Eamon R. Moran has written a comprehensive and well-referenced, 97-page article for the University of North Carolina School of Law’s North Carolina Banking Institute Journal about the causes of the crisis.  In Part I of this blog I focused on the role of the Community Reinvestment Act (CRA) of 1977.  This entry will focus on other regulations and acts that contributed to the mortgage meltdown.

Congress enacted many measures between 1980 and 2003 to make home ownership more attainable for moderate and low income borrowers.  Some of those measures included:

• An act that preempted state ceilings on home mortgage loans and encouraged subprime loans
• Another act that allowed adjustable rate mortgages, the loan of choice for subprime loans
• Tax law was revised to made interest on home loans the only consumer loan that is tax deductible
• HUD changed regulations so that borrowers no longer had to prove their incomes would remain stable
• CRA was strengthened to impose fines and business penalties on banks that refused home loans to low income borrowers
• Tax law was revised again to exempt most home sales from capital gains taxes

The outcome of these actions was that a borrower in California with an annual income of $14,000 was approved for a $720,000 home loan.  An investor in Minneapolis borrowed $2.4 million to buy ten properties, and all would go into foreclosure.  Financial institutions began bundling loans into complex packages, the rating agencies gave the packages AAA ratings, and the packages were sold around the world.  Millions of other examples such as these led to the eventual collapse of home values and created the crisis.

Congress leapt into action and passed a massive financial regulation while studiously ignoring the history of government’s role in creating the crisis.  The new laws will undoubtedly impede an economic recovery, and Congress will be given the opportunity to pass even more laws.