I thought David Limbaugh below was just stupidity, but apparently it has become the official party line of the wingers--the Community Reinvestment Act and other housing laws "forced" banks to lend in "high risk" areas. That is a complete lie. First of all, no financial institutions were forced to suspend prudential lending standards. Secondly, these are not the loans that are the basis of the subprime mess, and of course, by mentioning "high risk areas," they use codewords for where black people live, and did you notice that Barack Obama is black???
The loans in question can be traced not to fair housing laws but to the securitization of mortgage pools and the separation of the underwriting risk from the making of the loan. Mortgage-backed securities and instruments such as credit default swaps (which I don't understand, and I'm a securities lawyer), sold through a deregulated market, led to the crisis.
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My observations around town are that the cheaper housing/lower income areas look the same as always.
The average house is pretty much the same but there may be a "For Sale" sign every few blocks.
Then you go through the newer McMansion neighborhoods and every third house is for sale, and not at a profit. I guess the rich folk were the ones who finally got a shot at housing via the fair housing act?
And Peter, many people trading CDSs don't really understand them. For those interested in a dumbed down explanation, it's like you bought a really risky investment and then bought an insurance policy against the investment going belly up. The policy costs you money but it's a hedge against ending up with nothing.
In this case your buying insurance against a debt you hold. The banks/brokers sold high risk mortgages (the debt) AND backed them. So when they defaulted the banks that backed them in the CDS had to make good on the insurance that backed the debt.
Mind you, after 1933 it was illegal for banks to do exactly this. Thanks to The Financial Modernization Act of 1999 (ala Phil Gramm) financial holding companies can now own banks, insurance underwriters and security underwriters. This allowed banks to expose themselves to every level of risk available in the financial market.
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