I've been reading, which raises questions, which makes me search for answers, which means I have to do more reading.  Information surfing...  And, unlike surf surfing, with information surfing, one doesn't know where they will end up.  If you grab a board at the beach, you are supposed to end up at the sand. 

Let me tell you where I started...

I was looking at the beginnings of the sub-prime mortgage market, and how that situation came to be... and what I found was this. 

Banking in the 1970s, when CRA was passed, was a highly regulated industry in which small, local savings banks, rather than commercial banks, provided most home mortgages. Regulation prohibited savings banks from branching across state lines and sometimes even limited branching within states, inhibiting competition, the most powerful defense against discrimination. With such regulatory protection, savings banks could make a comfortable profit without doing the hard work of finding out which inner-city neighborhoods and borrowers were good risks and which were not. Savings banks also had reason to worry that if they charged inner-city borrowers a higher rate of interest to balance the additional risk of such lending, they might jeopardize the protection from competition they enjoyed.

Of course, that just begged me to learn more about the CRA.  And the CRA is the Community Reinvestment Act.  Originally passed under Cart in 1977, it basically allowed for banks to be "evaluated to determine if it has met the credit needs of its entire community" and then the results of those evaluations could be used to determine if a bank could expand, merge, or alter their business according to regulators. It was largely ignored and unenforced.

It was updated in 1994 under Clinton, with changes taking place January 31st, 1995 (that date is actually important).  Here is the Wikipedia entry regarding the Clinton era changes...

In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

In 2003, the Bush Administration attempted to revisit the CRA, as provided by the changes under Clinton leadership (and during the pre-Republican Revolution, Democrat-controlled Congress).  Here is a story from the New York Times from that era.  At that time, the President's plan would have tightened regulation on Fannie and Freddie... but those were defeated.  

The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session.

After the hearing, Representative Michael G. Oxley, chairman of the Financial Services Committee, and Senator Richard Shelby, chairman of the Senate Banking Committee, announced their intention to draft legislation based on the administration's proposal. Industry executives said Congress could complete action on legislation before leaving for recess in the fall.

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.

''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.

Of course, I couldn't let it end there...  Referencing the first article, it was noted that the CRA didn't really start to affect the mortgage world until the Clinton Administration.  When it was done, "community groups" could petition the banking regulators to hold up banks mergers, aquisitions or expansions for "low CRA scores."  And that is when things started to get ugly...

part 2...