The subprime mortgage collapse was government-caused
13th March 2008
That ought not to surprise you. The worst disasters in history were all caused by government action.
The crisis has its roots in the Community Reinvestment Act of 1977, a Carter-era law that purported to prevent “redlining” — denying mortgages to black borrowers — by pressuring banks to make home loans in “low- and moderate-income neighborhoods.” Under the act, banks were to be graded on their attentiveness to the “credit needs” of “predominantly minority neighborhoods.” The higher a bank’s rating, the more likely that government regulators would say yes when the bank sought to open a new branch or undertake a merger or acquisition.
But to earn high ratings, banks were forced to make increasingly risky loans to borrowers who wouldn’t qualify for a mortgage under normal standards of creditworthiness. The CRA, made even more stringent during the Clinton administration, trapped lenders in a Catch-22. “If they comply,” wrote Loyola College economist Thomas DiLorenzo, “they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties . . . which can cost a large corporation like Bank of America billions of dollars.”