Government action, beginning with federal legislation passed 33 years ago to help low-income people buy homes, was the cause of the economic collapse, Republican U.S. Senate candidate Ron Johnson said Wednesday.
Johnson told Journal Sentinel reporters and editors, as well as its Reader Advisory Committee, that the seeds of the collapse began in 1977 with passage of the Community Reinvestment Act.
"What caused this economic downturn, collapse, was pretty much government action," Johnson said. "It wasn't helped by the big banks. I always refer to it as caused by Washington, propelled by big banks and paid for by the American public."
Decades after its passage, the federal law that helped low-income and disadvantaged people get loans to buy their own homes continues to be hotly debated. The federal law applied only to depository institutions, not private, unregulated mortgage lenders.
In Johnson's view, the law "started forcing banks to make loans to people who couldn't afford to pay them back . . . "
Asked if the banks were forced to lend to people who couldn't afford it, Johnson said: "They threatened to bring the Department of Justice in to, I guess, to prosecute banks that would be accused of redlining. Not making loans to people in certain areas."
Johnson said the law made it easy for banks to lend money.
"We'll have Fannie (Mae) and Freddie (Mac) guarantee those things so you can sell those things on the open market," Johnson said. "What does that do to a bank? First of all, if I don't make those loans, I might have Department of Justice action taken against me. But if I make the loan, I can get all of the origination fees on it, I can make a lot of money and, by the way, I don't have to incur any of the risk. The last thing you want to do when somebody is trying to make a loan is remove the risk of making the loan. You don't throw out all constraints. . . . So what that did, that was the cause of the housing bubble." - Milwaukee Journal Sentinel
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