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Community Reinvestment Act and Fannie/Freddie

The housing problems the US market is facing right now have been apparent for several years.  I thought I understood the root cause as a historic change in lending standards, which caused a vicious cycle of increasing demand and increasing supply.  The demand came in the form new buyers and investors who would not previously have been eligible for mortgages and in outright fraud that was condoned in the rush to generate more business.  Also profit driven, the home building industry, ramped up production to meet the demand.  
 
What I did not understand until this week is what drove the loosening of historic lending standards.  Watch this video and read about the Community Reinvestment Act that legally compelled banks to lend.  In addition, the Act reduced the capitalization standards required of Fannie May and Freddie Mac to 2.5% vs. 10% required of normal banks.  This increased leverage allowed them to purchase many more loans, but resulted in the instability and eventual bankruptcy of the last month.

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