Mortgage Meltdown

Posted on September 20, 2008. Filed under: Finances, News | Tags: , , , , , , , , , , , |

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I had been thinking this, but hadn’t seen anybody writing about it.

Sub-prime mortgages have led to a financial crisis. The blame for sub-prime mortgages generally get laid on the greed of the mortgage bankers, but is that all there is to it?

Twenty years ago I remember the push to get banks and lending into low-income minority neighborhoods. There was a push at the time to make mortgages easier for those who could least afford them because it was good for the neighborhood.

Stan Liebowitz’s book, Housing America: Building out of a Crisis, puts the blame back on the federal government. I agree – without the government pushing banks to lend to risky people, there would have been less risk. Simple, no?

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Update from A Mortgage Fable -

- The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.

Robert Litan, an economist at the Brookings Institution, told the Washington Post this year that banks “had to show they were making a conscious effort to make loans to subprime borrowers.” The much-maligned Phil Gramm fought to limit these CRA requirements in the 1990s, albeit to little effect and much political jeering.

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