been waiting for a follow up to this...not sure I've seen the loans as a result of the expansion of the CRA cited as the cause of the crash but the expansion of the CRA is certainly the
turning point that can be cited as the beginning of government forcing banks to abandon long held lending practices in order to expand home ownership and in order to not be punished by the government...lenders became creative and translated that to the rest of the market, the government was essentially insuring their risk.....Fannie and Freddie became a repository for questionable loans...the sheer number of loan writing institutions and the risky instruments grew exponentially out of that...
as your friend Thomas Sowell said recently...banks were doing fine for nearly a hundred years prior with established lending practices...
"Prior to the rapid escalation of home prices, federal bank regulators began using the 1977 Community Reinvestment Act (CRA) to press for racial equality. The issue was the statistical difference in approval rates, not a claim that most blacks could not get mortgage loans. New regulations required that the banks not just look for qualified buyers, but make a requisite number of loans to low and moderate income buyers (quotas). Then, when legislation was proposed in 1999 to permit banks to diversify into selling investment securities, the Clinton White House urged "banks given unsatisfactory ratings under the CRA be prohibited from enjoying the new diversification privileges." The Congress happily obliged. Another factor was HUD's beginning legal action in 1993 against mortgage bankers that declined a higher percentage of minority applicants. HUD also set a 42% target for Freddie Mac and Fannie Mae (FM & FM) to buy mortgages for people whose income were less than an area's median. Banks, sensing that FM & FM were implicitly guaranteed, where only too happy to not only issue these mortgages, but to buy FM & FM debt as well. (In 2003, about 3,000 banks held FM & FM debt for 100% of their capital requirements.) The "icing" was FM & FM's creative accounting that misclassified $11 trillion of sub-prime assets. Then in 2002, Bush II urged Congress to pass the American Dream Down Payment Act, subsidizing down payments of prospective buyers with incomes below a certain level.
Sowell has now set the stage, and readers have no problem understanding what happened. Interest-only teaser rate ARMs rose to counter rising prices and down-payments. By 2005, interest-only mortgages had risen to 31% of all new mortgages, up from less than 10% in 2002. In Denver, Seattle, and Phoenix it was 40%, and 66% in the S.F. Bay area. Speculators jumped into the fray (28% in 2005, 22% in 2006) adding further fuel to the fire, and happy homeowners took out $1.13 trillion in home equity loans in 2007. However, the storm on the horizon was the rise of interest rates to avoid inflation (1% in 2004, to 5.25% in 2006), making monthly payments more expensive and reducing the demand and prices for housing, and everyone takes a loss - including the banks (about $40,000 per foreclosed house), and especially speculators, minorities, and those with ARMs and interest-only loans. (Interesting Note: As of October, 2008, 7% of Bank of America's mortgages were CRA lendings, and 24% of its defaults.) Bailing out FM & FM, with their sub-prime laden inventories, cost the government more than that for all the private banks put together.
Sowell also has no problems believing that many sub-prime loans were foisted upon unaware and uninformed buyers by predatory lenders - especially involving contracts for repairs or remodeling on credit.
Bottom Line: The law of unintended consequences strikes again - helping minorities was a good intention, but backfired. We're all to blame, though admittedly some more than others.
Deregulation was not the problem, rather misguided regulation.
the government is now doing the same thing for healthcare
