Banking Failure

[Dr. Shane]

The problem is that the government told banks to lend to people that could not afford to pay back the loans.

Community Reinvestment Act

Quote:

The Community Reinvestment Act is a United States federal law that requires banks and thrifts to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses.

The CRA was passed into law by the U.S. Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act.

Quote:

The Clinton Administration's regulatory revisions [1] with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997.

Quote:

In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." The change was to place two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under supervision of a new agency created within the Department of the Treasury. The changes were generally opposed along Party lines and eventually failed to happen. Representative Barney Frank(D-MA) claimed of the thrifts "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."

[fccool]

The problem is that banks are allowed to lend out money they don't have... that's the problem Everything else is just a result of that problem.

[Dr. Shane]

Well, that is never going to change. So it is a mute point.

[Dr. Shane]

Quote:

The problem is that the government told banks to lend to people that could not afford to pay back the loans.

The housing bubble, driven up by speculators, was also a major part of this problem. I didn't mean to exclude that, I was just not focusing on it.

[fccool]

Quote:

The problem is that the government told banks to lend to people that could not afford to pay back the loans.

The housing bubble, driven up by speculators, was also a major part of this problem. I didn't mean to exclude that, I was just not focusing on it.

Actually, these two are one broken leg of a problem... the same leg though, not two different ones.

The sad thing is this phenomenon is now observed worldwide. Take Moscow for example. It's now world's most expensive city to live in. How can that be? If you go right outside of Moscow, the housing prices drop 10 fold.

But, when you consider the major players at hand, it's becomes obvious that things could not be any other way. Cheap credit, and skyrocketing housing prices go hand in hand. It's in the interest of the banks for people to take out longest term loans, and it's in interest of realtors for the prices to be valued higher.

I have a friend who bought an apartment in Kiev, Ukraine. The aparment value is 60,000. His final tab when interest is counted - 160,000++ when all is said and done. How can that be, and how can any economy handle that without falling apart?