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Government Housing Policy and the Financial Crisis.

The Cato Journal 2010, Spring-Summer, 30, 2

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It is popular around the world to blame the financial crisis on the United States. But before we identify this as the usual anti-Americanism, we should perhaps look more seriously at our country's housing policies. Unfortunately, there is a strong argument that the financial crisis is indeed the fault of the United States--an artifact of the housing policies that this country has followed since the early 1990s. These policies produced an unprecedented number of subprime and other nonprime mortgages (known as Alt-A), and when the housing bubble topped out in late 2006 and early 2007, these loans began to default at unprecedented rates. In my view, the severe losses associated with these defaults caused weakness of Bear Steams and AIC--resulting in their rescue--the failure of Lehman Brothers, the severe recession we are experiencing in the United States today, and ultimately the financial crisis itself. Before proceeding, I should define some terms. A subprime loan is generally one in which the borrower has blemished credit, usually measured by a FICO credit score. The traditional dividing line between a subprime and a prime loan is a 660 FICO. An Alt-A loan is not a prime loan, even if the FICO score is above 660, because there is some deficiency in the loan itself. Alt-A loans, for example, have low downpayments (i.e., high loan-to-value ratios), low or no documentation concerning income or employment, negative amortization features, and other deficiencies that make them more likely to default than prime loans. In the current crisis, indeed, Alt-A loans are defaulting at rates roughly equivalent to subprime loans.

Government Housing Policy and the Financial Crisis.
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  • Available on iPhone, iPad, iPod touch, and Mac.
  • Category: Politics & Current Affairs
  • Published: 22 March 2010
  • Publisher: Cato Institute
  • Print Length: 14 Pages
  • Language: English
  • Requirements: To view this book, you must have an iOS device with iBooks 1.3.1 or later and iOS 4.3.3 or later, or a Mac with iBooks 1.0 or later and OS X 10.9 or later.

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