Government Policies and The Subprime Mortgage Crisis | Government Policies Subprime Mortgage Crisis

Government Policies And The Subprime Mortgage Crisis

The U.S. subprime mortgage crisis was a set of events and conditions that led to a financial crisis and subsequent recession that began in 2008. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. Several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.

Government housing policies, over-regulation, failed regulation and deregulation have all been claimed as causes of the crisis, along with many others. While the modern financial system evolved, regulation did not keep pace and became mismatched with the risks building in the economy. The Financial Crisis Inquiry Commission (FCIC) tasked with investigating the causes of the crisis reported in January 2011 that: "We had a 21st-century financial system with 19th-century safeguards."

Increasing home ownership has been the goal of several presidents including Roosevelt, Reagan, Clinton and George W. Bush. However, the FCIC wrote that Fannie Mae and Freddie Mac, government affordable housing policies, and the Community Reinvestment Act were not primary causes of the crisis.

Failure to regulate the non-depository banking system (also called the shadow banking system) has also been blamed. The non-depository system grew to exceed the size of the regulated depository banking system, but the investment banks, insurers, hedge funds, and money market funds were not subject to the same regulations. Many of these institutions suffered the equivalent of a bank run, with the notable collapses of Lehman Brothers and AIG during September 2008 precipitating a financial crisis and subsequent recession.

The government also repealed or implemented several laws that limited the regulation of the banking industry, such as the repeal of the Glass-Steagall Act and implementation of the Commodity Futures Modernization Act of 2000. The former allowed depository and investment banks to merge while the latter limited the regulation of financial derivatives.

Note: A general discussion of the causes of the Subprime mortgage crisis is included in Subprime mortgage crisis, Causes and Causes of the 2007–2012 global financial crisis. This article focuses on a subset of causes related to affordable housing policies, Fannie Mae and Freddie Mac and government regulation.

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