This concept that in 2008 the market was responding to incentive misalignments created by government regulation.. what regulation? All we did was deregulate from 92 onwards.
This is false. The Community Reinvestment Act, passed in '92 and periodically ratcheted upwards thereafter, forced banks to increase loans to minority groups. It issued guidelines on how lenders should evaluate borrowers for these purposes:
Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. [1]
While not a regulation issue as such, it's also true that attempts to rein in Freddie Mac and Sallie Mae (semi-governmental entities both) were rebuffed by Congress; even when we knew there was potential trouble, the regulators wouldn't allow market concerns to dictate to their beast.
The Big Short tells us "In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $724,000." Nothing in the CRA ever demanded that obvious inability to pay be disregarded. Once Wall St. started believing bogus CDO ratings and it became possible for mortgage banks to unload 100% of the risk, they weren't being pressured into writing stupid loans, they were eager to stuff the channel by writing as many as they possibly could before the music stopped, and used every trick they could think of (teaser rates, negative amortization) to get each buyer out the door and through the first months of a loan they knew was doomed.
This is false. The Community Reinvestment Act, passed in '92 and periodically ratcheted upwards thereafter, forced banks to increase loans to minority groups. It issued guidelines on how lenders should evaluate borrowers for these purposes:
Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. "Lack of credit history should not be seen as a negative factor," the Fed's guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as "valid income sources" to qualify for a mortgage. [1]
While not a regulation issue as such, it's also true that attempts to rein in Freddie Mac and Sallie Mae (semi-governmental entities both) were rebuffed by Congress; even when we knew there was potential trouble, the regulators wouldn't allow market concerns to dictate to their beast.
[1] http://www.boston.com/bostonglobe/editorial_opinion/oped/art... (note this link took forever to come up in my browser)