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The History of the Subprime Crisis began with Jimmy Carter and a Cool Widget

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May 07, 2009 – Comments (3)

From the Center for Public Integrity; 

The Depository Institutions Deregulation and Monetary Control Act of 1980 was enthusiastically endorsed by then-President Jimmy Carter. The act, passed in a time of high inflation and declining savings, made significant changes to the financial system and included a clause effectively barring states from limiting mortgage interest rates. As the subprime lending industry took off 20 years later, the act allowed lenders to charge 20, 40, even 60 percent interest on mortgages.

The other key piece of legislation was the Alternative Mortgage Transaction Parity Act, passed in 1982. The act made it possible for lenders to offer exotic mortgages, rather than the plain-vanilla 30-year, fixed-rate loan that had been offered for decades.

With the passage of the Parity Act, a slew of new mortgage products was born: adjustable-rate mortgages, mortgages with balloon payments, interest-only mortgages, and so-called option-ARM loans. In the midst of a severe recession, these new financial products were seen as innovative ways to get loans to borrowers who might not qualify for a traditional mortgage. Two decades later, in a time of free-flowing credit, the alternative mortgages became all too common.

The Parity Act also allowed federal regulators at the Office of Thrift Supervision and the Office of the Comptroller of the Currency to set guidelines for the lenders they regulate, preempting state banking laws. In the late 1990s, lenders began using the law to circumvent state bans on mortgage prepayment penalties and other consumer protections.

There is more...

The widget link.

Note to President Obama: There might be some names in this report that you could reach out to as you seek to regulate the Financial Industry, that are qualified, and are not the Financial Industry.

3 Comments – Post Your Own

#1) On May 08, 2009 at 1:10 AM, Option1307 (29.90) wrote:

Thanks for the link Devoish, good article...

I do agree for the most part with the general thoughts discussed, mainly that there was predatory lending practices going on and these certainly didn't help the situation. However, I feel the article tries to palce all of the blame on the shoulders of predatory lending, while certainly a large share of the blame deserves to go onto the backs of the idiotic homebuyers who willingly and knowingly took on tooooooo much mortage. They people who signed up for these loans need to be held accountable as well as the shameless predatory lending that indeed took place.

Comments such as,

William Brennan, who is still at the Atlanta Legal Aid Society, said the Fed’s failure to act more forcefully on HOEPA was a key missed opportunity. “That bill had potential to put a stop to all this,” he said. “That one bill in my opinion would have stopped this subprime mortgage meltdown crisis.

and,

Had the legislative efforts to curb abusive practices in the high-cost lending market succeeded — at the state or federal level — those loans might never have been made. But the proposals didn’t succeed, and many of the troubling mortgage provisions that contributed to the foreclosures are still legal today

sort of rub me the wrong way. While I agree that steps should have been taken to eliminate predatory lending policies, I feel it is pretty ridiculous and absurd to claim that the passage of one bill could have "stopped" the subprime mess we are currently in. Furthermore, it is a rather bold statement to say that the economic meltdown can be attributed mainly to the subprime crisis. It certainly played a lage par, but it wa by no means the only player. There is plenty of blame to go around, to both political parties and the average American consumer who fell into these horrible "cheap" mortage traps.

Thank again for the article.

 

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#2) On May 08, 2009 at 2:29 AM, Buckaneer (< 20) wrote:

Oh drop the partisan rhetoric. It's obvious from your subject heading (more like a headline) that you are biased. God Bless.

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#3) On May 08, 2009 at 7:42 AM, devoish (99.07) wrote:

Option,

Mostly, I linked to the article because it offered information about legislation and how it affected the crisis, that I was not familiar with. I was dissapointed by its not calling out Liar loans (alt-a) by name, because they were the ones that failed first. The methodology information does connect them to 2005-7 loans but IMHO does reference them, and their role clearly enough

Buckaneer, Thanks, you have no idea how complimentary I found a statement suggesting I am partisan against Democrats.

Along the way to "financial meltdown/armegeddon there have been many legislative steps, including the one signed and endorsed by President Carter.  All of them have a weakening of lending regulations in common. This one is a little special because by removing regulatory power from the States, it gave the investment banks one target to attack, not fifty.

It suggests to me that Federal Regulations, of any industry, should be a minimum and every State should be allowed/encouraged to set stricter regulations if the States residents see fit. Private enterprise should be allowed to choose not to compete in States with regulations they consider unfair.

The risks to States of losing business to a neighboring State is real and an excellent check/balance on over-regulation.

It is a difficult balancing act for legislatures at any level, and why politicians should be given much more credit than they are, as compared to corporate executives who have the relatively simple task of just earning income.

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