FINANCIAL REGULATORY FAILURE

Financial Regulatory Failure

Financial Regulatory Failure

Introduction

In 2008, the United States in the worst financial crisis since the Great Depression. The essence of the crisis lies in the fact that forty-four percent of all mortgages (or 25 million of mortgages) are prone to default, and this figure is unprecedented in U.S. history? Why are financial institutions and homeowners to buy so many mortgages that are in an emergency or in the wider default? I argue that this crisis is a consequence of the failure of regulation, market failure, and, above all, a political failure.

The "Affordable Housing" Mission In A Vacuum Rules

In connection with the S & L crisis in the late 1980's, many in Congress understand the need to regulate the GSEs, because it was dangerous to private companies to take large risks with public guarantees. In order to prevent regulation, Fannie Mae director Jim Johnson suggested that the GSEs to add affordable housing mission of their goals (Wallison and Pinto, 2008). Members of Congress saw they could use the GSE projects much as they used targeted to increase the popularity of pork projects in their home districts. Congressmen may require funding from the GSEs on projects in their districts. For example, in 2006, the office of Senator Charles Schumer issued a press release headlined:

"Schumer announces up to $ 100 million Freddie Mac commitment to Fort Drum and Watertown Housing Crunch". (Pinto, 2008)

Incentives From The Community Reinvestment Act And Problems With The Private Sector

Pinto (2008) believed that Fannie and Freddie bought an estimated 50 percent of toxic mortgages. We have yet to explain why the private sector to set up and bought the rest. And we must also explain why so many homeowners who are richer than low or moderate income are unfair to the mortgage loans. Part of the answer lies in the fact that Fannie and Freddie played a "market maker" role. They are the size of the dominant market, and their willingness to buy these risky mortgages are set standards on the market and brought others into the business trying to profit from risky mortgages.t 'There is, however, another important component to reduce the mortgage bank's standards. In mid-1990's, the Government has changed the way the Community reinvestment Act in force, and effectively forced the banks to initiate risky mortgages. In addition, it was an incentive or a market problem, induced all the key private actors to act in socially counterproductive way.

Banks Of Incentives And The Role Of The Community Reinvestment Act

Authors, and servicers of the mortgages are banks and mortgage brokers. There were two problems that have led to many banks issuing mortgage loans with excessive risk. First, efforts to lower mortgage underwriting standards was led by the Ministry of Housing and Urban Development (HUD). He has published its "National Strategy for Housing in 1994, in which he called for" a funding strategy, fueled by creativity and resources of public and private sectors to help homeowners, the lack of cash ...