1. Politicians had policies which supported bad lending practices. They believed that not enough loans were being made to minority groups, so they expanded the power and scope of the Community Reinvestment Act, which was designed to get more minorities to buy homes.
2. There was the problem of minority incomes not being high enough and their credit not being good enough to get home loans.
3. FNMA and FHLMC are quasi-government institutions (now, fully government institutions) which make the rules for buying mortgages, as mortgage companies do not hold their mortgages; they sell them on the secondary mortgage market, and use that money to make new loans. In the past, FNMA and FHLMC had strict loan requirements, so that people who met those requirements were highly unlikely to default on a mortgage loan.
4. At first, some lending institutions did not go along with these practices.
5. These lending institutions were excoriated by activist groups (like ACORN). These groups even demonstrated out in front of the private homes of various bank presidents, scaring their families.
6. At the same time, there was the threat that the government would no longer buy their loans. Mortgage companies function by making loans, not by holding loans, so this would destroy any mortgage company.
7. Lending institutions which made a lot of minority loans, taking advantage of the new relaxed standards of FNMA and FHLMC, were rewarded.
8. All of a sudden, millions of people who previously could not buy a home were now qualified. This flooded the market with millions of new buyers, who did not have to qualify in terms of income and credit (strong indicators of loan-worthiness).
9. This flood of new buyers drove housing prices up, which is simple supply and demand economics. This is the great housing bubble of the early and mid-2000’s where homes increased in value by as much as 100% or more in some communities.
10. Since loans had become easier to get, millions more people refinanced their homes, with the inflated home value, and pulled cash out of this refinancing. This meant more people had more money, which meant more spending, which inflated our economy and the market (some of this money was invested, of course).
11. At the same time, revenues to the state governments kept on going up, because housing values escalated to a tremendous degree. States had tons of new money
coming in from taxes.
12. State governments began using this money to buy votes and to incur favor from their various constituencies. I doubt that many states recognized that this was a lot of new money coming in, and that maybe they ought to bank it or reduce property taxes.
13. When a huge percentage of these questionable loans went bad, the housing market crashed.
14. As the home values went down, some people walked away from their loans simply because they were “under water” (the house was no longer worth its inflated value, and, therefore, the loan against the house was greater than the value of the house).
15. As the value of the houses went down, revenue to state governments suddenly went down causing enormous state-by-state debt.
16. At one time, investing in the mortgage market was a sure thing, so virtually every pension fund and many investment groups were heavily invested in the housing market (please realize that the amount of money this represents makes ENRON look like a child’s lemonade stand).
17. So, as the housing market crashed, so did the stock market and every single investment portfolio. As the stock market began to spiral because the housing market was at an artificially inflated value, this pulled down the rest of the market with it (with automatic buys and sells built into the system, this can happen in just a few hours).
18. As a result, the exact same politicians who caused this mess blamed predatory lending practices—the same practices which their policies encouraged! Of course, they quickly blamed the President in charge (President George W. Bush, who attempted to reform FNMA and FHLMC practices, which attempts were shot down by the opposing party). These same politicians also blamed capitalism and they blamed Wall Street, because the housing market caused the entire market to crash.
19. Again, the politicians who caused housing bubble, the worthless loans, the inevitable housing bubble bursting, the resultant market crash and our present financial woes then blamed everyone except themselves.