Where Did It All Begin?
Let’s keep it simple. My version of the Wiki page.
The Community Reinvestment Act. It was passed into law by the 95th United States Congress in 1977…during the Carter (D) administration. The law was a response to “grassroots” pressures, by community organizers, for more affordable housing. The CRA was to provide credit, including home ownership opportunities to underserved populations (ie. people with bad credit, low income, no job, on welfare, etc) and commercial loans to small businesses.
Who were the main players?
The Federal Government
Fannie Mae - Federal National Mortgage Association
Freddie Mac – Federal Home Loan Mortgage Corporation
Because of CRA, Fannie Mae enabled mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers. Because of the CRA, Freddie Mac was encouraged to buy mortgages on the secondary market and sell them as mortgage-backed securities on the open market.
In 1995, during President Bill Clinton’s (D) administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators’ attention on institutions’ performance in helping to meet “community credit” (read “bad credit”) needs. These revisions were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. The regulators agreed to revisit the rule after it had been fully implemented for seven years…in other words, when Bill was out of office…and the problems potentially created by these revisions could be someone else’s problems.
To hear today’s Democrats, you’d think all this started in the last couple years. But the crisis began much earlier. The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.
Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.
These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans. [...]
Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called “CRA rating” that graded how diverse their lending portfolio was. [...]
In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings.
Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.
That’s how the contagion began.
With those changes, the subprime market took off. From a mere $35 billion in loans in 1994, it soared to $1 trillion by 2008.
Interesting.
