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Date Submitted: 03/18/2016 03:15 PM
Kara Goldsborough & Juha Penttila
Professor Richard Anderson
Money and Banking
11 December 2015
Redlining in the United States
An essential part of the American dream has widely been considered as owning a home. This became particularly topical during Clinton’s and Bush’s administrations, both of which pursued policies that would make it easier for Americans to acquire mortgages and become homeowners. Legislation in the late 90’s to partially remove taxation on residential capital, and risen household income led to a bubble developing in the housing market (Gjerstand & Smith, 2009). Furthermore, the Federal Reserve’s decision to aggressively expand the economy in the aftermath of the tech crisis at the turn of the century cut borrowing costs and encouraged lenders ease their credit standards. Thus, banks began providing low-income and high-risk households highly leveraged loans with the belief that the housing market was going to keep booming. Once the subprime market had grown unsustainable and mortgage defaults increased, the bubble infamously burst in 2007-2008 when house and asset prices experienced a drastic decline. The U.S was facing its worst financial crisis since the Great Depression.
Clearly, the single biggest reason for the collapsing of the housing market was the reckless subprime lending. Government institutions and financial intermediaries took advantage of an upwards trend on the market, and kept pushing the accelerator by targeting low-income and credit-score households in order to gain higher returns. This practice was the exact opposite of what has allegedly, in different terms and forms, taken place in the U.S housing market since the implementation of the FHA in the early 1930’s: redlining.
The Federal Housing Administration was established 1934 to alleviate housing concerns amidst the Great Depression. Prior to the 1930’s, no real mortgage market existed in the U.S. Instead, insurance companies offered contracts to people...