The financial crisis happened partly because of loosened lending standards, which resulted in risky loans to people with bad credit and no money for a down payment. Why were these risky loans made? One reason was government pressure. The Obama administration is now ratcheting up that pressure on banks to make more of the risky loans that led to the financial crisis. Attorney Ted Frank explains how we got into this mess:
Now, reports Business Week, “the Obama administration Department of Justice has created a twenty-person task force” to bring more discrimination cases against banks that don’t make enough loans in poor or disadvantaged areas. The government is also adopting more onerous interpretations of the Community Reinvestment Act and fair-lending laws to force banks to make more risky loans:
One bank was forced to open a new branch in a poor town it had never done business in before to settle charges against it.
The Wall Street Journal, Investors Business Daily, investment bankers and many economists, have argued that the Community Reinvestment Act was a key contributor to the financial crisis by virtue of regulations promulgated under the Act during the Clinton administration that greatly expanded its reach and provided powerful incentives for risky lending. Yet the Obama administration has consistently supported expanding its enforcement.
Clinton-era affordable housing mandates were also a key reason for the risky lending. The Washington Examiner cited a recent study by Peter Wallison, who had prophetically warned about risky financial practices for years, finding that two-thirds of all bad mortgages were either “bought by government agencies or required to be bought by private companies under government pressure.”
As the economist Thomas Sowell noted, liberal lawmakers imposed these mandates heedless of the consequences:
Sowell’s observations about the harmfulness of affordable-housing mandates are echoed in a study by Ed Pinto, a former executive of the government-sponsored mortgage giant Fannie Mae, which later had to be bailed out at a cost of hundreds of billions of dollars thanks to such mandates.
Banks and mortgage companies have long been under pressure from lawmakers and regulators to give loans to people with bad credit, in order to provide “affordable housing” and promote “diversity.” That played a key role in triggering the mortgage crisis, judging from a story in the New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.”
Commentators who once minimized the role of government mandates in causing the financial crisis now think government pressure was a major factor. In a May 3 note to clients, Michael Cembalest, the Chief Investment Officer of JP Morgan Private Bank, revised his 2009 account of what caused the financial crisis. Under the general heading of “Retractions – the primary catalyst for the US housing crisis” he wrote (emphasis Cembalest’s):
