Jimmy Carter back in the hippy dippy days of 1976, in his first year in office, wanted to make nice with the nation’s poor declaring everyone should have a home, apparently not understanding that if you could not afford it you could not finance it when they were critically credit impaired. Made no difference to him he went ahead anyway and signed into law The Community Reinvestment Act (CRA).
Politicians Wanted To Look Good
That gave community organizers and gung ho political upstarts the power to twist the arms of bankers to give near do wells with below average credit ratings (that means they had skipped out on payments before and had also been late on payments) a chance to own their own homes even though they were unqualified high risk low wage borrowers. Politicians, being the power freaks they are, just wanted to look good for the mid-term elections, gave the CRA all the help it needed to blow the nay-sayers out of the water by backing this nonsense to the hilt.
The Feds, being the geniuses they are, denied permission to banks (that failed to fulfill CRA loan quotas) to do corporate mergers, acquisitions or a chance to expand their business. The Feds throttled those notions using government blackmail along the way, except no one went to jail.
Ninjas
The bankers quickly categorized people with No Income, No Job or Assets, and therefore of little traditional credit-worthiness, NINJAS.
Under tremendous pressure from Carter and later Bill Clinton & George W. Bush, bankers were coerced into making a trillion dollars’ worth of sub-prime loans to people at the low end of the food chain. In other words the first ones fired when a recession hits. Flash bang to the future in 2007 the recession hits, the mortgage crisis ensues; who do you think gets laid off first? The low income people that were now without a job simply walked away from the payments and either went to live with relatives or rented somewhere else. Who do you think gets stuck with the trillion dollar tab?
So many of these CRA mortgagers that had hardly any skin in the game on their upside down homes just walked away sticking banks with the foreclosures and eventually the taxpayers with the trillion dollar debt. The bankers are then stuck with 1.7 million foreclosed homes they cannot put on the market yet lest the oversupply would drive down the price of homes even further.
Cruise to the Future
Fannie May & Freddie Mac, that started this fiasco in the first place, were then nationalized by the Feds and have been used since 2008 to soak up the flood of toxic mortgages that are now slowly poisoning bank balance sheets. Now in 2013 this shadow inventory bankers are now telling us has ballooned to $5.3 Trillion in mortgages. Out of this amount 13.5% are sub-prime loans.
Conclusion
This Federal government caused collapse was then blamed on the bankers who then had to merge with larger banks and fall under scrutiny of the New Dodd-Frank Bill that slammed even more rules and regs on the banks. The 8,000 page bill will shut down most of the responsible lending thus shorting industries that want to borrow to expand and hire new employees. Politicians, protecting their nest, simply passed the blame onto the money hungry bankers, as they were called.
These arrogant politicians and political activists once bragged that they had driven ownership to 68% of American families. This economic horror story has now driven home ownership to its lowest point in American history making the American dream of buying a home even further from reality. If the Fed would stick to what they know America would be more financially secure than it is today.