"Obama administration pushes banks to make home loans to people with weaker credit" is the headline over at Washington Post today.
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.
Skeptics say?
Takes less than a minute to come up with a variety of links to the cause of the 2008 recession.
Cause of 2008 Recession
Irrational exuberance in the housing market led many people to buy houses they couldn't afford, because everyone thought housing prices could only go up. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses.
By August 2007, banks became afraid to lend to each other because they didn't want these toxic loans as collateral. This led to the $700 billion bailout, and bankruptcies or government nationalization of Bear Stearns, AIG, Fannie Mae, Freddie Mac, IndyMac Bank, and Washington Mutual. By December 2008, employment was declining faster than in the 2001 recession.
Those "toxic loans" are sub-prime mortgages.
What is a sub-prime mortgage?
So glad you asked.
A sub-prime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because sub-prime borrowers present a higher risk for lenders, sub-prime mortgages charge interest rates above the prime lending rate.The result:
Many lenders were more liberal in granting these loans from 2004 to 2006 as a result of lower interest rates and high capital liquidity. Lenders sought additional profits through these higher risk loans, and they charged interest rates above prime in order to compensate for the additional risk they assumed. Consequently, once the rate of sub-prime mortgage foreclosures skyrocketed, many lenders experienced extreme financial difficulties, and even bankruptcy.
Read more about "The Fuel That Fed The Sub-Prime Mortgage Meltdown."
Banks making toxic sub-prime mortgage loans and the fallout, which led to the 2008 recession, and now seeing that Obama is pushing banks to do it all over again, makes it quite understandable why conservatives are using the word insane as they write about this Wapo article.
Insanity.
Insanity.
Insanity.
Insanity.
Insanity.
Rob Port over at Say Anything gets the quote of the day:
According to the article, banks are getting “assurances” that they won’t face consequences for making risky loans, but how did that work out last time? The federal government was all about making subprime loans, using Fanny Mae and Freddie Mac among other economic and regulatory carrots/sticks to push banks into making risky loans. But when the house of cards collapsed? All the politicians could talk about was “Wall Street Greed.”
It took decades for the effects of banks making sub-prime toxic mortgages to result in the country going into the worst recession since the Great Depression, which means Obama won't be the one forced to deal with the fallout from his latest bout of insanity.
History
The Community Reinvestment Act of 1977 and later liberalization of regulations gave lenders strong incentive to loan money to low-income borrowers. The Deregulation and Monetary Control Act of 1980 enabled lenders to charge higher interest rates to borrowers with low credit scores. Then, the Alternative Mortgage Transaction Parity Act, passed in 1982, enabled the use of variable-rate loans and balloon payments. Finally, the Tax Reform Act of 1986 eliminated the interest deduction for consumer loans, but kept the mortgage interest deduction. These acts set the onslaught of subprime lending in motion.
Related:
Video- The Short and Simple Story of the Credit Crisis -- The Full Version
