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Roots of the housing collapse

GFC Lessons Not Learnt

In reality, the real causes of the financial crisis lie deeper; to problems going back a century. In the early 20th century, the American government faced an alarming problem. The Russian Revolution of 1917 terrified government officials. They believed that to deter the rise of communism, more Americans needed to become invested in the system of private property: the best way to make the average American a good capitalist was to make him a homeowner.

The federal government thus began insuring bank mortgage lending, thereby expanding finance available for middle class consumers. But there was a catch: any new housing must be racially segregated to gain federal insurance. No insurance was to be extended to African-American purchasers or to white purchasers moving into African-American neighbourhoods. This practice, known as “redlining” of neighbourhoods, largely provided home ownership for whites while denying it for African-Americans.

Unable to own their own home and forced into poor quality neighbourhoods, African-Americans missed out on generations of wealth-building opportunities. As house prices rose over time, the gap between minority and white household wealth grew greater. So by the time President Bill Clinton was inaugurated in 1993, he faced a familiar problem—too few low-income and minority Americans owned their home. Clinton was under enormous pressure from housing activists to radically expand homeownership. Activist groups were particularly critical of banks’ strict underwriting standards for home loans, such as requiring high credit scores and solid downpayments. They claimed these higher standards disproportionately hurt low-income earners and minorities. Their answer was to wield the power of the federal government to force the mortgage market to loosen its underwriting standards, so that more and more marginal borrowers could qualify for a home loan. Prominent community activist Gale Cincotta made this clear, testifying before Congress in 1991, that “lenders will respond to the most conservative standards unless [federal government agencies] are aggressive and convincing in their efforts to expand historically narrow underwriting”.
     — Daniel Press
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Rite to right

I'd argue that the writing was on the wall when marriage was legally defined and moved away from being a religious rite to being a secular right.

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