Just over a decade following the real estate housing bubble bust across the nation, the market is experiencing another boom, as the folly of Wall Street and Washington never changes, it just shifts in appearance like a chameleon. Case in point is the subprime loan now called a “non-prime,” with soaring demand.
The current run-up in valuations is similar to the previous bubble in many respects, fueled by wayward federal housing policy, regulatory negligence, easy monetary policy, and household debt binging. The real culprit of the Great Recession was the derivatives market. I fear the downside of the current unaffordable run-up will be more profound than the previous, no matter how much of a role the current derivatives market may partake. Consider reading my recent article, “Debt-Slaving U.S.A. Likely to be the Next ‘Big Short’ Opportunity,” for some insight on a potential issue brewing within the securitization of mortgages in the non-banking industry.
Forget About Housing, The Real Cause Of The Crisis Was OTC Derivatives – Business Insider, May 2010
To be fair, congressional mandates enshrined within the Community Reinvestment Act (CRA) do contribute to the non-bank and TBTF banking industry financialization of unsustainable price moves encouraged by monetary policy, which then accelerate localized volatility when the housing supply is considered constrained for any number of reasons other than fair market value. The CRA is not solely responsible by a long shot because only a small percentage of those loans went bad during the previous bust. The economic turmoil extended across all mortgage types and affected borrowers across all income stratifications, but the mainstream media’s scapegoat for Wall Street’s carelessness and Washington’s blind eyes focused on the word subprime, and the peasantry be damned.
The Community Reinvestment Act “is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulation BB (12 CFR 228). The regulation was substantially revised in May 1995 and updated again in August 2005.” – Federal Reserve
Community Reinvestment Act – Did This 1977 Law Create the 2008 Financial Crisis? – The Balance, Jan. 2018
Read the full article by TraderStef at CrushTheStreet – originally published on Apr. 19, 2018.