purchase and refinance market are twice that for non-CRA loans.

Among all institutions, about 40 percent of CRA special lending programs are not profitable. For large institutions, 58 percent report that their CRA special lending programs are not profitable. This is inconsistent with the safety and soundness requirements of CRA.

By every measure, CRA loans are not as profitable as non-CRA loans.

No institution reported that CRA lending was more profitable than non-CRA lending for home mortgage, refinance, home improvement, or small business loans.

For home purchase and refinance lending, three times as many institutions reported their CRA-related loans not profitable as compared to non-CRA-related loans.

One out of three large institutions report that CRA lending in the home mortgage and refinance markets is not profitable.

Three times the value of CRA home improvement loans are not profitable as compared to non-CRA loans.

Delinquency rates for CRA loans in the home purchase and refinance market are twice that for non-CRA loans.

Among all institutions, about 40 percent of CRA special lending programs are not profitable. For large institutions, 58 percent report that their CRA special lending programs are not profitable. This is inconsistent with the safety and soundness requirements of CRA.

http://www.allbusiness.com/personal-finance/real-estate-mortgage-loans/677967-1.html

Also, 2000 Fed study on CRA loans that concludes they have a 2x default rate and are not profitable.

http://www.banking.senate.gov/docs/reports/cra-sun/frb-cra.htm

Fascinating to see how this all came together.

Bob Smith wrote:
“They[Wall Street] foolishly assumed that "insurance" could substitute for collateral, that there was no counterparty risk in their default swaps.”

BUT – as history reveals itself the government IS backing the “Insurance” as collateral.

What now?

Because the "smart people" were finance wonks on Wall Street, not real estate investors. They forgot that the payor doesn't matter, it's the collateral that ultimately pays you. They foolishly assumed that "insurance" could substitute for collateral, that there was no counterparty risk in their default swaps.

That's not what they claimed. The claim is that markets are self-correcting if they are left alone by political meddling.

The reality is that markets are rarely left alone by political meddling.

Also, see above post.

Seems you've never heard of regulatory capture.

When government creates bureaucracy to regulate business, the incentive is created for business to influence that bureaucracy, either directly, or via influence on legislators.

It's not as simple as blaming 'the government' as much as discerning the systemic flaws in regulatory systems.

It's similar to drug prohibition creating profit incentives for drug distributors to corrupt enforcement bureaucracy.

Here's a question: Given the fact of drug prohibition, how do you eliminate drug criminality?

You can't

Given the existence of business regulation, how to you eliminate business's influence on the regulatory system?

You can't.

A system of political power creates an oligarchy. Businesspeople quickly learn that it is better to join the oligarchy than to remain outside of it.

What can we the people do about it?

Keeping government out of business will keep business out of government.

That's the only way…as I see it.

They aren't self-correcting when government steps in to intercede.

The assets of these two GSEs have value. Politicians decided they still wanted their market toys. And will pay any price to keep them.

This unwillingness to let go their policy toys means that we will probably never know the real value of Freddie and Fannie's assets. Without that, we'll never be able to know when they are "fixed".

I've listened to all the pundits talk about the situation, and those who agree with the intervention state their view that they hope Congress deals with this.

Expecting Congress to deal with a crisis? They've such a lovely track record.
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I don't think we can fully assign blame to any single entity. Of course everyone had their hands in the pot. However you need to look and *why* the incentives were in place to lead people to make such poor decisions and *what* incentivized (i know, i think i made that word up) people to make or take unethical actions to really understand the root of the problem.

In most cases, the boom in the sub-prime sector was sponsored by government policies crafted to create an entitlement to home ownership. Prior to any incentives being in place, you still had a very rigid mortgage structure where real risk was fairly well-known.

Seems to me, no one here wants to admit the possibility that markets aren't rational and self-correcting in the way Friedman/Hayek told us they were, so they're looking to put the blame elsewhere.

Maybe those smart people were actually foreign governments. Due to their desire to sell us more goods than they purchased from us, those governments had billions of Dollars on hand. What should they do with those dollars? They could hold Dollars, but then the Fed was quickly devaluing them. They could buy Treasuries, and they did, but the building inflation was threatening those holdings as well. So many of them looked for higher returns, with a US Government backing. The market responded with securitized mortages: a play on the housing boom and with some implied U.S. Federal backing.
It was all quite rational given the situation.

Per the Federal Reserve:

Abstract: The Community Reinvestment Act (CRA) encourages lenders to make mortgage loans to certain classes of borrowers. However, the law does not apply to all lenders, and lenders do not necessarily receive credit for all loans made to borrowers of a particular class. We use this variation to test whether or not CRA-affected lenders cut interest rates to CRA-eligible borrowers; in other words, we test for the presence of a regulation-driven subsidy. Our theory suggests that loans made by commercial banks and savings associations (“relationship lenders'') and mortgage companies (“transaction lenders'') will differ from one another depending on borrower risk and homeownership benefits. Empirically, we find that CRA-eligible loans at CRA-affected institutions do carry lower mortgage spreads compared with other loans at the same institution. However, once we control for risk and benefit effects suggested by our theory, these differences in mortgage spreads become economically and statistically insignificant.

[Emphasis added]

Well, my gosh, that wouldn't change anyone's incentives. Being artificially insulated from risk just means greedy and corrupt businessmen wrecked the economy, it couldn't possibly be influenced by a GSE.

Maybe because they weren't that smart.

Maybe because they felt other smart people had already evaluated it, and it passed muster.

Maybe because the people selling were a bit smarter than the people buying.

In any case, it's an accounting nightmare. I don't see any long term losses from long term investors.