ABSTRACT
This chapter provides some understanding of how the mortgage market melted down so badly. The government passed the Community Reinvestment Act in 1977, requiring banks to conduct business across the entirety of geographic areas in which they operated, thus preventing them from doing business in a suburb, say, while neglecting a downtown area. If relaxed lending standards allowed more households to qualify for financing, basic economics also says that housing prices would have risen as the demand for homes increased. Mortgages from the poorer portion of the income distribution have, for the last 30 years at least, have had much higher default rates than traditional mortgages, a result that is conveniently ignored in so much of this literature. The mortgages with outrageously lax underwriting standards that have been justifiably ridiculed in the press are not unusual outliers but unfortunately representative of a great many mortgages that have been made in the last few years.
