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Deregulation to Financial Crisis
Transcript of Deregulation to Financial Crisis
Required banks to give loans to people living in “bad loan” areas
Promoted the use of two governmental enterprises to acquire loans,
The Federal National Mortgage Association (Fannie Mae)
The Federal Home Loan Mortgage Corporation (Freddie Mac)
Government enforced strict requirements
700+ credit score, 20% down payment on the loan, five years on a job, two months of payments in the bank, and no bankruptcy in the last eight years
Kept the rate of foreclosure below four-tenths of a percent 1980's President Carter reinforced CRA in 1980 by signing The Deregulation and Monetary Control Act
Allowed banks to charge any loan interest rate they chose
President Ronald Reagan signed The Alternative Mortgage Transactions Parity Act which created 3 new forms of mortgages:
adjustable-rate mortgage, which allows the interest rate on a loan to fluctuate after a number of years,
the balloon payment mortgage, which has a larger payment remaining when the loan reaches maturity
the interest-only mortgage, requires that borrowers pay interest on the principle balance only during the first years of the loan 1990's In 1993, President Clinton made it even easier for under-qualified loan candidates to get mortgages by modifying the CRA
Plus, Incentives for banks to give out subprime loans
Rewarding banks with points for each loan
Rising interest rates and property values made payments high
Under-qualified borrowers defaulted on their mortgages Deregulation's Connection to the Late-2000s Financial Crisis Collin Stubblefield &
Elaine Vasquez "Great Recession" Mortgage lenders joined banks
Both entities began to sell the loans to investment banks
Investment banks bundled loans into “collateralized debt obligations”
Sold them to Wall Street
Wall street failed to realize people were given loans with minimal credit checks and minimal down payments
Housing bubble burst, securities tied to the housing market plummeted
Huge amounts of failed investments on Wall Street
Prevention is Key Causes for collapse began in the 1977 Community Reinvestment Act, an act that was modified and supplemented through the 80’s and 90’s
Proper regulation of the subprime mortgages that razed the country could have prevented the market crash all together
Stricter adherence to the standards for getting a loan could also have prevented the crash Failure to Intervene to Pop the Housing Bubble Along with an influx of capital, Federal Reserve policy kept interest rates very low
Economists Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research insisted for Federal Reserve Chair Alan Greenspan to identifying the bubble -- and adjusting public perception of the future of the housing market
Could have prevented or at least contained the bubble
He declined, and even denied the existence of a bubble No Controls Over Predatory Lenders Financial deregulation + the housing bubble created circumstances in which aggressive lenders were nearly certain to abuse vulnerable borrowers
The terms of your loan don't matter, they effectively purred to borrowers
Effective regulation of lending practices could have prevented the abusive loans, but none was to be found. Ratio of Financial Services Wages to Private Sector Wages 1910-2006 Thank You!