The Housing Crisis

The housing crunch in America has so many aspects to it, over so many years. And there is an extreme amount of ‘finger-pointing’. Fat cat bank execs, greedy Wall Street, morons at Freddie and Fannie, and on and on.

Admission; I was in finance and banking for almost 25 years. Everything from a consumer finance company, doing lending and collections, to only talking to millionaires. I remember when the Community Re-Investment Act (CRA) passed. I lived through a “Bank Run” in a savings and Loan in Ohio.. I saw the end to ‘red-lining’, the passage of Fair Housing act, and increased pressure from regulators.

In all, the blame goes back to Congress, for passing highly noble, yet idiotic, measures.

I will start with redlining, a practice where in certain areas of a community, loans ere not made. This looked like discrimination, since minorities occupied the areas.

In truth, it was statistics. A person that can’t afford to pay 200 a month in rent obviously can not afford 400 a month for a mortgage.

It was outlawed, and with the CRA, it was even demanded that lenders “invest” in those areas, to help re-vitalize them. No one felt more empathy, for those areas, but every person I knew, talked to, or overheard agreed that CRA would become a disaster.

Then came the quotas, and the Fair Housing Act. Again – VERY noble, and honestly in MANY lenders – very NEEDED. There WAS a lot of discrimination at that time in home lending. But as usual, the regulations Congress passed went WAY too far.

So Congressional acts, and pressure, forced all the criteria to be lowered.

I remember being told by a Federal Regulator, that not ONLY was not lending according to their rules a violation of a Reg, with fines etc to the bank, and maybe me personally, it was also a violation of Civil Rights, and possibly would include jail time.

The loans we KNEW would fail were made. The Executives knew only one way to get through it. Keep the money moving around, and make enough loans to dilute the bad ones, till the economy, and inflation rose wages to a point where the people could afford them.

Moving the money was easy. Every banker knew about ‘Check Kiting’. No longer viable since checks clear so quickly, but in past times, a person would open accounts at multiple banks, depositing checks from each one into the account of another. As long as they stayed ahead of the checks clearing (which used to be as much as 3 weeks), a person COULD make it look like they had 5 times the amount they actually had.

That was done with home loans. Package them, sell them to Freddie and Fannie (who were FORCED by Reg to lower their standards), have them bundled, re-sold in the stock market, trade futures based on them, do rate swaps, credit swaps, etc etc, to keep the money moving in a circle.

The economy of course, did not catch up. People that had a home, wanted bigger homes, so they didn’t stay in that house they couldn’t afford before, they moved to a newer, more expensive home they couldn’t afford now.

Then the shoe dropped.

And WHO do we see behind EVERY single problem? Congress. THEY passed the laws, and regulations; they also repealed the regulations that allowed the creation of all the ‘financial derivatives’, to allow the money to be floated. Along with the DE-regulation, every one in the finance world could do everything. Stock Brokers could sell Bank accounts, Banks could sell stocks. All to spread our markets, in an attempt to dilute the problem, that could not be stopped.


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