Sub-prime lending of Financial Crisis of 2007–2009

This article is about the series of financial market events, starting in July 2007, which were the proximate cause of a weakening of the global economy. For details on the stock market crashes and bank bailouts of late 2008, see Global financial crisis of 2008–2009. For economic issues beyond the financial markets, see Late 2000s recession. For discussions of major aspects of the policy response to the crisis, see The Keynesian Resurgence of 2008 / 2009 and 2009 G-20 London summit.

Based on the assumption that sub-prime lending precipitated the crisis, some have argued that the Clinton Administration may be partially to blame, while others have pointed to the passage of the Gramm-Leach-Bliley Act by the 106th Congress, and over-leveraging by banks and investors eager to achieve high returns on capital.

Some, like American Enterprise Institute fellow Peter J. Wallison[12], believe the roots of the crisis can be traced directly to sub-prime lending by Fannie Mae and Freddie Mac, which are government sponsored entities. On 30 September 1999, The New York Times reported that the Clinton Administration pushed for sub-prime lending: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people."

In 1995, the administration also tinkered with Carter's Community Reinvestment Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt by many[who?] that this was done to help a stagnated home ownership figure that had hovered around 65% for many years. The result was a push by the administration for greater investment, by financial institutions, into riskier loans. A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage credit poured out of CRA-covered lenders into low and mid level income borrowers and neighborhoods.[13]

Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren’t enough Americans with (bad) credit taking out loans to satisfy investors’ appetite for the end product. (Investment banks and hedge funds) used (financial technology) to synthesize more of them. They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans." [14]

On September 30, 1999 The New York Times said, referring to the Fannie Mae Corporation easing credit requirements on loans purchased from lenders: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."[15]