On July 15, 1993, Clinton signed a law that encouraged lending institutions to serve their communities, followed by regulations “in support of the law” to rate lenders in how well they served the minorities in their communities.
Immediately, they found that Blacks and Hispanics were turned down for loans at a much higher rate than Whites. In fact, if factors such as credit worthiness and being able to fill out an application were considered, the rates for acceptance were statistically similar.
No surprise there
That evidence was ignored.
No surprise there either
Lending institutions were rated against other institutions and those that rated low were punished when it came to dealings with the Federal Reserve. It was taken to the point the banks were told where they had to open new branches, so they were serving areas with high percentages of minorities. Then, the government went to work pressuring the lending institutions to make loans to the less credit worthy.
In 1999, Clinton signed a new law, repealing one that had separated lending institutions, security traders, and insurance companies. With the new law, lenders, now acting as security traders, were allowed to bundle mortgages as securities and sell them to other institutions. In this way, lenders didn’t have to worry about the poor credit ratings of those they had given loans to because they could just sell the loans to others without any further liability.
That made it very easy to comply with the pressure they were getting to lend more money to minorities, regardless of credit rating. All they had to do was come up with an innovative loan that would appeal to those with little reliable income. Hence, the sub-prime loan was born. Soon domestic and foreign financial institutions, pension funds and insurance companies were buying the newly formed securities like crazy. After all, since they were promoted by the US government, wouldn’t they be protected?
And, as they say, the rest is history.