No. of Recommendations: 9
This mortgage debacle began when Henry Cisneros, the HUD Director under Bill Clinton, sold the idea in Washington that America needed more homeowners.

While this may have had an impact, I think the debacle started a little earlier than that -- in 1913 with the creation of the Federal Reserve. The Federal Reserve had a huge role in artificially depressing interest rates and encouraging financial institutions to use huge amounts of debt.

Then the problem was made worse in 1938 with the creation of Fannie Mae and in 1968 with the creation of Freddie Mac. The implicit guarantee (which has suddenly become much more explicit) that these two organizations enjoyed reduced borrowing costs and created an incentive to expand dramatically.

Then in the 1970s, the SEC required the use of government-approved Nationally Recognized Statistical Rating Organizations as rating agencies, which reduced the competition among ratings agencies.

And then there was the Community Reinvestment Act of 1977, which essentially forced lenders to lend to uncreditworthy individuals.

There is also the income tax deduction for mortgage interest and real estate taxes, which also encourages people to borrow heavily and purchase big houses. Although I don’t know when this started, it was long before Cisneros came along.

Add it all together, and you have a huge government-created debacle on your hands.
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