Turns out, Jimmy Carter is to blame for the subprime chaos and resulting credit crunch Ã¢â‚¬â€œ I knew it all along! In truth, Carter may have planted the seeds for what we regretfully reap today, but there were plenty of others along the way that contributed to todayÃ¢â‚¬â„¢s crisis.
Way back in 1977, President Jimmy Carter brought the Community Reinvestment Act (CRA) into law. This act required mortgage lenders to qualify Americans with lower incomes that had previously been earmarked as too great a risk. Harmless enough, right? IsnÃ¢â‚¬â„¢t this the Ã¢â‚¬Å“American DreamÃ¢â‚¬Â after all?
Then it was President Bill ClintonÃ¢â‚¬â„¢s turn to play political one-upmanship. ClintonÃ¢â‚¬â„¢s Secretary of Housing and Urban Development, Andrew Cuomo, pressured the government-sponsored Fannie Mae and Freddie Mac lending agents to provide mortgages to an even wider group specifically targeting the poor and minority groups. Under ClintonÃ¢â‚¬â„¢s demands, unemployment and welfare payments were to be treated as eligible income and mortgage lenders that could not show a sufficient number of low income clients found themselves liable for discrimination lawsuits.
This led to the absurd reality of mortgage lenders turning down applicants representing little risk of defaulting to ensure sufficient funds on hand to provide mortgages to low income applicants despite a greater risk potential. In order to ensure sufficient low-income applicants could be qualified, the mortgage industry Ã¢â‚¬â€œ showing just how wonderfully resourceful they could be Ã¢â‚¬â€œ came up Ã¢â‚¬Å“No DocumentationÃ¢â‚¬Â and Ã¢â‚¬Å“Alternative DocumentationÃ¢â‚¬Â loans making proof of income virtually unnecessary when applying for a mortgage.
When President Bush came to office, he gladly accepted credit for Ã¢â‚¬Å“making it possibleÃ¢â‚¬Â for more Americans than ever to own their home Ã¢â‚¬â€œ well, Ã¢â‚¬Å“ownÃ¢â‚¬Â is used very loosely perhaps. Nevertheless, everything seemed fine until the housing bubble fuelling this house of cards suddenly popped ( you can read more in this FXPedia article on subprime mortgages).
So, we have now come full circle. The House of Representatives will vote tomorrow on a bail-out package that will buy up to $700 billion of bad mortgage debt in a desperate bid to save what is left of the U.S. banking industry. Guess that makes the U.S. government the countryÃ¢â‚¬â„¢s largest mortgage lender in addition to being the countryÃ¢â‚¬â„¢s largest money launderer.
About the Author
Scott Boyd has been working in and writing about the financial industry since the early 1990s. As a technical writer and project manager with several of Canada’s leading financial institutions, Scott has produced educational materials for investment system end-users including portfolio managers and traders. Scott now administers and contributes to OANDA FXPedia and regularly provides commentaries for the OANDA FXTrade website.