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The Absurd Zombie Lie About the Economy Right-Wingers Desperately Cling To -- And Why It's Totally Wrong

Home loans didn't bring on the recession; gimmicky financial instruments bloated to 100 times their value are what caused all this pain.

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But, contrary to the conservative spin, University of Michigan law professor Michael Barr told a congressional committee that although there was in fact quite a bit of irresponsible lending in low-income communities in the late 1990s and the early 2000s, “More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts [subject to CRA standards].” Barr concluded, “The worst and most widespread abuses occurred in the institutions with the least federal oversight."

The reality is that no bank has ever been “forced to comply with government mandates about mortgage lending” – it's a bald-faced lie.

There are no “government mandates,” and there never were. In order to qualify for government-backed deposit insurance—a benefit that banks aren’t forced to accept but enjoy having—the Community Reinvestment Act – and similar measures designed to prevent discrimination in lending (to qualified individuals) – only encourage banks to lend in all of the areas where they do business. And Section 802 (b) of the Act stresses that all loans must be “consistent with safe and sound operations”—it’s the opposite of requiring that lenders write risky mortgages.

There are no penalties for noncompliance with CRA guidelines. The only “stick” hanging over banks that fail to meet those standards is that their refusal might be taken into account by regulators when they want to open new branches or merge with other financial institutions. What’s more, there are no defined standards for CRA compliance, and within the banking community, the loose guidelines are considered to be somewhat of a joke.

As Sheila Blair, the chairwoman of the FDIC, asked in a December 2008 speech, “Where in the CRA does it say: make loans to people who can’t afford to repay? Nowhere! And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth...pure and simple.”

Fannie and Freddie: Tempted by Easy Profits

Fannie Mae and Freddie Mac were created by an act of Congress, but they are (or were, until being taken over in the wake of the housing crash) private, for-profit entities whose dual mandate was to increase the availability of mortgages to moderate- and low-income families, and at the same time turn a profit for their shareholders. Fannie and Freddie did end up with a very large portfolio of subprime loans, with a high rate of default, but they didn’t get into the market early, or because the government mandated it. They dived in deep because there were profits to be made as the housing bubble expanded. As Mary Kane, a finance reporter for the Washington Independent , put it:

Neither the Community Reinvestment Act—the law most cited as the culprit—nor other affordable housing goals set by the government forced Fannie, Freddie or any other lender to make loans they didn’t want to. The lure of the subprime market was high yields and healthy profit margins—it’s as simple as that.

Creating a Market

None of this is to suggest that millions of Americans didn’t bite off more than they would eventually be able to chew in the housing market. A lot of people looking to turn a quick buck by capturing the booming value of real estate in the mid- to late-2000s bought property with “teaser” loans that offered very low rates for the first few years; the investors assumed they’d be able to turn a tidy profit before higher interest rates kicked in. Many of those individuals have since found themselves “under water”—owing more on their homes (and investment properties) than they’re worth.