By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies--all under congressional and HUD pressure--followed suit. This continued through the 1990s and 2000s until the housing bubble--created by all this government-backed spending--collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.
http://www.theatlantic.com/business/archive/2011/12/hey-barney-frank-the-government-did-cause-the-housing-crisis/249903/
Yep. There is no discounting the role of gov’t in creating demand for these loans. And at the same time you had shadow banks farming the subprime sector in their own hunt for yield when they were getting essentially no return on their usual investments. None of them appreciated the amount of risk that they were involved in.
No doubt whatsover that the CRA had an impact. But I can't find anything that validates that Fannie/Freddie was the major player in 2003-2008, and in fact were making changes to allow them to get into the game because they were losing market share rapidly. Also the losses were concentrated in 3 areas - California, Florida, and Las Vegas (and Detroit, although much lower $ amt). If it was just the CRA, the losses would have been catastrophic everywhere - including where I was living with 35% minority, but our prices only dropped about 5%. Furthermore, I knew LOTS of people who were middle class white Americans with Alt-A loans. In 2004-07, getting a mortgage loan was a piece of cake for everyone. They didn't call them liar loans for nothing. Also, everyone was using HELOCs as a piggy bank and refinancing as well to cash out, which is also not a CRA issue. [and yes, CRA should be repealed]
Private sector loans, not Fannie or Freddie, triggered crisis
Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006. Federal Reserve Board data show that:
More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law
Lastly, I'd note that banks and financial institutions could have gone the more conservative route - which is to require tougher standards on prime loans rather than relax or eliminate standards on subprime and alt-a loans. And with property leverage, it wouldn't have been a big deal anyway, but when you allow financial institutions to lever up close to 50:1, it only takes a 2% deterioration in the value to blow it up. That is why I have a major issue with fractional reserve lending.