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In Defense Of Liberty
...The first lesson to learn is that the Community Reinvestment Act of 1977 was a mistake. The law forces banks with branches in poor neighborhoods to lend money there--which is to say, to lend money to people with poor credit ratings. This price is exacted from any bank looking for permission to add a branch or buy another bank. The rule is enforced by private community organizations like Acorn.

There are two ways that banks cope with the law's demands. One is simply by avoiding poor neighborhoods altogether, leaving the business of providing financial services there to pawnshops, check-cashing outlets and businesses making usurious payday loans. The other is by writing a lot of mortgages. That means issuing subprime mortgages with low down payments and low teaser rates. The monthly payments, that is, start out looking affordable. After a while the loan resets to a much higher rate.

The problems occasioned by the latter approach were compounded by a 1995 law permitting the securitization of subprime loans. Securitizing frees the mortgage originator from an obligation to hold weak loans in its own portfolio and thus makes that originator more indifferent to the risks. Beginning in the late 1990s the White House and Congress also put strong pressure on Fannie Mae and Freddie Mac to buy securities backed by these mortgages. Over the years 2005--07 about 40% of the mortgages that the two enterprises added to their portfolios of single-family loans were junk loans....