I am well aware of your talk radio rhetoric.
There is a difference between redlining, and practicing proper risk management with respect to underwriting. It is impossible to force a bank to lend; the only way they would do so is if they believe they could make money from it. And playing financial hot-potato was profitable (you know offering loans to people who they knew could not afford them, only to push the loans into secondary markets at a profit), until those who got stuck holding mis-priced securities began to go under in droves.
Drivel.
Viewing peoples applications in a normal manner is does not guarantee all applicants will receive credit.
Kushinator have you bothered to read the The Community Reinvestment Act (or CRA, (Public Law 95-128), title VIII, (US Statute 91:1147), (US Code 12:2901) passed by a Democrat Congress and signed into law by President Carter? Prior to the CRA, bankers did not take risks on loaning money. And the redline scenario came about because banks naturally shied away from low income neighborhoods because of the risk involved. The CRA, however, mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That means from that point on they would have to accept a certain number of high risk loan applications because that record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB). But when Clinton got into office and he too had a Democrat majority in Congress increased the regulations on the CRA. In 1995, as a result of interest from President Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for five years. Thus in 2002, the regulators opened up the regulation for review and potential revision and that was when the calls for reform were made by the Bush administration for it showed a great increase in foreclosures of these subj-prime loans. But back to Clinton....
On January 31, 1995, because of Clinton and the Democrat Congress 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. Massive new provisions to CRA that forced banks to issue $1 trillion dollars in bad loans. Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997.
The new CRA regulations also instructed bank examiners to take into account how well banks responded to complaints. The old CRA evaluation process had allowed advocacy groups a chance to express their views on individual banks, and publicly available data on the lending patterns of individual banks allowed activist groups to target institutions considered vulnerable to protest. But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition, a foundation-funded umbrella group for community activist groups that profit from the CRA, issued a clarion call to its members in a leaflet entitled 'The New CRA Regulations: How Community Groups Can Get Involved.' 'Timely comments,' the NCRC observed with a certain understatement, 'can have a strong influence on a bank's CRA rating.'" 'To avoid the possibility of a denied or delayed application,' advises the NCRC 'lending institutions have an incentive to make formal agreements with community organizations.' By intervening, even just threatening to intervene, in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city.
So what you and many others fail to understand, is what the revisions Clinton made to the CRA amounted to government extortion on the banks. They either make the risky bad loans or have the feds breathing down their neck with fines etc. All it would take is some organization like ACORN to file a complaint to cause a banking institution much grief.
Then they created sub-prime mortgage securities.
Bear Sterns was the first company to do it. Remember them?
Fannie Mae added fuel to the fire by purchasing $2 billion of dodgy "MyCommunityMortgage" loans.
And sub-prime mortgages started to grow. Between 1995 and 1999, Fannie Mae Sub-prime Alt-A & Other Purchases grew from under $2 billion to over $16 billion per year!
Now home prices started to rise - from under 2% to over 6% per year, year-after-year.
Fannie Mae is a "Government Sponsored Enterprise". Fannie Mae guarantees mortgages and then Fannie Mae sells them to banks and investors. The more mortgages, the more money Fannie Mae makes.
So how do you increase the number of mortgages? You move down the 'income ladder'
With "affordable mortgages", fixed-rate loans were replaced by variable-rate loans (ARMS) and in turn by interest-only loans. These new loans gave "flexibility to lenders by allowing variances that borrowers need to qualify for loans". (CSRwire). These variances applied to: loan-to-value ratio, borrower contribution, housing expense-to-income ratio, among others. In other words, to flakes.
Remember, the banks had to issue sub-prime loans or pay big penalties to the government.
How do you keep these loans "affordable"?
No money! No money down! Interest only! Low variable rate! No income verification! Bad Credit! No credit! No problem! Just sign here! ("Moneyfor nothing ).
By 2004, 92% of Fannie Mae's sub-prime loans were variable rate.
Fannie Mae told the banks "Make the loans -- we'll guarantee them".
Home ownership kept rising -- and so did prices, and the demand for houses rose too.
But demand for loans caused the interest rate to rise. It's your basic supply and demand stuff. Something once upon a time kids were taught in high school. Apparently not Senators or Representatives. Those who had purchased home on balloon rates (Arm's) saw a significant increase in their mortgage payments and the higher rates stunted new home sales especially the demand for new homes to be built. That meant layoffs. Gas prices shot up and the private sector had already started cutting back meaning more layoffs. Paychecks got squeezed. Especially low-income paychecks. Some borrowers stopped paying -- so banks stopped lending. New ARMS and other "affordability loans" dropped from nearly 20% of total market share in 2006 to just 10% in 2007.
So the sub-prime market collapsed. From Fourth Quarter 2006 to Fourth Quarter 2007, Sub-prime mortgage originations dropped from $140 billion to under $18 billion, a drop of 88%.
Foreclosures started pilling up. No buyers, only sellers.
Home prices started falling.
More borrowers stopped paying. 60 day+ delinquencies went from under 8% in 2006 to over 25% by mid-2007.
Fannie Mae "Guarantees" became worthless - because they kept overstating their assets.
Regulators Spin Public to Boost Fannie, Freddie: Jonathan Weil - Bloomberg
Banks collapsed due to worthlessness. Government Sponsored Securities issued by Fannie Mae became worthless. Jobs disappeared -- and here we are.
Why is the expansion of the Government's Community Reinvestment Act to blame?
Before CRA expansion, home prices simply increased with the underlying inflation rate, going up by 200% from 1975 through 1995 as the dollar dropped in value by the same amount. Home prices and home ownership rates were essentially flat - after adjusting for inflation. After CRA, home prices became unhinged from inflation, jumping 100% from 1996 to 2006 while inflation increased by 'only' 33%.
CRA caused home prices to rise too fast. Economic fundamentals did not support this growth. Government regulation-mandated credit did.
A bubble -- waiting to burst!
So, did it have to happen?
NO!
