I'm on that page, too--and I've been close to the developing problem for a long time as a career banker and banking regulator.

If you want to put your finger on the first rotten apple in the barrel, it is the Community Reinvestment Act of 1977 (CRA). Here is a detailed discussion of the political steps that caused this government-wielded knife to end up in the backs of lenders, commercial bankers, mortgage bankers, investors, Wall Street investment bankers, and every other private sector participant in the housing finance industry.

CRA allowed activist organizations (ACORN being the best example) to extort lending commitments from FDIC-insured banks. These commitments called for pouring money into low & moderate income neighborhoods--regardless of credit demand or borrower qualifications. In addition to ACORN and the like, the banking regulators (charged with "enforcing" the CRA) pushed banks to make loans in marginal areas and to maintain "demographic balance" in their lending records--again, with little concern for creditworthiness.

When it became harder and harder for banks to stomach portfolios of these questionable loans, liberal Congressional Democrats forced Fannie & Freddie to throw the doors wide open and buy just about anything a lender could shove in a loan folder. Mortgage bankers (unaffected by CRA because they were not FDIC-insured) saw a golden opportunity to cash in, and also started pushing loans at marginal borrowers--all of which were sold to Fannie & Freddie.

When they ran out of marginally qualified borrowers, these same lenders decided to reduce/eliminate down payments, reduce payments to less than the interest accruing each month (aka - negative amortization), and defer payment adjustments for years--even decades--into the future. All of these steps allowed unqualified borrowers to "realize the great American dream of home ownership." After all, the lenders reasoned, Fannie or Freddie would be holding the loans when it became obvious that borrowers were in way over their heads. They rationalized these deadly loans and shrugged off borrower concerns by telling borrowers their properties would continue appreciating forever and when the payment adjustments came due, the loans could be refinanced--possibly with cash back!

Free markets clense themselves, just like a free-flowing stream. When government gets in the way of this process, it's never in our long-term interest.

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