Subprime lending was a significant factor in our present economic crisis. There was money to be made by securitizing loans and from both ends on loan originations and there is plenty of blame to go around.
Both political parties are guilty as well as the FED.Certainly greed also figures in, from the folks on the finance end to the buyers to the rating agencies. There was a bubble and a frenzy to make $ with people thinking home prices would never come down.
What continues to frustrate me are Republican efforts to put an ideological spin on the matter and put the lions share of the blame on liberals and minorities. This just isn't true but their spin persists.
The most prevalent tale is blaming the 1977 Community Reinvestment Act. If you listen to Michele Bachman it goes something like this:
The CRA forced the banks to make subprime loans to minorities and levied heavy fines if they weren't willing to make those bad loans. The bankers didn't want to do it but were afraid of racism charges from ACORN so that's what caused the Subprime Crisis.
The only problem is, none of what they say is true. The CRA was set up to prevent redlining,the process of not making loans to qualified people who lived in poorer neighborhoods. Theory was, if the institution is willing to take their deposits and savings it should be willing to provide the proper services that are provided in more affluent areas. By definition the intent was for the loans to go to qualified people.
The CRA only applies to depository institutions so excludes mortage brokers and investment banks from its purview. It has NO ability to levy fines, all it can do is offer a poor CRA compliance report which would possibly affect a bank if it was being sold or merged.
About 20% of subprime loans came from CRA institutions. These had a significantly lower default and foreclosure rate. According to a FED audit 6% of high priced loans to low income areas were CRA institutions, indicating those areas were not targeted by covered banks. Only a single CRA institution was among the top 25 Subprime dealers.
The next big lie is that Bush and John McCain were leading a charge to regulate FNMA and FMAC in 2004 but the Democrats stopped it. Generally it's Barney Frank leading the charge plus the Democrats voting as a bloc and filibustering.
Ok, your first clue should be-Bush and McCain ? Neither man is particularly sound in economics,and seeing how all but a handful of economists were still cheerleading at that point it's really hard to credit those two with being prescient about the economy.
Nevertheless there was a bill S.190 which was sponsored by Chuck Hagel and later co-sponsored by McCain. It was indeed dealing with regulation, specifically dealing with accounting fraud which had plagued a number of housing agencies, among them FNMA and FMAC. It was to take them out of HUD's oversight and establish a new regulating agency for the five institutions. The bill was introduced in January of 2005 to the House Banking Committee. The bill was then forwarded on to the desk of Rick Santorum in July of 2005 following a party line vote with 11 Republicans in favor and 9 Democrats opposed. Simple majority is all that's needed in committee.
There it died a quiet death. There was no filibuster, it was never sent to the Senate. Also, if the Republicans would look at the timeline they would understand they had 55-44 control of the Senate during this period so Santorum could easily have submitted S.190 .
Why did it die ? Who knows ? Probably cause it was a bad bill. It called for FNMA/FMAC to sell the loans held in their own portfolio, thus tossing even more toxic assets into the financial market. It also raised the Jumbo loan limits for the Agencies from 417K to 500-something.
But it was NOT blocked by Democrats, and it was not intended to regulate subprime loans but rather internal auditing procedures.
I would explain it to our two friends in the picture above but they just enjoyed listening to Glen Beck explain these things much better than I can.
