What really got the crisis rolling when Fannie Mae agreed to buy non-conforming loans. Fannie Mae and the FHA originally set the standards for what we now call “conforming” loans (41%/28%debt-to-income ratios, no more than 80% loan-to-value, etc). These, by definition, were loans that Fannie Mae was willing to buy from the lenders so that the lenders wouldn’t have to carry a lot of debt on their books and thus would be more willing to make more home loans. This is why home ownership skyrocketed in the 1950s and 60s. I don’t think the CRA as originally written was much of a factor, given how much redlining (refusal to lend for home purchases in a designated “bad area”) was truly happening. Sub-prime mortgages have always been with us, and the poor deluded folks who got talked into buying them would ultimately lose their home, the BBB would be called, and the group would get nailed for having faxed a fraudulent document to some bank at some point. But then the financiers figured out how to “eliminate” risk by combining thousands of mortgages into a big group and slicing the group into marketable securities. Suddenly everyone wanted to sell subprime mortgages becase there was so much profit in it and anyone would buy them because there was “no risk”. Rapidly-rising home values fueled the spree. It got to be so much of a fad that Fannie Mae figured it would lose market share unless it agreed to buy nonconforming loans. THIS was the point of no return for the whole fiasco, as far as the government is concerned.
