One of the major causes of the current foreclosure crisis is related to the history of the banking industry and how it has changed over time. At one point in time, there was a difference between investment, home lending, and commercial banking. The investment banks, like Goldman Sachs or the now-defunct Lehman Brothers, activities were limited according to the Glass-Steagal Act. The Glass-Steagal Act separated banks by type, and specifically prohibited cross-banking, i.e., investment banks could not own a commercial bank, and savings and loan could not have checking accounts. Savings and loans were originally created to originate home loans, investment banks raised capital for the issuance of securities, and commercial banks handled only commercial loans. There was never any combination of these types of financial institutions until 1999 when the Glass-Steagal act was repealed during the Clinton Administration. As such, the banking industry was more connected to the communities in which the separate branches operated.
As everyone is aware, now once loans are granted, they are pooled together, and sold as bonds on Wall Street. Financial institutions are now free to comingle their services and provide them under one roof, as there are no longer restrictions on what financial institutions can own, which the Glass-Steagal Act once prohibited. These varied services may come with the obvious conveniences to consumers of being provided all in one place, and sometimes at discounted fees. However, the current foreclosure crisis is evidence that such benefits have been outweighed by the costs.
