Community Reinvestment Act

The mortgage crisis of 2007 marked catastrophe for millions of homeowners who suffered from foreclosure and short sales. Most of the problems involving the foreclosing of families’ homes could boil down to risky borrowing and lending. Lenders were pushed to ensure families would be eligible for a loan, when in previous years the same families would have been deemed too high-risk to obtain any kind of loan. With the increase in high-risk families obtaining loans, there was a huge increase in home buyers and subsequently a rapid increase in home prices. As a result, prices peaked and then began falling just as fast as they rose. Soon after families began to default on their mortgages forcing them either into foreclosure or short sales. Who was to blame for the risky lending and borrowing that caused the mortgage meltdown? Many might blame the company Fannie Mae and Freddie Mac, but in reality the entire system of buying and selling and free market failed home owners and the housing economy.

Since mid 1990s, the subprime mortgage market has grown rapidly experiencing a phenomenal 23% compound annual growth rate to 2006. The total subprime loan originations increased from $65 billion in 1995 to $613 billion in 2006. The subprime sector has become a significant sub-sector of the total residential market accounting for 21% of all residential mortgage originations in 2006. Similarly, by year-end 2006, total outstanding balance of subprime loans grew to $1.2 trillion, approximately 12.6% of all outstanding mortgage debt.

The reality of the worst financial crisis in the last 80 years has led to wide speculation of its causes. While a plethora of theories have been offered, none have been as persistent and as patently false as the assertion that the Community Reinvestment Act of 1977 played a significant role in the housing bubble collapse. Critics of the Community Investment Act (CRA) argue that by pushing banks to meet the credit needs of low-income borrowers, the law forced lending institutions to take on riskier loans that proved to be fiscally irresponsible. The securitization and speculation of these low quality loans led to the housing bubble collapse and the wider

In 2008 the real estate market crashed because of the Graham-Leach-Bliley Act and Commodities Futures Modernization Act, which led to shady mortgage lending or “liar loans” (Hartman). The loans primarily approved for lower income and middle class borrowers with little income or no job income verification, which lead to many buyers purchasing homes they could not afford because everyone wants a piece of the American dream; homeownership. Because of “reckless lending to lower- and middle-income borrowers who could not afford to repay their loans many of the home buyers lost everything when the market collapsed” (Tankersley 3). Homeowners often continued to live in their houses for months or years without paying any

Many factors that led to the crash of the financial markets in 2008. Liberals and conservatives have differing views on the reasons for this crisis. From 1980 to 2007, deregulation, HUD, the Community Reinvestment Act (CRA), and bank management pushing banks to make high risk loans caused the market to shatter. Hedge funds contributed a humongous portion of the market crash. A commission of conservatives and liberals was established to try get to the bottom of how the stock market crashed. The name of the commission to conduct this study is Financial Inquiry Commission.

Additionally, a primary factor in the financial crisis was unsustainable mortgage lending. Subprime mortgages increased from eight percent of total mortgages in 2004 to twenty percent in 2006 with more than 90 percent of these mortgages being adjustable rate mortgages allowing borrowers to qualify for loans for which they did not have long-term repayment capacity. Furthermore, lenders lowered their loan underwriting standards especially for loan to appraised value and repayment capacity to allow borrowers to obtain significantly larger loans than in the past. System institutions did not participate in lowered lending standards. The System is prohibited by regulation from making mortgage loans with

The mortgage crisis we are experiencing in the United States today is already ranking as among the most serious economic events since the Great Depression of the 1930’s. Hardly a day goes by without a story in the newspaper or on the cable news stations reporting about the increase in the number of foreclosures across the United States. The effects of this crisis have spread across all financial markets, where in the end all of us are paying a price for this home mortgage crisis. When the housing market collapsed, so did the availability of credit which our economy depends upon. The home mortgage crisis, the financial crisis and overall economic crisis all need to address by the

Low interest rates and the ease of borrowing money are two primary causes of the current recession. In 2007, 37% of the total home mortgage loans were considered a “liar loan” because the mortgage lender did not evaluate income or assests (Russo, Mitschow, & Schinski, 2015). The Federal Government sought to encourage home loaners to loan to risky homebuyers and they kept low interest rates for far too long. During this time mortgage brokers began selling home mortgage loans rather than a commercial banking system. They were not subject to the scrutinized federal regulations, and lent money to many individuals who were unable to afford the homes that they were buying. Many people overestimate their ability to pay debt, resulting in them buying expensive homes because they were approved regardless of their credit or income. The crisis occurred when homes values dropped due to the ability for individuals to buy expensive homes, which resulted in people owing more on their homes than the value of the house. It was nearly impossible for people to make a profit when selling their homes, so many homeowner’s felt that it would be best to default on their loans as they were losing money paying for a home with less value than the actual loan. The more foreclosures there was, the more home values diminished and causing more and more

Sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by the lending institutions, in order to provide everyone the American Dream. During the expanding economy, this dream became a reality—untested and unchecked—as low interest rates fueled the desire of investors to make dreams come true! Ultimately, the vicissitudes of the economy turned downward and the snowball effect began while financial sectors and investors scrambled to catch the falling knife. While history is being written this very day and hindsight is 20/20, we can reflect on the ideologies and policies that brought forth the worst economic downturn since the Great

During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

Financial institutions did little stop subprime lending, the popularity of these types of loans kept growing, and lending companies took quantity of loans over quality which added to the so called “housing bubble” (Burry, 2010). Financial institutions didn’t

Before the beginning of the financial crisis in 2007, rules and policies passed in the United States had required the banking sector to allow more consumers to be able buy homes (Nielsen, 2008). Starting in the year 2004, the bursting of the housing bubble took place, when Freddie Mac and Fannie Mae, two of the largest and most well-known mortgage lenders in the United States, obtained a large quantity of mortgage assets, including some chancy mortgages. They charged substantial fees and accepted lofty margins from these subprime mortgages. The mortgages were used as safety or security for getting private label mortgage-based

All the economy’s parts seem to be working together for a change: joblessness is under 5% - a 24 year low – yet inflation is holding steady at 3%, a combination that economists thought impossible” (Pooley). This article placed the economy in very favorable position, but the economy collapsed back in 2008 when Wall Street folded. In a video published by Johnathan Jarvis titled “The Cause and Effects of the 2008 Financial Crisis,” the video explains how the economy went from being healthy and vibrant, to desperate and helpless because investors were creating mortgages with people who were not financially stable, and those mortgagors were more than likely struggling to pay their debts prior to attaining a sub-prime mortgage loan. When these sub-prime mortgages defaulted, the house was reposed by the mortgagee and put on the market to sell. When the house went up for sale because of the default, the

But government should force banks to work extremely hard with borrowers who are diligently trying to save their home. The time for action is now as any inaction will only lengthen the crisis. The subprime mortgage crisis is an on-going financial problem and a housing market nightmare for the United States economy. Some believe that a dramatic increase in mortgage delinquencies and foreclosures will caused a significant adverse effect on banking institutions and financial markets. Thus far, the housing market has crumbled due to this mortgage crisis, resulting in elevated record number of foreclosures. For many, the dream of home ownership has evaporated. How can this dream be re-established? Kevin Alexander Gray states “We‘ve got to do more to stem the tide of foreclosures and stabilize communities throughout the country,” (Gray, 2009). What actions should be taken? Mr. Gray points out, that the goal is to take corrective action to prevent a continuous meltdown.

Due to such events as the subprime mortgage crisis, the auto market and Wall Street’s failure, the United States suffered a severe economic blow. Looking at the situation from an economic view, supply is supposed to equal demand. Due to the mortgage crisis and the careless attempts of some to make money, there is a superfluous amount of empty homes throughout the United States. In the subprime mortgage crisis, the nature of the failure was the inability to account for money given to individuals, who lack the appropriate requirements. In order to obtain a loan, collateral is needed. References were not being checked and poor credit history went ignored. People were obtaining loans and not paying attention to the interests rates associated. “This time around, the slack standards allowed millions of high-risk borrowers to get easy home mortgages. When this so-called subprime market collapsed beginning about a year ago, ordinary working people bore the brunt” (Gallagher, 2008). Companies were so anxious to place people in homes, that it cost them billions of dollars and