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Default CRA and weakened mortgage underwriting standards produced the crash

Two narratives seem to be forming to describe the underlying causes of
the financial crisis. One, as outlined in a New York Times front-page
story on Sunday, December 21, is that President Bush excessively
promoted growth in home ownership without sufficiently regulating the
banks and other mortgage lenders that made the bad loans. The result was
a banking system suffused with junk mortgages, the continuing losses on
which are dragging down the banks and the economy. The other narrative
is that government policy over many years--particularly the use of the
Community Reinvestment Act and Fannie Mae and Freddie Mac to distort the
housing credit system-- underlies the current crisis. The stakes in the
competing narratives are high. The diagnosis determines the
prescription. If the Times diagnosis prevails, the prescription is more
regulation of the financial system; if instead government policy is to
blame, the prescription is to terminate those government policies that
distort mortgage lending.

There really isnt any question of which approach is factually correct:
right on the front page of the Times edition of December 21 is a chart
that shows the growth of home ownership in the United States since 1990.
In 1993 it was 63 percent; by the end of the Clinton administration it
was 68 percent. The growth in the Bush administration was about 1
percent. The Times itself reported in 1999 that Fannie Mae and Freddie
Mac were under pressure from the Clinton administration to increase
lending to minorities and low-income home buyers--a policy that
necessarily entailed higher risks. Can there really be a question, other
than in the fevered imagination of the Times, where the push to reduce
lending standards and boost home ownership came from?

The fact is that neither political party, and no administration, is
blameless; the honest answer, as outlined below, is that government
policy over many years caused this problem. The regulators, in both the
Clinton and Bush administrations, were the enforcers of the reduced
lending standards that were essential to the growth in home ownership
and the housing bubble.

Read more at
http://spectator.org/articles/42211/...nancial-crisis
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Default CRA and weakened mortgage underwriting standards produced thecrash

"Hey, Barney Frank: The Government *Did* Cause the Housing Crisis"

It is certainly possible to find prime mortgages among borrowers below
the median income, but when half or more of the mortgages the GSEs
bought had to be made to people below that income level, it was
inevitable that underwriting standards had to decline. And they did. By
2000, Fannie was offering no-downpayment loans. By 2002, Fannie and
Freddie had bought well over $1 trillion of subprime and other low
quality loans. Fannie and Freddie were by far the largest part of this
effort, but the FHA, Federal Home Loan Banks, Veterans Administration
and other agencies--all under congressional and HUD pressure--followed
suit. This continued through the 1990s and 2000s until the housing
bubble--created by all this government-backed spending--collapsed in
2007. As a result, in 2008, before the mortgage meltdown that triggered
the crisis, there were 27 million subprime and other low quality
mortgages in the US financial system. That was half of all mortgages. Of
these, over 70% (19.2 million) were on the books of government agencies
like Fannie and Freddie, so there is no doubt that the government
created the demand for these weak loans; less than 30% (7.8 million)
were held or distributed by the banks, which profited from the
opportunity created by the government. When these mortgages failed in
unprecedented numbers in 2008, driving down housing prices throughout
the U.S., they weakened all financial institutions and caused the
financial crisis.

http://www.theatlantic.com/business/...crisis/249903/
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