US Housing Policy and the Financial Crisis

Peter J. Wallison

Chapter 4 in The First Great Financial Crisis of the 21st Century:A Retrospective, 2015, pp 75-100 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Although the conventional explanation for the 2008 financial crisis is that it was caused by insufficient or inadequate government regulation of private sector risk-taking, there is compelling evidence that the underlying cause of the crisis was US government's housing policies, implemented primarily through the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. These policies, principally the affordable-housing goals administered by the US Department of Housing and Urban Development (HUD), forced the loosening of traditional mortgage underwriting standards in order to make mortgage credit more available to low-income borrowers. However, the loosened standards spread to the wider market and helped to build a massive housing price bubble between 1997 and 2007. By 2008, most of the mortgages in the US were subprime or otherwise weak. When the housing bubble deflated, these mortgages failed in unprecedented numbers, weakening the largest financial institutions and causing a financial panic when Lehman Brothers was allowed to fail.

Keywords: Financial Economics; Banks; Depository Institutions; Micro Finance Institutions; Mortgages; Macroeconomics; Monetary Economics; Dodd-Frank; Financial Crisis; Financial Regulations; Regulatory Framework; Bankers; Systemic Risk; Recession (search for similar items in EconPapers)
Date: 2015
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