Hey Congress... Do Your Job!!!

I believe members of Congress CAUSED the current financial problems... and I do NOT trust them to resolve those problems.

It all started in 1977 with the Community Reinvestment Act (CRA), which was "intended to encourage depository institutions to help meet the credit needs of the communities in which they operate". The intent of this legislation was to prevent "redlining", where banks would only loan money for the purchase of homes to certain (more favorable) geographic areas and deny loans in others. Such blanket policies were deemed unfair and prejudicial against minorities.

Typical of most government intervention, even when the intent is good, the execution is flawed. Rather than requiring loans to be issued based on equal credit standards, an objective foundation for any kind of loan and the basis of good financial management, it looked only at the "location" of the loans. In other words, the address of the home which would be used as collateral for the loan became a key factor... and less focus was placed on the credit of the borrower (that is, the ability to repay the loan).

Again, as is the pattern with government involvement in business activities, once the nose of the camel is under the tent, you can expect the head to follow. When a government program is implemented, it will almost invariably expand in its scope and intrusion upon "normal business". Then, with the laudable goal of expanding home ownership by minorities, a number of changes were implemented which expanded the scope of the CRA.

So, financial institutions were strongly encouraged BY GOVERNMENT to provide loans to borrowers who did not really qualify for loans. Many of these loans did not require the borrower to invest a portion of the purchase price ("no down" loans) or provide documented proof of income ("no doc" loans). A HUGE number of loans were made, disproportionately to minorities, and the stated goal of increased minority home ownership was achieved.

Complicating the situation is the fact that, unlike in the "old days", home loan mortgages were generally not held by the original lending bank. With the backing of the government through FNMA and FHLMC, mortgages are usually bundled into a package and sold like stocks, with each shareholder owning a slice of that package. Not to get bogged down in the specifics, even more complex financial products are created from these "mortgage packages", which are sold to investors. Regardless, at the bottom of all the fancy investments are the home loans that serve as collateral.

If loans to unqualified borrowers was only a small fraction of the overall business, this model might have survived. Every business has risks and some losses can be endured. However, due to the pervasiveness of sub-prime (under-qualified) loans, the system began to crumble. When enough people finally could not make their loan payments, it started catching up with the lenders.

Delaying the "chickens coming home to roost" were several factors:

The end result was inevitable. When the number of loans not being repaid reached a tipping point, the government-manipulated system began to collapse. Circumstances compounded the situation:

The cascading effect is astounding... but totally understandable.

The root of the problem... the core problem... was making loans to borrowers who had little ability to repay them.

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