You can thank the Community Reinvestment Act for this debacle.
Now, that’s not to say they’re aren’t hard working people who were just dealt a bad hand. However, it was exacerbated by the CRA.
No, actually, that’s a simplistic answer that was given to the public by politicians who didn’t want to tell the American people the truth because they didn’t want to get tarred and feathered.
The truth is, the American people are at fault and the government is at fault. The government is at fault because it was apparent by 2003 that this was all one huge bubble but no one dared say anything because too many people were making too much money. No one dared question that maybe the fact that a middle class home in L.A. was now costing 7 figure amounts was a cause for concern.
No one also dared to ever make a public service announcement or even a speech lamenting the fact that Americans had managed to leverage themselves into credit card debts that in many cases approached and exceeded 50% of total household income.
And I’ll tell you this. You’d be surprised how many people actually got subprime loans and didn’t default on them. Many people who got those loans were responsible and did take good use of them.
The reason the politicians have used them as a scapegoat is because they are an easy scapegoat and by blaming it on bad credit borrowers (many of whom it turns out have learned from their mistakes) they deflect the blame from the morons out in California, New York (not coincidentally, all markets that are hubs of the financial industry) that really brought the market down as their inflated prices sucked in all the capital with it.
I made my living in commercial real estate for 20 years. Believe me when I tell you, if you hold subprime borrowers as the primary reason for the collapse, then you’ve just taken the bait hook, line and sinker.
There were simply not enough homes purchased with the subprime loans to crash the market. The crash we saw was no different than the crash in South Florida after the 20’s land boom collapsed. And what we had this time was the same thing but on a national scale. A handful of metropolitan markets had extreme valuation hikes like in Florida in the 20’s, sucked in the capital with them and then when they went down it took the ship with it.
Yes, some subprime loans going down helped aggravate it but I’m sorry, the subprimes were not the cause of this. The fundamentals of the economy were weak long beforehand and the trouble we’re in now is a long time coming. What subprime defaults there were constituted only a small piece of a very very large puzzle.