The government forced banks to make these type of mortgages. Look up redlining. This is a terrible practice if it is truly the motivation behind business practices. The government ran bogus studies and basically labeled the financial industry as using racist redlining tactics and threatened big fines if loans were not made.
So, why did they make the loans? Government regulation.
Some of the very people who are now advocating new regulations were the same ones that forced through the regulations over a decade ago that caused the problems that we are facing today.
This all started back in 1992, when a Boston Federal Reserve study claimed to find evidence of racial discrimination. The Fed later used the study to produce a manual for mortgage lenders that: “discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower–income minority applicants.”
So what is on the list of Fed’s “outdated criteria”? Such “discriminatory” factors as the borrower’s credit history, income verification, and the size of the mortgage payment relative to income.
But it turns out that the original study was mistaken.
Economists discovered that there were errors in the data the study used. Some minorities were listed as having wealth up to hundreds of times greater than they actually had, making it look like wealthy minorities were being turned down for loans. When the data errors were corrected minorities with the same financial background as whites had been at no disadvantage in getting mortgages.
Read this article. Watch this video.
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