Oct 16 2008
How The Housing Crisis Started
The housing crisis started with the forclosures of many homes where families could no longer afford them. These families were given these loans under the Community Reinvestment Act (CRA). The CRA was established in 1977, and modified in 1995. The modifications in 1995 is what caused the housing “bubble” and the crisis that we face today. The CRA established guidlines that said that banks have to provide equal lending to lower and middle income families. Well in 1995 banks were making loans to every family that they felt was a capable candidate to repay a loan. ACORN, and other democrats accused that the banks were declining applications on the basis of race. The pushed for deregulation of the mortgage system and received what they asked for. Many republicans fought against that deregulation, but were pressured to fall in line for fear of being viewed as racist. That is where republicans messed up. They should have stood up for what was right regardless of what political implications may follow. There job is to serve the people, and clearly they were serving their own self interest and their careers by not standing up for what is right.
The sub-prime market grew and grew and grew. As the subprime market grew, so did housing prices. The overwhelming demand for housing shot prices through the roof, overvaluing the majority of houses sold. Many families that could not previously afford to buy a house could do so, under the amendments to the CRA. Families that couldn’t afford to put down a down payment, could now purchase a house. Families with previous forclosures, and poor credit ratings could now obtain a mortgage. The CRA led to very creative ways to make it “affordable” for families to purchase houses. Some of these creative lending practices include interest only mortgages, where the borrower only pays the interest on the loan, and never pays money towards the principal of the loan. There are also the infamous ARM’s. These adjustable rate mortgages provided homebuyers the opportunity to purchase a house at a substantially lower rate than a fixed rate mortgage. The catch here, if the interest rate goes up, so does your house payment. Many of these loans were structured so that the interest rate did increase after three years. This lead to preditory lending practices, putting people in homes they couldn’t afford. These practices wouldn’t have happened without the CRA.
This is a problem in the upcoming election. Obama blames John McCain and the republicans for causing the economic crisis. While the current administration has participated in outragous spending the true cause of the economic crisis is the housing market. Democrats and republicans agree on this fact. Obama criticizes John McCain for advocating deregulation of the economy, but doesn’t tell the people that he also played a part in the deregulation of the economy. He doesn’t want the people to know that. He even worked for a law firm that prosecuted banks for not lending to candidates on a basis of race, which was not true. They didn’t lend to candidates on a basis of income, not race. Obama and the democrats caused this mess, blame the republicans, and now want you to belive that he and the democrats can solve this problem.
I have no faith in this man. America, begin re-evaluating where you stand on the issues.
http://article.nationalreview.com/?q=ZjRjYzE0YmQxNzU4MDJjYWE5MjIzMTMxMmNhZWQ1MTA=
5 Responses to “How The Housing Crisis Started”
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“However, others dispute the involvement of the CRA in the crisis. In a Bank for International Settlements (”BIS”) working paper, economist Luci Ellis concluded that “there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust,” relying partly on evidence that the housing bust has been a largely exurban event.[59] Others commentators, for example, Daniel Gross of Slate, Tim Westrich of the Center for American Progress,[60] Robert Gordon of the American Prospect,[61] and Aaron Pressman from BusinessWeek,[62] have also concluded that the CRA did not contribute to the current financial crisis.
Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton,[63][32] stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA. Another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. He stated that institutions fully regulated by CRA made “perhaps” one in four sub-prime loans. Referring to CRA and abuses in the subprime market, Michael Barr stated that in his judgment “the worst and most widespread abuses occurred in the institutions with the least federal oversight”.[64] According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made “high-priced loans” at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.[65] A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.[66]”
Yeah, sure, blame it on the perhaps 25% of loans involved. Yep, sure.
Wow, financial experts say that these loans are safe? These sub-prime disasters that caused the economy to collapse are safe? Tell me what expert today would agree with those claims from February. Nobody would agree with those claims, they’re outragous. Well maybe the financial genius Barney Frank agrees with those statements, and we all know how smart he is. I feel sorry that you agree with them. CRA regulated banks were less likely to make sub-prime loans? Come on. The whole act was aimed at promoting sub-prime loans. Interest rates were lower, of course they were. How else were banks going to get people into houses they couldn’t afford? Houisng was well overpriced, and lenders were lending 120% of homes values to sub-prime candidates. Before CRA the cost of housing rose with inflation. With CRA housing prices rose too fast creating a wedge between the rate of inflation and the rate of increase in housing prices. That wedge, that was created by regulation mandated credit, causing wreckless speculation and a housing bubble. Bush’s administration proposed legislation in 2003 to deal with the potential problem and increase regulation, but democrats fought it citing that lower income families may not be able to finance homes. Barney Frank said that ‘the more pressure(regulations) there is on these companies(banks), the less we will see in terms of affordable housing’. But lets not forget that the housing has become less affordable. The price of housing has greatly increased since the changes made to CRA in 1995 putting the dream of owning a house further out of the reach of American, but democrats still want low income families to be able to buy these over-inflated houses.
John McCain co-sponsored a bill in 2005 to combat this issue, but it was struck down by Senate Democrats. It was “The Housing Enterprise Regulatory Act of 2005″. Go look it up for yourself. Obama likes to portray McCain as a deregulator that caused this problem, but he proposed legislation to regulate Fannie Mae and Freddie Mac, but Senate Democrats didn’t feel there was a problem. Why didn’t democrats want to regulate Fannie and Fredie? Well who gives the elected officials money? Fannie and Freddie were large contributors to Obama, and Obama returned the favor by having Jim Johnson help him select his VP. Who is Jim Johnson? Former chairman of Fannie Mae when CRA was changed to help lower income families. Hmmm. He resigned after questions were raised about his home mortgage deals and it brought attention to Obama being influenced by special interest groups. Who is one of Barack Obama’s housing advisors? Franklin Raines. Who’s that? Well he worked for the Carter administration when CRA was first enacted in 1977. He was the Vice-Chairman of Fannie Mae from 91-96 when CRA was expanded. CEO of Fannie Mae from 99-2004 who resigned due to accounting irregularities and left with a golden parachutte of $25 million dollars. He has received more contributions per year from Fannie Mae than any other politician in the last 20 years. Yes John McCain has accepted money from Fannie Mae over the last 20 years. He accepted $862/year in the last 20 years from Fannie Mae while Obama collected over $42,000/year. Who is more likely to provide favors for Fannie Mae, like not vote for more regulation?
Obama’s heart is in the right place, but the plan is not effective. Now I’m not saying that low income families don’t deserve homes, but they need to live within their means like everybody else. We can’t create strategies that put our economy at risk in order to raise the lifestyles of lower income families. Lower income families in America means that they have a hard time paying bills. Lower income families in most of the rest of the world means that families are lucky if they have more than one outfit. We already have social programs in place to help lower income families in America. We don’t need to put ourselves at risk.
Lets go with just your figure that 25% of loans were poor loans, that’s huge. With an average of 6 million homes purchased a month over the last 10-15 years it’s no wonder why our economy came to a screetching hault when this problem rose.
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