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Your friend's information is grotequely skewed.
First, let's talk about the low income loan law. I've been on the board of directors of a community bank for nearly 25 years. So, when those laws were renewed and encouraged, the banks had a clear option.
They could lower the threshhold for what constituted a mortgage.
Instead of saying that they would not write paper on a home that didn't at least cost $75k, they could have lowered that standard to $35k. Then lower income people would buy cheaper homes with a long term mortgage with affordable payments, rather than have to lend as short term real estate collateralized signature loans at much higher interest.
That simple move helps lower income folks buy homes. No mansions, just their own home. A good thing.
Instead, banks decided to moderate risk by raising their debt to income and loan to value ratios. So, they could offer low down payment loans, but of course, the payment would be too high. So they manipulated the payments for the first few years by offering ARM's, knowing full well that they would sell the bundles of paper before the loans repriced.
But, at the time the loans were bundled and sold, the payment history was still solid, so they were sold as AAA paper. (Which was, of course, illusory.)
So, it was the underregulated banks that did this and nobody made them.
And, of course, i'd sure like to have your friend explain how one bank "makes" another bank buy a bad risk loan. The LACK of regulation created a situation where the originator could hide the real risk when they sold them off. So, the LACK of regulation created the secondary purchase option.
Anybody who thinks that too much regulation was the problem is probably irretreivably stupid, and no amount of explaining will sink into their thick skulls.
But, at least you now know that the whole "gov't made them" excuse is claptrap. The Professor
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