The notion that the government forced lenders to loan money is a common misconception.
The CRA was a government agency that offered mortgage insurance to lenders willing to lend in distressed areas. The CRA was a 1976 creation but they never grew very big. Lenders didn’t need their insurance. But they got hammered by people that don’t understand the mortgage crisis.
The cause of the mortgage collapse was allowing investment banks (sharks) to swim into the waters of local mortgage markets. This permission was granted by the repeal of Glass-Steagall in 1999.
Investment banks were allowed to ‘bundle’ mortgage revenue streams from underlying real property loans, bundle them and form a ‘bond’, a mortgage-backed security. There could be 5,000 loans bundled into one bond. At an average house cost of $350,000, the value of the bond would be $1.75 billion.
A mortgage-backed security originator would get the bonds rated and then sell them on bond exchanges. For a $1.75 billion MBS bond, a 6% commission would net $105 million.
Selling numerous MBS bonds every month netted billions in revenue each month. The business was off the scale lucrative.
This business was so hot that greed took over and threw underwriting standards to the wind. Anything that was breathing was signed up for a mortgage loan. And in fact, dead people were signed up as well. Janitors were qualified to buy 5-bedroom homes, maids were known to buy several homes.
The way it worked was that a spreadsheet with fictitious names and addresses were attached to a rated MBS, seasoned and then sold to investors. The MBS bond securitizers would quickly, very quickly dispatch mortgage brokers, many of whom were convicts or employing convicts, dispatch them into cities and towns to find real names and real addresses to backfill the spreadsheet as the bond was sold. This is what caused unqualified people to be able to get loans. The underwriting standards were thrown to the side, out of the way.
GW Bush turned a blind eye. His people would not prosecute Wall St. sharks for their fraud for fear of ‘talking the economy down”. Bush let everyone know that the economy was a most important factor to his administration, hence the SEC, the bank examiners, the CFTC, all of the oversight agencies were told to stand down.
Well said!
Wrong. First, the CRA was not an “agency”. It was an Act. The community reinvestment act. Fanny and Freddie were ordered to guaranty crap loans-mortgages had been sold for decades. The investor .( not just bank) put them in bundles and sold them without recourse. Because of the absolute guaranty and the mandate to get a house to a parasite, millions of crap loans were sold and resold becsause they were GUARATEED with your money!! That’s genius. The insurance also included PMI by AIG. The entire thing was the fault of government policy! The communists tried to blame the banks!! But banks didn’t cause this. The sheep in this country are so easily mislead.