Yesterday, April 18, 2014, Bill Clinton's Presidential Library released documents concerning how what was purported to reinvest in communities showed how the federal government encouraged banks to lend money to Americans would normally not finance. The Financial Services Modernization Act & Community Reinvestment Act along with other documents released yesterday reveal a plan by Bill Clinton and other officials to expand the program for the federal government to buy questionable loans made by banks simply so more Americans could own homes - regardless of their creditworthiness or proof of their ability to repay the loans.
In discussions concerning the Community Reinvestment Act (CRA), it was revealed, "Evidence suggests that public disclosure of CRA ratings, to with the changes made by the regulators under your [President Clinton] leadership, have significantly contributed to improved performance by financial institutions in meeting the needs of low and moderate income communities and minorities. Since 1993, the number of home mortgage loans to African Americans by 58%, to Hispanics by 62%, and to low and moderate income borrowers by 38 well above the overall market increase. Since 1992, nonprofit community organizations estimate that the private sector has pledged over $1 trillion in loans and investment under CRA."
Instead of letting the free market work, government intervention had a strong hand in what has become known as the Great Recession - the worst financial crisis since the Great Depression. Both situations have their roots with the government attempting to manipulate the markets rather than allowing them to operate on their own. Both situations also were made worse and continued longer than they needed to be because the government would refuse to allow the free market to work.
It was through the encouragement from the federal government with the expansion of the FHA, Fannie Mae and Freddie Mac that allowed banks to off load loans they would not normally make. It was through government forced affordable housing regulations that Fannie Mae and Freddie Mac required them to purchase mortgages from banks which could be referred to as questionable - which was required to be 30% of all mortgages made. This number eventually escalated to 55% during the Bush-era which lit the fuse on the bomb which had already been set. Had government regulations not forced banks into making the loans, it would have resulted in less people owning homes, however it likely would have prevented the eventual use of homes as piggy banks with the frenzied use of home equity loans. It would have likely also stunted the sub-prime loan market and thereby the repackaging of those loans into derivatives by Wall Street.
In the government's quest for all Americans to own their own homes, it fostered in the no down payment style loans as well as the 'no doc' loans, which if kept to a small percentage of loans made is manageable, however the number scaled to unsafe levels creating a house of cards which would eventually collapse. Whereas there may have been some bad actors on Wall Street and the banking industry, none of it could have happened without the encouragement or force by the federal government.