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Unfairness This Is A Short Review Of Research Paper

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Unfairness This is a short review of literature that discusses the subprime mortgage crisis which many believe had a significant impact on the financial crisis that began in 2008. The discussion will range from how the crisis started and what the banks knew might happen because of faulty legislation and greedy lenders prior to the crash, to how the crash has impacted families and how some entities have tried to mitigate it with little success.

The financial crisis that began in earnest in 2008 followed many decisions which, in retrospect, were not wise. Legislation can be traced back to the 1960s that began allowing lending companies (banks) and hedge funds to buy large numbers of mortgages and leverage them as if they were real assets (Block-Lieb & Janger, 2011). Other laws followed such as the Community Reinvestment Act first passed in 1977 and amended with much stronger language in 1995 pushed lenders to make loans to people who could not easily afford them (Canner & Passmore, 1995). The result of these laws was that lenders were tasked with promoting low initial cost loans (ARMs) that were often defaulted on by borrowers after the initial low payment period ended (Ruzich & Grant, 2009). Another cause of the financial collapse of 2008/2009 was the fact that speculators bought up large amounts of loans which sent prices skyrocketing. Unfortunately the crisis has affected people unequally, and has helped to foster financial problems worldwide which were further exacerbated by poor socialist practices in other countries. A great deal of research has been conducted since the initial phases of the crisis, but looking at literature from before during and after the crisis is the most accurate method for determining what actually happened and why.

The Community Reinvestment Act (CRA)

Legislators often act in what they believe is the best interests of their constituents and people across the country; presumably, that is what happened when the CRA was

Signed into law by Jimmy Carter in 1977. The law was amended several times over the years, but in 1995 it evolved into a mandate for lenders (Canner & Passmore, 1995). At the time, analysts believed that this amendment was positive, and it is difficult to find research literature that refutes that view. Proponents of the law believed that "lenders overlook[ed] safe and...

The law makers responsible for this and further legislation of the kind were interested in ensuring that people, despite where they lived or what ethnicity they were received the same opportunities as every other individual. This was an honorable undertaking that was undermined by predatory lending practices and the irresponsibility of people who would not have been able to afford loans under traditional methods of lending (Miller, 2009). Unfortunately it led to more complications that most likely exacerbated the housing loan crisis.
Fannie and Freddie

In the United States, most institutions are not protected by the government and treated, essentially as government owned entities. The United States government, due to the fact that the U.S. has been set up as a free market economy, does not operate businesses. However, there are businesses, because of the benefit that they will supply to the populace, that have a special relationship with the United States government. These government-sponsored enterprises, or GSEs, are not owned by the government, but they are sponsored in such a way that they essentially become a part of the government in many people's eyes (Peterson, 2005). The most prominent and well-known of these is the United States Post Office which has been operating in this fashion since the organization of the U.S.; another, Amtrak, receives special subsidies that artificially allow it to maintain operations. However, two GSEs that provide home loans are Fannie Mae and Freddie Mac (Peterson, 2005).

These companies came under very close scrutiny following the housing crisis because they owned more loans, by far, than any other lender (Miller, 2009). These two companies not only guaranteed and made loans with different banks as their operative partner, they guaranteed a large amount of loans and speculated on funds that carried even greater amounts (Block-Lieb & Janger, 2011). These practices were recognized as early as 2004 when it was discovered that Fannie Mae had misrepresented earnings. According to Peterson (2005),

"an accounting scandal that forced the company to restate its earnings for the past four years, eras[ed] $9 billion in previously reported profit. The unexpected hit leaves Fannie with…

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References

Block-Lieb, S., & Janger, E.J. (2011). Reforming regulation in the markets for home loans. Fordham Urban Law Journal, 38(3), 681-699.

Canner, G.B., & Passmore, W. (1995). Home purchase lending in low-income neighborhoods and to low-income borrowers. Federal Reserve Bulletin, 81(2), 71-78.

Miller, M. (2009). Stemming the subprime crisis: The North Carolina foreclosure prevention project. Stanford Law & Policy Review, 20(1), 213-231.

Peterson, J.R. (2005). Fannie fallout: The ongoing scrutiny of Fannie Mae will affect you. The effects could be a plus for some mortgage lenders, but hedging will require more careful attention. ABA Banking Journal, 97(4), 34-53.
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