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Government and the Subprime Crisis

Government and the Subprime Crisis. Tax Reform Act of 1986: only HOME interest is deductible Federal Reserve Board lowered interest rates after the 9/11 recession from 6.5% (2000) to 1.0% (2003) Raised rates from 2004 to 2006. TOO MUCH Regulation?. Community Reinvestment Act (1977)

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Government and the Subprime Crisis

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  1. Government and the Subprime Crisis • Tax Reform Act of 1986: • only HOME interest is deductible • Federal Reserve Board • lowered interest rates after the 9/11 recession from 6.5% (2000) to 1.0% (2003) • Raised rates from 2004 to 2006

  2. TOO MUCH Regulation? • Community Reinvestment Act (1977) • -forbid “redlining” and encouraged investment in low income neighborhoods. • Mostly applied during bank mergers in the late 1990s • Applied on to federally insured banks (partly) • Did not apply to lenders issuing 50-75% of subprime loans

  3. Regulation • Fannie Mae and Freddie Mac • 1999 relaxed requirements for mortgages it “securitized” • Began purchasing subprime loans in 2004, especially in 2005(arrived late to subprime loans)

  4. Deregulation • Alternative Mortgage Transactions Parity Act (AMTPA) 1982 • Allowed non-federally chartered housing creditors to write adjustable-rate mortgages • 2004: SEC allows unregulated investment companies to issue more debt (Bears and Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs) • They invest in more mortgages

  5. Government response to the crisis: Federal Reserve • Lowers “discount” interest rate to near 0 • $30 Billion for Bears Stearns buyout • $200 Billion to nationalize Fannie and Freddie • Buys most of AIG for $182 Billion (or $85B)-- “covers” investors who bought credit default swaps at full value. • (2008-9) Buys $300 Billion of US Debt(“monetizes” the debt) • Buys $1.25 Trillion in Mortgage-backed securities

  6. TARP: Troubled Asset Relief Program • $750 Billion • Fall, 2008 (big issue in presidential campaign) • Initial purpose: to buy “toxic” mortgage securities • Instead: to “buy” the Banks themselves:AIG: $40B CITI $45B Bank of Am. $45BGM: $13.4B Chrysler: 4B

  7. American Recovery and Reinvestment Act of 2009“Stimulus Bill” • Feb, 2009: $787 Billion • Tax cuts: $288B • Health Care: $144B (Medicaid and COBRA) • Education: $90B • Income assistance: $83B (unemployment, Food Stamps, Social Security bonus) • Infrastructure\vehicles\energy $81B • Homebuyers tax credit $8000 (until 4/30/10)

  8. NEXT • Pending FHA default • 2% of all mortgages in 2006 • 33% in 2009 • 1 in 6 borrowers in default

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