By mid 2008 almost everybody knew that we were in deep financial trouble. But the forces that brought it about actually began decades ago with The Community Reinvestment Act in 1977. This legislation “forced lending institutions to grant mortgages to people whose income, credit histories, and net worth would previously have disqualified them from getting such loans.”

An old adage suggests that in getting a loan from a bank the recipient must first prove that he does not need one by listing his assets. The bank uses this list to retrieve all or a portion of what is owed should the recipient default on the loan. The less invested or potentially lost the easier it is for the recipient to walk or default. Such is long standing wisdom and favors the more industrious individuals, as it should. What this means in real life is that high crime or impoverished areas of town do not attract investors as readily.

Socialists (share the wealth advocates) saw a race connection, thus injustice, when it was realized that “only 72 percent of minority applicants were approved for mortgages, versus 89 percent of white applicants.” Moral outrage followed which was resolved by legislation ”forcing lending institutions to loan money to people they would otherwise not lend to and in places where they would otherwise not put their money” (“Government Bailout,” The New American, Sept. 29, 2008, pp.11-15).

This forced banks “to engage in far-riskier lending practices or receive a failing CRA (Community Reinvestment Act) grade. To avoid an ‘F’ from the CRA, which could jeopardize their viability, the banks were pressured to direct hundreds of billions of dollars in high-risk mortgages to inner-city and low-income neighborhoods. Moreover, under CRA pressure, banks would ‘hire’ radical, non-profit groups like ACORN to find them customers.”

Banks too benefited as the government organizations Fannie Mae and Freddie Mac would buy these poor-quality loans, now referred to as “sub-prime” loans and take them off the banks’ books (Human Events, Oct. 13, 2008, p 8). It seemed good for everyone. I watched in horror as “kids” with little or no credit purchased homes well above their means and home prices doubled in a “fake-value” bubble. There seemed no consequence for risky behavior.

Please note: these faulty loans were brought about by government intervention and regulation, not the free market.
If a person has not repaid previous loans what is the probability that he will repay a new loan? Should exceptions be made for individuals who are non-white? Race should have nothing to do with lending. But banks insisted on giving loans anyway to meet new government race-based quotas. Politicians were loved because they had helped some live beyond their means with zero down loans. Key politicians received healthy contributions from the two government entities that kept them from exercising sufficient scrutiny over the process.

When the defaults inevitably began, investors purchasing the Fannie Mae and Freddie Mac “sub-prime” bundles quickly became leery of them and stock in these two government entities plummeted in late 2008. Congress responded with The American Housing Rescue and Foreclosure Prevention Act of 2008 which raised the federal debt limit to $800 billion. The two organizations were considered to be too big to fail. Unfortunately the housing bailout did not restore confidence and property values continued plummeting at somewhere near the foreclosure rate, plus the national debt skyrocketed.
Now getting a loan for everyone is very difficult. Old businesses are retracting (laying off) to survive. Regular businesses cannot expand (hire) without growth capital. New businesses cannot be created without someone’s risk capital. Those able to risk will not do so until the storm passes and the storm is going to be with us for a while. Thanks, Congress. You flunked Economics 101.

Harold Pease

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