by Ofuoma Odje

Created on: April 28, 2009

Government Role in the subprime Financial Collapse

There are at least 2 facets of Government responsibility in the current subprime financial collapse.

The first is was the aggressive promotion of home ownership by the Bush and Clinton Administrations. The New York Times front-page story on Sunday, December 21, 2008 reported that former President Bush excessively promoted growth in home ownership without adequately enforcing oversight over banks and other mortgage lenders that made the bad loans. This is now what has resulted in a banking system flooded with bad mortgages whose losses continue to drag down the banks and the economy.

The second was government policy over the last 2 decades. The Community Reinvestment Act (CRA) and the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac are both Governmental vehicles that were used to distort the housing credit system, crash the housing market and ultimately the broader economy.

The New York Times edition of December 21, 2008 reported on home ownership in the United States since 1990. In 1993 home ownership was at 63 percent, and by the end of the Clinton administration it was 68 percent. Under the Bush administration, it grew by about1 percent to 69 percent.

The Times also reported that in 1999 the Clinton administration put pressure on Fannie Mae and Freddie Mac to increase lending to minorities and low-income home buyers.

This was of course a high risk policy that is partly responsible for today's financial crisis because it opened the door to subprime predatory lending and other irresponsible borrowing and lending practices that abused the mortgage markets.

The Clinton and Bush administrations' aggressive promotion of home ownership by reduced lending standards led to the housing bubble and burst.

The CRA was originally enacted in 1977 under President Carter. It mandated regulators to consider whether an insured bank was serving the needs of the entire community. The Act was set in place to encourage banks to halt the practice of lending discrimination.

The Clinton Treasury Department changed the Community Reinvestment Act in 1995. The change required banks that wanted outstanding CRA ratings to demonstrate statistically that they were lending in poor neighborhoods and to lower-income households.

Some economists say this amendment to the CRA raised the amount of home loans to unqualified low-income borrowers and also allowed for the first time the securitization of CRA-regulated loans containing

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