Housing bubble root causes

Scott at Powerline describes a book by Peter Schweizer: Secrets of the financial crisis titled Architects of Ruin. It addresses what happens when a big money pool seeking investment and good intentions intersect.

The idea sounds appealing enough: encourage homeownership in order to reduce crime, unemployment, and broken families. But activities pushed their agenda by demanding that lending institutions loosen their lending standards and look the other way when lending to people with bad credit. Activist groups such as ACORN, the Congressional Black Caucus, and the Service Employees International Union pushed banks to use “less traditional income sources such as food stamps, unemployment, part-time jobs, non-court ordered child support and foster care payments” while considering a mortgage application.

Liberal activists also pushed banks to agree “to lower down payment and closing costs” for lenders. What this meant is that the borrower would have little or no money in the game–no incentive to hang on if times got tough. The activists also pushed banks to allow people to take out larger loans on lower incomes, upending the traditional notion that people should only be allowed to have a mortgage payment account for, say, 28% of their income. Activists argued that this was all necessary in the name of social justice.

The real culprits here are the social activists and their allies in Washington who pushed an activist agenda. They helped to propel us into the mortgage crisis we face today.

The key upon which this thesis rests is the finding common to several studies that the major impact of the financial crisis has been in poor and minority neighborhoods where this ‘good intentions’ activism has been most at play. It is another topic as to why there has been much publicity about “all the talk of unsold condos in South Florida and McMansions sitting empty in California” and house flipping for investment returns.

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