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12: THE COLLAPSE!

he financial crisis of 2007-2008 is a story of
Tintrigue, secret dealings, ambition, greed, and
epic battles where heroes are villains and villains are
heroes. How is it that the world’s financial system stood
on the brink of total collapse? How is it that a domino
effect of loan defaults came perilously close to
throwing the world into economic darkness? What are
the events that led to the financial crisis of 2007-2008?
Can it happen again?
We begin our story with the Community
Reinvestment Act (CRA) of 1977, an act that Congress
has amended in 1989, 1995, and 2005. This Act
promoted banking services to all members of a
community and prohibited redlining, the refusing a loan
to someone because they live in a poor neighborhood.
Banks make prime loans to creditworthy
customers and make subprime loans to people with poor
credit. The Community Reinvestment Act popularized
subprime loans with relaxed lending standards. Thus,
low or no money down, variable or adjustable rate, Alt-
A, and negative amortization loans became popular.

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