Narrate the effects Establish a Timeline so as to get remote – to – immediate causality Establish Cause-Effect Sequence the causes and effects --Necessary Cause --Sufficient Cause --Remote Cause(s) --Precipitating Cause(s) --Proximate Cause(s) --Reciprocal Cause(s) write about the issue below and, without assigning blame, assess a chain of causes. BEGINNINGS OF THE PROBLEM (make bad loans or else…..) 1977 Community Reinvestment Act Source: http://en.wikipedia.org/wiki/Community_Reinvestment_Act The Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. [Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining. The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 80.) Problems & Solutions: Same Source: 1999 In the fall of 1999, Senators Christopher Dodd and Charles E. Schumer prevented another impasse by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the Federal Deposit Insurance Act (12 U.S.C. ch.16) to allow banks to merge or expand into other types of financial institutions. The new Gramm-Leach-Bliley Act`s FDIC related provisions, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect. …On signing the Gramm-Leach-Bliley Act, President Clinton said that it, "establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act". CRA regulations give community groups the right to comment on or protest about banks` non-compliance with CRA. Such comments could help or hinder banks` planned expansions. Groups at first only slowly took advantage of these rights. Regulatory changes during President Bill Clinton`s administration allowed these community groups better access to CRA information and enabled them to increase their activities. In an article for the New York Post, economist Stan Liebowitz wrote that community activists intervention at yearly bank reviews resulted in their obtaining large amounts of money from banks, since poor reviews could lead to frustrated merger plans and even legal challenges by the Justice Department[ Michelle Minton noted that Chase Manhattan and J.P. Morgan donated hundreds of thousands of dollars to ACORN at about the same time they were to apply for permission to merge and needed to comply with CRA regulations. According to the New York Times, some of these housing advocacy groups provided early warnings about the potential impact of lowered credit standards and the resulting unsupportable increase in real estate values they were causing in low to moderate income communities. Ballooning mortgages on rental properties threatened to require large rent increases from low and moderate income tenants that could ill afford them. Housing advocacy groups were also leaders in the fight against subprime lending in low- and moderate-income communities, "In fact, community advocates had been telling the Federal Reserve about the dangers of subprime lending since the 1990s", according to Inner City Press. "For example, Bronx-based Fair Finance Watch commented to the Federal Reserve about the practices of now-defunct non-bank subprime lender New Century, when U.S. Bancorp bought warrants for 24% of New Century`s stock. The Fed, rather than take any action on New Century, merely waited until U.S. Bancorp sold off some of the warrants, and then said the issue was moot." However, subprime loans were so profitable, that they were aggressively marketed in low-and moderate-income communities, even over the objections and warnings of housing advocacy groups like ACORN.[102 The ratio of lower-quality subprime mortgages originated rose from the historical 8% or lower range to approximately 20% from 2004-2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products. This paragraph Source: http://en.wikipedia.org/wiki/Subprime_mortgage_crisis THE “SECONDARY MARKETS” and “SHADOW BANKING”: HERE IS WHEN “THE BALLOON” STARTED & “Wall Street” (hedge funds, etc) got involved In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied "AAA" rating. The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit. In October 2000, to expand the secondary market for affordable community-based mortgages and to increase liquidity for CRA-eligible loans, Fannie Mae committed to purchase and securitize $2 billion of "MyCommunityMortgage" loans. In November 2000 Fannie Mae announced that the Department of Housing and Urban Development ("HUD") would soon require it to dedicate 50% of its business to low- and moderate-income families." It stated that since 1997 Fannie Mae had done nearly $7 billion in CRA business with depository institutions, but its goal was $20 billion. In 2001 Fannie Mae announced that it had acquired $10 billion in specially-targeted Community Reinvestment Act (CRA) loans more than one and a half years ahead of schedule, and announced its goal to finance over $500 billion in CRA business by 2010, about one third of loans anticipated to be financed by Fannie Mae during that period. The ratio of lower-quality subprime mortgages originated rose from the historical 8% or lower range to approximately 20% from 2004-2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products. This paragraph Source: http://en.wikipedia.org/wiki/Subprime_mortgage_crisis SUMMARY: President Jimmy Carter sponsored the well-meaning Community Reinvestment Act (CRA) in 1977. It required banks and savings and loans to offer credit to “underserved populations” so they could obtain credit, including home ownership In 1991, the Home Mortgage Disclosure Act required lenders to report rejection rates by race. Lenders were informed that their loans would be examined for evidence of bias. Violators would face fines -- get this -- as high as $500,000. The Democratic Congress in 1992 passed the Federal Housing Enterprise Act, providing HUD the hammer to carry out Congressional intent to “meet the mortgage credit needs of all potential home buyers, including those with low and moderate incomes.” The 1992 act was the fuse that lit the largest housing blow-up the U.S. has ever seen, because one provision required that mortgage giants Fannie and Freddie “should accept down payments of 5 percent or less, ignore impaired credit if the blot was over one year old, and otherwise loosen (their) lending guidelines.” The Federal Reserve had a hand in creating the problem: “An influential 1992 report from the Boston Fed recommended: ‘Policies regarding applicants with no credit history or problem credit history should not be seen as a negative factor`”. Food stamps and welfare checks were allowed to be counted as “income” on loan applications. Racial quotas and penalties were imposed on lenders with unfavorable “CRA ratings”. “Banks that failed to make enough of these loans were often held hostage by activists when they sought some regulatory approval.” Next, President Bill Clinton re-wrote the CRA Act in 1994, using his HUD Secretary Henry Cisneros to “put it on steroids”, and juice it into overdrive. It “required the banks to lend to people who were poor credit risks, in the name of ‘housing rights.`” This precipitated a huge surge in mortgage lending to unqualified buyers because Fannie Mae was under unrelenting pressure from Clinton`s Administration “to expand mortgage loans among low and moderate income people.” The CRA was a club “used to force banks to subsidize poor communities with close to $1 trillion in high-risk loans…” If she didn`t like the reports on who was getting loans and who wasn`t, then Attorney General Janet Reno bullied the banks with quotas and faulty statistics to literally extort millions of dollars from banks by alleging racial discrimination if they didn`t play along. This intimidated many banks to agree to pay cash settlements so they could avoid trials and negative publicity. It turned into a free-for-all of banks approving loans for people who clearly couldn`t afford to repay them. By 1996, 42 percent of Fannie and Freddie`s mortgage financing went to borrowers with below-median income. This target increased in 2000 to 50 percent, and was 52 percent by 2005. This series of political events, this flood of risky loans that were distributed around the globe by Congressional creatures Fannie and Freddie, was the root cause that inflated the credit bubble to the bursting point and brought our financial system near the brink of destruction. THIS SOURCE IS BIASED AGAINST WHAT HAPPENED, but it traces the problem in short form. The article doesn`t allude to another political ploy: use of Fannie & Freddie as PACs for political campaigns, but that`s another topic. In a wonderful quirk of history, the U.S. is broke (borrowing 40 cents of every dollar it issues, mainly from China) at the same time that socialist nations in Europe (not Germany, however) run out of cash also.