Over the past few months the American public has been inundated with information on the current financial crisis, which will surely burden global economies for years to come. Certainly, there are a multiplicity of factors that contributed to the economic downturn that we’re currently experiencing; one of these factors is the issuance of sub-prime mortgages. However, there is an aspect of the sub-prime crisis that has been discussed by numerous economists, but has not garnered much media attention. This aspect, is the attempt of the government (including both Republicans and Democrats) to alleviate racial and socio-economic discrimination by mandating that lending firms give out loans to sub-prime borrowers.

One often unmentioned way that government regulation contributed to the sub-prime crisis is the enactment of the Community Reinvestment Act (CRA) of 1977. According to Russell Roberts, a professor of economics at George Mason University, in 1995 the CRA was strengthened, leading to a massive 80% increase in the number of loans given out to lower income households. In the last few years of the 20th century, companies like Bear Stearns and Countrywide lent billions of dollars in CRA loans to sub-prime borrowers. Soon, these companies were securitizing these mortgages, packaging them into collateralized debt obligations (CDOs), in order to further capitalize on the government’s mandate – and increasing demand for sub-prime mortgages. Fannie Mae and Freddie Mac backed these loans, being pushed to do so by the Department of Housing and Urban Development, which in 1996 mandated that over 40% of their mortgage guarantees had to be issued to people or households who made below the median income in their geographical area. Eventually this mandate increased to above 50%. The Community Reinvestment Act, along with the Department of Housing and Urban Development’s mandate, forced lending firms to make loans that many knew might never be repaid. Coinciding with these regulations was the cultural push for higher home ownership percentages, i.e. demand for houses was increasing as well.

Of course, as demand for home-ownership increased, so did the number of sub-prime borrowers who sought mortgages to afford the houses that they felt society demanded they have. With the strengthening of the Community Reinvestment Act came a new push by the government to have lending firms issue sub-prime mortgages to make sure that all people, despite their income, could afford homes. Mandates by the Department of Housing and Urban Development forced Fannie Mae and Freddie Mac to finance these sub-prime mortgages, which the CRA had made possible. Bear Stearns, Countrywide, Fannie Mae and Freddie Mac are all familiar household names today. Many will blame the greed of these entities for the issuance of sub-prime mortgages and their subsequent securitization. Undoubtedly, greed played a huge part. However, beyond human avarice, government regulation also played a huge role in causing the sub-prime mortgage meltdown.

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