CRA, Fannie Mae and Freddie Mac

CRA, Fannie Mae and Freddie Mac

The CRA by itself would never have produced the Financial Disaster of 2008, but when the risky CRA loans were guaranteed by Fannie Mae and Freddie Mac, the risky loans became "AAA" rated because they were backed by the federal government.

This linking of CRA, Fannie Mae and Freddie Mac occurred when the CRA was revised in 1995 under the Clinton Administration.

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2/23/09
Community Reinvestment Act
From Wikipedia, the free encyclopedia

In October 1997, First Union Capital Markets and Bear, Stearns & Co launched the first publicly available securitization of Community Reinvestment Act loans, issuing $384.6 million of such securities. The securities were guaranteed by Freddie Mac and had an implied "AAA" rating.[29][22] The public offering was several times oversubscribed, predominantly by money managers and insurance companies who were not buying them for CRA credit.[30][edit] Legislative changes 1999.

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Please note the phrase "implied "AAA" rating".

The reason the housing bubble lasted so long and the dangers not fully recognized was "rising home values". I remember a phrase called "flipping". Flipping meant buying a rundown home, throwing some paint on it and selling it for a very large profit. It was all possible because home values were rising and the Fannie and Freddie were guaranteeing the loans. Even if the people buying the home defaulted, another coat of paint was applied and sold again with a big profit.

Everyone was fat, dumb and happy, until the housing market was saturated with homes. When the defaulted homes could not be resold, the people turned to Fannie and Freddie to pay, but Fannie and Freddie did not have the money to pay.

Fannie and Freddie are now in default on there loan guarantees.

The root cause of the Financial Disaster of 2008 was the CRA, a piece of socialistic legislation passed by the democrats in 1977 in the Carter Administration and amended by democrats in 1995 in the Clinton Administration.

The idea for a solution being floated is to wipe out all the sub prime debt and start all over again. This means trillions of dollars lost by people who thought they were buying an investment that had a "AAA" rating. It also means violating the rule of "Moral Hazard", because evil activity is being rewarded.