Reply To: Political Statements
P.S. I’m doing some more reading on this. I haven’t been able to find a single helpful source to point to, but what I’m reading goes kinda like this. CRA –> market for creative mortgages to lower income/higher risk borrowers –> increased demand for housing –> housing prices increase (perfectly normal supply/demand response) –> speculators swoop in, taking advantage of these creative mortgages –> mortgage-backed securities created and vastly overvalued, while housing prices go to the crazy place –> foreclosures on adjustable-rate mortgages suck value out of these securities –> market for these securities collapses –> domino effect ensues.
(FYI, the bailout plan primarily addresses the lack of market for these securities. The government would buy them up and then resell them as that market recovers.)
The most succinct summary I’ve found is here, which is a brief summary of a recent paper on the subject. From that summary:
…increasing numbers of borrowers started speculating in homes. These borrowers were attracted by adjustable-rate mortgages, because they expected to sell the homes for a profit before the rates adjusted. The fact that we now have such a large inventory of unoccupied homes is consistent with the view that many of the new owners were speculators, not owner-occupants.
While the CRA legislation may have had unintended consequences, this crisis was not caused by low-income/high-risk borrowers. It’s important to understand that subprime, interest-only mortgages etc. are not evil in and of themselves. For savvy investors, these loan schemes work out just fine. The problem is that these loans started being made in increasing numbers to people who didn’t really understand them, regardless of their income. Short answer: There’s plenty of bipartisan and nonpartisan blame to go around.
Sorry, this was much longer than I intended.