Why the Housing Bubble Happened - Visualized!!

With all this talk recently of the SEC investigation of Goldman Sachs and the federal government pushing for finance reform, I think it'd be nice to review why the housing bubble and subsequent bust happened.





It sort of begs the question, why would banks, recently, start lending to people that shouldn't qualify for loans? This has never happened before. Growing up, my parents told me that I would have to save 20% before I could afford to apply for a mortgage. It made sense and if I should try to do otherwise, the banks would rightfully laugh in my face. I mean, why would a bank lend to someone who couldn't or wouldn't be able to pay them back?

The problem comes from the federal government (of course). During the Carter administration "the Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area and prohibits them from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses."* Further, under the Clinton administration, in 1995, his "...strategy to "deal with the problems of the inner city and distressed rural communities"** resulted in the regulatory changes of 1995 and the setup for the boom and bust.

This should serve as a reminder that there are unintended consequences to many laws. Often, the best thing to do is nothing and let the people and the economy fix themselves.

* http://money.gather.com/viewArticle.action?articleId=281474977461051
 ** http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Regulatory_changes_1995