•In 1977, while Jimmuh Carter was President and Tip O'Neill and Robert 'KKK' Byrd were Speaker of the House and Senate Majority Leader, respectively, the Community Reinvestment Act, or CRA, law was passed. Passed with the best intentions, the CRA was intended to cut down on discriminatory lending practices and open up loans to borrowers in low and moderate income neighborhoods.
•Then in 1980, with the same players in power, Congress passed the Depository Institutions Deregulation and Monetary Control Act. This act removed the state limits on interest rates banks could charge on mortgages. Amongst other things, this legislation was a continuation of the policy to get more low and moderate income home ownership, by giving banks more incentive to lend to riskier parties.
•In 1982, with Reagan in the White House, and Democratics still in control of both houses of congress, the Alternative Mortgage Transactions Parity Act was passed. AMTPA specifically allowed alternative types of financing on home loans other than traditional fixed rate mortgages. Again, here as with before, the intention was to open up home ownership to low and moderate-income households by offering additional methods to finance a house.
•Starting in 1995, the GSE's (read: oxymoron), Government Sponsored Enterprises, began to receive government tax incentives to purchase mortgage backed securities. This is a critical turning point in the foreclosure crisis, because later it will be shown that after HUD set goals for the GSE's to buy more subprime paper, which are riskier than traditional mortgages and have a higher rate of failure, the GSE's turned around and sold to investment banks as low-risk investments.
•In 1997, congress passed, and President Clinton signed the Taxpayer Relief Act of 1997. This legislation reduced the capital gains on the sale of homes under $500,000. This action alone did nothing to impact the foreclosure crisis. However, when coupled with insane subprime lending practices, these tax rates made home sales the best return on the dollar investment for the average person. Thus began the home speculation wave.
•In 1998, HUD Director Andrew Cuomo held a press conference detailing a settlement reached with a major bank on a lending discrimination case, presumably based on the CRA. The result of the settlement was $2.1 Billion for subprime loan offers. He admits that the lawsuit forced the bank to lower it's qualification standards as a remedy to the 'discriminatory' lending practices. This is is another crucial turn in the foreclosure crisis. The press conference was a warning to other lending institutions that the administration intended to interpret the CRA laws broadly and that the full force of the Clinton Administration would be aligned against any company that did not meet their standards of the CRA.
http://www.youtube.com/watch?v=ivmL-lXNy64&feature=player_embedded#!
It is these enforcement techniques coupled with the marketing of the MBS as low-risk investments which spurred the enthusiastic subprime lending from the private lenders. What was the risk? Offer risky loans to low-income applicants making a large profit, then sell the asset to the GSE's which then acquired the risk. No risk, high profit subprime loans then became a no lose option for the private lenders.
•The next step is one of supply and demand. With a flood of new 'qualified buyers' on the market for homes, the new home builders went gonzo. New home starts went through the roof, as demand never seemed to dry up. Demand out paced supply until sometime during mid 2006. Once the supply of homes outweighed the demand by consumers, home prices began to fall. It is this fall coupled with insane personal debt amounts that would begin the foreclosure crisis. During the boom years between 1998 and 2006, home owners were able to use their homes as banks, borrowing against the equity in their home at values higher than the home's actual value, all while banking on the increasing value of the home. Also at this time, Adjustable Rate Mortgages were in demand allowing a home owner to purchase the home with an introductory, low interest rate, which would adjust after 3-5 years. The expectation was that the value of the home would have risen during that time, allowing the owner to refinance into another ARM or traditional loan, at a lower interest rate. It was this expectation of an ever increasing home value that lead home owner after home owner to extend their personal debt beyond the sustainable point.
Once home values began to fall, and adjustable rate mortgages adjusted, many home owners were no longer able to afford their monthly mortgage payments. As a result, foreclosures began to rise. In turn home values fell further causing the housing bubble to burst.
•Finally, and most despicably, the systematic fraud committed by the two GSE's in mis-stating earnings as to increase the bonus compensation for the executive staff's allowed the crisis to continue on long after it should have. The GSE's were government entities, so they could borrow money at lower interest rates, they required less capitalization and they had less regulations all of which were supposed to translate into more money available to securitize mortgages. Instead, names like Franklin Raines, Jamie Gorelick and Jim Johnson all cooked the books in order to increase their bonuses. At the same time, Alan Greenspan was pointing out the dangers of the GSE's weak capitalization. There were voices of reason, but few had ears to listen.
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