usa, loans, sub-primeDid US Fair Housing Legislation actually force the banks to make loans to people who were unlikely to repay them, or was it just an incentive to make these loans available?
Fair Housing Legislation may have gotten “the ball rolling,” but ultimately was NOT responsible for the sub-prime crisis.
The main piece of legislation was the Community Reinvestment Act (CRA) of 1977, which mandated that banks taking deposits in “bad” neighborhoods reinvest a portion of those deposits in those neighborhoods, e.g., the Bronx.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
It didn’t mandate loans to bad borrowers, per se, but did mandate loans to certain regions considered “bad risks.” As such, it forced bankers to violate “prudent” lending standards OF THEIR TIME (late 1970s).
The main impetus that the legislation gave to subprime lending, was that it created an incentive for bankers to sell off such loans to brokerage houses, which then resold them to other clients. Pretty soon, the brokerage houses made the rounds of banks to buy the loans that banks didn’t want. This caused banks to create loans, not for their own investment, but for “resale” purposes. These resold loans were on the whole riskier than the admittedly risky ones mandated by the CRA. All this turned home lending into a game of “hot potato” or musical chairs.
All content is licensed under CC BY-SA 3.0.