Remember, the requirement wasn’t that minority borrowers got loans, just that they got them at the same level as non-minority ones. If banks wrote crap loans to everyone, this might actually become true. However, CRA passed over a decade before the crisis. I don’t know how well the banks did - perhaps they really did clean up their act, and the subprime problem started when the market for mortgages grew, and also because low interest rates reduced the profitability of prime mortgages.
BTW, the lenders did not really clean up their act. In New York minority districts got a lot more subprimes written than non-minority neighborhoods with similar income levels.
If we allowed others to buy insurance on their house, and their policies say they get Y, then they would pay out People * Y. But that isn’t the problem. Insurance companies can’t have reserves for the worst imaginable catastrophe, just the most likely ones. If you let everyone buy insurance on any house, you are increasing the cost of various scenarios. If there are H houses and P people, in the current system worst case - where everything burns - is H * Y. In the other case it is H * P * Y. We really don’t do this because while it is possible for a person to burn down his own house for insurance, there are negatives and it is relatively easy to catch them, while if everyone in town has a financial incentive for burning down someone else’s house, arson will increase.
Before the crash I believe there was more insurance outstanding on bank debt than there was money in the world. There was no central clearing house, so no one could raise a red flag about it.
I think the idea was that the deadbeats could afford the low teaser payments, and refinance into other low teaser payments before they rose to the point where they couldn’t afford them. People are also hopeful that they’d get raises and stuff. It is usually good policy to buy as much house as you can afford, because I can testify that after ten years your payments look a lot better thanks to inflation.
But here is the example I was thinking of using. Say you have a bunch of relatives of various income levels. Your deadbeat relatives - actually those with crap jobs - know that they will have to pay more for a loan. Say you can give loans at 3, 5 and 7% depending on the income level. Now, say you have found some suckers to buy loans from you. Since the 7% loans make them more money, they want them. Are they safe? No problem, you say, these are all my relatives. In any case I’ll mix in some safer 3% loans too. Sure one of the 7% guys may lose his job and default, but that will be a tiny portion of the loans package. There is nothing to worry about.
All is fine, except that the low income relatives work on the line for a factory, which suddenly closes. Lots of them default, and the value of the loan package suddenly goes south. The people with the loans don’t get most of their income any more, reduce their expenditures, and stop buying. Now the 5% people, who are shopkeepers, take an income hit and start to default. And so it snowballs. A lot of the people getting foreclosed on now are not deadbeats, but people who got their mortgages legitimately and now can’t pay them due to being laid off from the crash.
In any case, the mortgage companies got more money the worse the loans were - and the higher the interest rates they received - and the salesmen got bigger commissions selling loans to deadbeats. There was little downside so long as the market stayed strong, the number of defaults was low, and the paper could be shoveled into the hands of the investors. They made more money selling to deadbeats than to those with high credit scores, and send the risk elsewhere.
If interest rates are higher, the cost of owning a home increases, there are fewer people who can afford to buy a given home, and with fewer buyers prices decline.
Yes, after a recession it is standard policy to lower interest rates to increase the money supply and make it cheaper for consumers and businesses to buy more. That is from Friedman, but even pure Keynsians agree these days. The problem was that Greenspan did not increase interest rates as the economy recovered, possibly because we were heading into the 2004 election and a slowdown would be seen as a bad thing for Bush. I’m not saying Bush (or someone who understood this) told Greenspan what to do. Not necessary, any more than Romney has to tell his buddies what to do with their Super PAC money.
) is how much risk are you willing to accept. If the bonds were rates low, higher risk in line with their return, their market would be reduced. The scam came from the banks figuring out how to mix this stuff with other bonds to get AAA ratings - high return, low risk, and thus a huge market. Like suckers everywhere, buyers were clamoring to be taken. So you see, the more deadbeats, the more high interest loans, the more sales, the more profit. That is why the mortgage brokers didn’t reluctantly sell to deadbeats, they recruited deadbeats.