Direct Deposit Authorization Form: Fill & Download for Free

There are a number of different ways, depending on the source of income. This answer is specific to the USA (although parts of it may be applicable elsewhere too). And it will be rather detailed too.Let's start with the easiest, income from W-2 employment. The W-2 income is verified by the prospective tenant supplying pay stubs for two consecutive immediately preceding months and/or via contacting the employer. The "and/or" there is in place because, though ideally you do both of those, there are some situations that will leave the landlord with only one of those as an option. For some employers, no information regarding an employee will be released to any third party without that employee (in this case the prospective tenant) first giving written authorization to release the information, so the landlord should have a form that the prospective tenant completes and signs that gives the landlord the needed authorization. So time to list some of the exceptions that were alluded to. There are employers that have outsourced employment verification activity to third parties; one such third party is The Work Number, and there are others, but the key here is that these third parties charge a fee of approximately $20 to perform this verification (excessive IMO because my tenant screening service only charges $25 for a package that included a credit report, nationwide eviction report, and nationwide criminal background report). If all other things with this prospective have been supplied honestly, the pay stubs can fairly safely assumed to not have been altered, especially if the prospective tenant is paid via direct deposit and a bank statement can be supplied to show deposits that match the net pay on the pay stubs. Another exception occurs when the prospective tenant is relocating from a distance to take a new job - there will be no pay stubs to see, so the employer is contacted, or there could be an offer letter that the prospective tenant has been given, to verify the income. Worst case, you might have to look at the previous year's tax return; in doing this, you have the prospective tenant provide a paper or electronic copy of the tax return they (allegedly) filed with the IRS, but you also require the prospective tenant to supply a completed and signed IRS form 4506-T (or 4506 but that can take longer) so that the landlord can verify the amounts with what the IRS was actually supplied.That was quite a bit just to cover a W-2 worker. And that covers the vast majority of prospective tenants (at least that I have seen in nearly twenty years of having rentals). So the stuff that follows is definitely going to be less frequently encountered.The hardest income to establish is for those who are self-employed. The self-employed prospective tenant will have to show tax returns (see earlier part of this post on how to deal with that). And then there could be big expenses that cause the net income to appear drastically lower than what the gross income was. There are certain deductions to income (such as depreciation) that really should be added back in, as these do not have the effect of lowering how much was actually netted. This can be a bit tricky, because for the purpose of paying taxes the prospective tenant would want to show as little income as possible, yet for qualifying for a rental the prospective tenant would want to show as much income as possible.There are also "self employed" people who operate as what I will label as an "independent contractor". This type of person will have income reported on a 1099-MISC and will work at one particular place of employment in a contract basis. Sometimes the contract at one place can be rather long term, so with that type of situation you can verify the contract with that employer, similar to how a W-2 worker would be verified.And there are other forms of income that a prospective tenant might wish to declare in order to achieve a high enough qualifying income. Many of these will have some form of "award letter" and that is normally accompanied by direct deposits, so bank statements plus the award letter usually are used although if there are no deposits then the landlord should make an effort to verify with the party paying the prospective tenant (to confirm that the award letter was not altered to give a higher than actual amount).Pensions - verified via award letter and/or direct deposit.Social Security - verified via award letter and/or direct deposit.Child support - verified via award letter and/or direct deposit. Note that there could be an expiration date on this source of income, as the child reaches the age of being considered an adult no longer in need of being supported.IRA - two things to verify here are the annual minimum distribution that must occur to avoid the IRS penalty, and the total value. Account statement would show the latter, the minimum distribution is a calculated amount.Investment income. Investment income verification depends on the type of investment. The easier investments to verify will have a periodic statement of earnings; the more difficult ones (like the renters who themselves own rental properties in some distant location) will require looking at tax returns.Government assistance. Tenants on these programs from the government can receive the funds in different ways. So they should be able to list the varying forms of assistance they receive, there should be something in writing from the government that grants the assistance, and you might be able to get information from the government caseworker(s) with the prospective tenant's permission / authorization.If the prospective tenant is a college student, they could be receiving some different forms of income. Be sure to only consider sources that actually put money into the student's wallet for living expenses.And let's not forget guarantors (AKA co-signers). Some prospective tenants can't qualify without help, so they bring in a guarantor. Ideally the guarantor owns real estate in the same county as where the rental is located (if not then next best is in the same state, and if not then if they own an out of state piece of real estate it might be something to discuss with your attorney as to whether that can be "attached" via a judgment in the county where the rental is located), the idea being that a judgment can be obtained that leads to a lien being attached to that real estate. When that guarantor's real estate is not in the same county, some other filings might be needed to create a foreign judgment in the county where the guarantor's property lies. This way the threat of a potential lien can be used to try to collect. The guarantor still needs some income too, because you are looking for payment, not judgments. The amount of income the guarantor should have should be based on the assumption that the prospective tenant will pay zero and that the guarantor thus needs to pay for their own living expenses plus those of the prospective tenant.Lastly, you can only verify documented income. Cash under the table employment is undocumented. Illegally obtained income is undocumented. Steer clear of any prospective tenant that does not have sufficient documented income to qualify (unless they have a guarantor with sufficient documented income). And I consider tenants who work in the family business to be either undocumented or self-employed; these types of prospects do show up on occasion. Verification with their family is almost a joke - do you think the family is verbally going to not give the family member prospect some income that works? Tax returns are the indicator of the truth with these types.If you have a prospective tenant with some form of income that wasn't listed here, feel free to ask about that in the comments, so I can attempt to update this answer to cover anything I may have missed.

There are several answers to your question. I will offer one of my own invention (which I consider the superior of the two), and the other was published and thoroughly studied by the IMF, or at least by several of its employees with the use of IMF resources and computer modeling. The IMF concept is an excellent proposal in its own right, but i believe it could be considerably improved on. I would suggest implementing the IMF proposal immediately, nationwide, then experimenting with my proposal at a local level, in an individual state, city or county, before expanding it nationwide and globally (since fractional reserve banking is used around the world, not just in the United States).The first proposal is known as “The Chicago Plan”. It was originally put forward in the wake of the Great Depression (which occurred only 16 years after the Federal Reserve Act was passed). The proposal was forgotten for many years, then resurrected by the aforementioned team within the IMF after the 2008 crash, with a new study of the old proposal, titled “The Chicago Plan Revisited”.My plan is fairly simple. Abolish not only fractional reserve banking, but all usury, so that nearly all lending as a form of capitalization for corporations is replaced entirely by equity (i.e stock, investments in corporate shares, instead of debt/bonds), while commercial deposit banks are replaced by investment banks with a cash reserve ratio and some small limitations on withdrawals that exceed a certain percentage of the total value of the account, i.e. such withdrawals might take a few extra days while the account-holder’s securities are being sold to satisfy their withdrawal. So instead of putting one’s money in a bank for perhaps 1% interest on deposits, while those deposits are lent out by the bank at perhaps 5%-10% on mortgages, car loans, credit cards, etc., the depositor would have a little less than half their deposits kept in cash, while most of the deposits are invested in stocks, resulting in capital gains and dividends of around 5% on the deposited funds (10% on the investments, 0% on the cash), while the bank charges a fee on the invested portion of the deposits, like an investment bank or a fund manager would, except the fee would be on the profits from the investments, not a percentage of the funds invested).The Chicago Plan, in short, was also very simple: require 100% reserve backing for deposits. The “revisited” plan used the latest and greatest computer modeling software available to the IMF to model exactly what such a proposal would look like if it were implemented nationwide in the United States, and their findings were that such an economy would look far better than the current US economy, across the board.The broad headlines of the IMF findings were that:a. All of the findings of the original Chicago Plan proposal are supported by the best available IMF data and computer modeling of the modern AUS economy, given the proposed changes put forward by the Chicago Plan.b. US GDP would grow by 10% per year.c. Virtually all public and private debt in the entire United States, including all government debt, would be eliminated within roughly a 10 year period (the IMF’s words, and the conclusions of their super-computer modeling, not my words or my conclusions).d. There could never again be a run on the bankse. Inflation would drop to zero.f. Enormous reduction of the boom-bust economic cycle, i.e. no more crashes of 1929 or 2008, but not so much “irrational exuberance” in the recovery from those crashes either, which of course would be vastly better for the average retail investor and pensioner, since most investors do the worst thing possible, and sell in the terror of the crash, then buy in the exuberance of the recovery (i.e buy high and sell low, rather than buying low and selling high), when the professional investors take Warren Buffet’s advice to be greedy when others are fearful and fearful when others are greedy.But if you don’t believe me when I say that is what an economy without fractional reserve banking would look like, then hear from the IMF themselves in the paragraphs below.To save a bit of time on my part, I will simply quote both the abstract and the conclusion of the IMF report directly, rather than paraphrasing. I should note, however, that the full report is 71 pages, and is filled with abundant details of what such an economy would indeed look like. You may read the full report here, on the IMF’s website:The Chicago Plan RevisitedAt the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Chicago-Plan-Revisited-26178Abstract:“At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.”Conclusion:“This paper revisits the Chicago Plan, a proposal for fundamental monetary reform that was put forward by many leading U.S. economists at the height of the Great Depression.Fisher (1936), in his brilliant summary of the Chicago Plan, claimed that it had four major advantages, ranging from greater macroeconomic stability to much lower debt levels throughout the economy. In this paper we are able to rigorously evaluate his claims, by applying the recommendations of the Chicago Plan to a state-of-the-art monetary DSGE model that contains a fully microfounded and carefully calibrated model of the current U.S. financial system. The critical feature of this model is that the economy’s money supply is created by banks, through debt, rather than being created debt-free by the government.Our analytical and simulation results fully validate Fisher’s (1936) claims. The Chicago Plan could significantly reduce business cycle volatility caused by rapid changes in banks’ attitudes towards credit risk, it would eliminate bank runs, and it would lead to an instantaneous and large reduction in the levels of both government and private debt. It would accomplish the latter by making government-issued money, which represents equity in the commonwealth rather than debt, the central liquid asset of the economy, while banks concentrate on their strength, the extension of credit to investment projects that require monitoring and risk management expertise. We find that the advantages of the Chicago Plan go even beyond those claimed by Fisher. One additional advantage is larges teady state output gains due to the removal or reduction of multiple distortions,including interest rate risk spreads, distortionary taxes, and costly monitoring of macroeconomically unnecessary credit risks. Another advantage is the ability to drive steady state inflation to zero in an environment where liquidity traps do not exist, and where monetarism becomes feasible and desirable because the government does in fact control broad monetary aggregates. This ability to generate and live with zero steady state inflation is an important result, because it answers the somewhat confused claim of opponents of an exclusive government monopoly on money issuance, namely that such a monetary system would be highly inflationary. There is nothing in our theoretical framework to support this claim. And as discussed in Section II, there is very little in the monetary history of ancient societies and Western nations to support it either.”Direct Link to the PDF of the Full Report:https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdfAs for the details of my proposed plan, I would suggest a fairly large portion be held in cash, around 40% of each depositor’s total funds, while the rest would be invested in highly diversified, un-leveraged, mid- to low-beta securities (i.e. equities, stock in corporations, since there would be no bonds left to invest in if public and private debt would soon be completely eliminated, first by the Chicago Plan proposal, then by law). This would be a deposit bank, after all, and if the depositor wanted to invest a higher percentage of his funds in equities, he could simply deposit most of his money in a normal brokerage, while the aforementioned “commercial deposit investment bank”, if you will, would be used for everyday deposits and withdrawals. Of course, there would be many accounts that would have little money in them, or none at all by the end of the month, so little money would be made from them, but the same is true for today’s commercial deposit accounts. The bank would not be allowed to charge a fee on deposits, or on holding an account, but rather, it would earn a percentage of the profits that the depositor earns on his investments, which should add up to an enormous amount of money each year. The notion that banks would go bankrupt or be forced to charge higher fees if an account has low funds, or if fractional reserve banking were not allowed, as argued by some of the other answers to this question, is of course absurd. Bankers and financiers are the wealthiest people in the world. This should really not be so, because their contributions to the economy are not greater than that of other sectors of the economy, in terms of actual value and wealth generated. They should be less wealthy than the operators of the corporations that produce goods and services of greater value. They should not become multi-billionaires simply because they are managers of everyone else’s money, but rather, the fact that they do is the clearest evidence of corruption, inefficiency, and perverse incentives in the industry and in the broader economy, especially since well over 90% of their wealth was not created by their services, or their fees, but rather, by a single law which allowed them to lend out 10 times more money than they had in deposits (i.e. the Federal Reserve Act itself, which was written and promoted by the financiers, by the lenders and bankers). If the US has M3 Money Supply of $19.2 Trillion, as it does, and all of that is deposited in some bank, as most of it is, and this new variety of “commercial deposit investment bank” invests 60% of that amount, rather than lending out 10 times that much (or $11.5 Trillion in investments), and those investments average a return of 10%-11% compounded annually, as the well diversified S&P 500 does (a total return of $1.15 Trillion annually), and the deposit investment banks charge a fee of 5% of those average annual profits, that would result in an average annual revenue of $57.5 Billion per year. Since our modern banks have proven that, while they pretend there is a free market, in reality, the various firms collude as an oligopoly to fix prices and fees above market rates, this 5% of annual investment profits will be set as an upper limit to what a firm is allowed to charge. They may charge more as a regular brokerage if they wish, if their customers will pay it, but these deposit investment banks will be the monetary backbone of the society, so usury and exploitation through price fixing and collusion must be prohibited, in any and all forms such behavior may take, including the form of excessive fees on investment income. Firms would be further required to set aside much of their fees on investment income, to ensure they could weather downturns in the stock market, for years at a time, when there might be little or no return on investments on which to charge a fee, much like the story of Joseph and the 7 fat years followed by 7 lean years. Thus, they would be expected to accumulate enough cash reserves (not the depositors’ cash, but their own cash, from their own firm’s profits made from fees charged as a percentage of the depositors’ profits) to cover their operating costs for up to 7 years, after which they could spend as much as they wish on whatever they wish. The firms would not be permitted to charge a fee as a percentage of the amount deposited, nor the amount invested, but only a percentage of the profits earned from the investments, so the bank would only profit when its depositors profit, so that their financial interests would be aligned with those of their depositors, unlike now, where the bank profits most when their depositors earn least and are most in debt, which creates a perverse, predatory incentive ot maximize debt, which actually also minimizes household wealth and GDP. As with the depositors, 60% of the firm’s reserves could be invested, while the rest should be held in cash, to limit the risk of loss of principle during economic downturns, and to ensure liquidity and stability of the commercial deposit investment banking system and the overall economy. Similarly, the depositor’s account would be re-balanced each year to ensure a 40/60 ratio between cash and investments is maintained, so that, in the event of an investment downturn, or larger than usual outflows, liquidity would be maintained while risk was also mitigated. Depositors could invest less than 60% of their cash, but to keep the bank profitable, the economy growing, and the depositor participating in that economic growth, the depositor would be required to invest at least 10% of their deposits in the bank. They would have broad choices in what to invest in, but the funds that could be invested in would have to include at least 100 different stocks spread across at least 3 minimally-correlated sectors, and the fund would be required to have a beta of less than 1.2, to maximize stability and liquidity of the system, while minimizing fluctuations. These figures are strategically calculated by the author, but could of course be modified by the legislature, at either the state or federal level, however they wanted to regulate it.In a very few years, and for all generations that would follow thereafter, the citizenry would have substantial and steadily growing net median household savings, instead of net median household debt, would own their homes outright, and would be able to pay for their childrens’ homes, because debt would no longer be artificially created nor artificially inflated to 10 times the levels that would ever have been possible without fractional reserve banking, which would never have existed in free markets without the passage of the Federal Reserve Act, which was proposed by net lenders and the primary beneficiaries of the system, such as Paul Warburg, J.P. Morgan, John D. Rockefeller, and Rockefeller’s uncle in law, Senator Nelson Aldrich , the primary sponsor of the Federal Reserve Act (Aldrich’s daughter married John D. Rockefeller 7 years prior to the formation of the Aldrich-Vreeland commission, and 12 years prior to the passage of the Federal Reserve Act). At first, though, citizens would be required to save money and pay cash for their homes, if you can imagine that. While that might sound like a hardship, at first, I would remind you that doing so cuts the total cost of the home in half, since half the cost of most mortgaged homes is interest. Those who had to build sooner would have to turn to their community, their family, and their church or their synagogue for help, and they would have a moral duty to help them, without charging them interest, just as the Bible commands us to.So there you have it: a perfectly viable plan for an economy that not only does away with fractional reserve banking, but does away with usury altogether. Not only that, but this plan would still have all the economic benefits of the Chicago Plan (tripled GDP, elimination of all public and private debt, minimized boom/bust cycles, 0% inflation, etc), and on top of that, Americans would very soon find the median household income would be rapidly increasing, as most of it would soon be investment income, since rather than the paltry 1% return their savings account, while inflation is 2% to 3%, in my proposed banking system, their return would be at least 6% on average (10% return on 60% of their deposits, while 40% remains in cash), but probably the return would be more like a 9% return (15% return on 60% of their deposits), since the overall GDP would be growing so much faster than it is in our current heavily indebted and therefore mostly stagnant economy, since there would be no corporate or consumer or government debt to slow it down, and surely much of that GDP growth would be passed down to the corporations, which would in turn pass those increased profits on to the investors of the diversified exchange traded funds, which 60% of the deposits would be invested in. And on top of that 6%-9% return on deposits, the depositors would have 0% inflation (so that would result in a net return on savings of 6%-9%, rather than negative 1%-2%, as it is today, after their deposit interest is adjusted for inflation), and their overall costs of living would be dramatically reduced, since their cars and houses would cost half as much once the cost of interest on mortgages and car loans is eliminated, even if that means working and living with your parents for a few years before you get married and buy your first home with cash, without a mortgage. Overall, America would be a far better place, far more politically stable, far more prosperous, far more free and just, with much happier citizens, and our bankers would still be extremely wealthy, wealthier every year, but would no longer be accurately seen as thinly veiled tyrants, undeserving of even 10% of their present wealth, which they acquired through debt that was created by law, artificially, who therefore have acquired total domination of the entire economy and total subjugation of nearly the entire citizenry and all future generations, as is the case today.(Belated image caption: notice in the image at the top that interest rates and the inflation rate steadily declined as the national balance sheet’s debt to income ratio steadily deteriorated; this is not at all normal, cannot be maintained indefinitely, and is a ticking economic time bomb that will go off eventually, globally, much as it did in 1929, 16 years after the FED was established. The FED rate being stuck at 0, and negative in other nations, means the fuse is getting rather short, with no further stimulus available, without hyper inflation, and the only way out is abolishing fractional reserve banking, or else forgiving the debt, worldwide, with the abolition of fractional reserve banking and the active encouragement of household savings being the preferred option, by far, and the only long-term solution. Watch and see if you don’t believe me. Polish-Lithuanian peasantry (near-slave) driving, justified by malevolent and entirely artificial, hereditary indebtedness to the landholding oligarchy was what actually invented the Cossack/proto-Marx alliance, which led to the violent destruction of that same landholding oligarchy (regardless of whether or not the landholding oligarchy intended to accomplish the exact opposite, which obviously it did), just as fractional reserve banking and fiat currency money printing established by the Rothschilds and Paul Warburg’s ancestors, with the blessing of (and in actuality under the direct command of) the Holy Roman Emperors, was what really did lay the groundwork for WW1, the collapse of the Weimar Republic, and WW2, with its supposedly baseless but actually quite accurate tendency to blame certain classes of financiers for the hardships of the German working class (much as the peasantry of medieval Europe had so often blamed the first and only middle class in Europe at that time for all the evils of the world, while conveniently over-looking the role of the European monarchs and nobles, whom had employed said middle class in the coining of currency and the lending of money, and given them little choice in the matter other than a torturous death and genocide of their entire population, then laid all the blame for the misery of the peasantry on said middle class, which nonetheless did share some blame, in the eyes of God, if only that of a junior partner) and Alan Greenspan + J.P. Morgan + Paul Warburg + Bretton Woods + Rockefeller + Aldrich-Vreeland + Bush Wars + Deep State budgets + Bank Bailouts, etc. were the true founders of Antifa, American Socialism, the Tea Party, the Proud Boys, the Mexican Invasion and the coming thalassocracy of the People’s Liberation Army Navy of China in the Pacific and the south and east China seas. They dug their own graves with their terrible, misguided, unjust and ultimately self-defeating policies, just as the arrogance and over-confidence of Coriolanus led to the first Plebeian secessions in Republican Rome, then the murder of Spurious Cassius led to the murder of Cicero, followed by the murder of Boethius and the reign of Theodoric (the first German King of Italy), and the complete destruction and subjugation of the “Eternal City”, whose ruins became a cautionary tale for all future empires which might build their edifices upon a most unsound foundation of net household debt and crushing usury … because sometimes, fore-warned is not fore-armed, but is rather merely for-gotten by the many, and fore-boding to a minuscule, disempowered, and much-ridiculed un-lucky few, who fore-saw the impending disaster, but whose warnings were promptly ignored and discounted as overly pessimistic catastrophizing, until the catastrophe arrived, as it was always certain to from the moment the unsound foundation was laid)(The images below are both paintings by Michelangelo. On the left is the Jewish Prophet Ezekiel, who said. “[He who] hath given forth upon usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him.” On the right is the Jewish Prophet Isaiah, who accurately foretold the conquest and destruction of Israel by the Assyrians, and rightly attributed the downfall of the nation to its sins, its oppression of the majority for the benefit of the ruling elite, and its persecution of the most wise and just, in order to conceal the truth of the rot that was consuming the nation from within. For this honorable and benevolent service, the King of Judah had Isaiah sawn in half alive. It is said in the Midrash that, when God called Isaiah to speak to Israel on His behalf, the Lord forewarned Isaiah of the danger of speaking the truth of the consequences of sin and injustice, saying, “My children are troublesome and sensitive; if you are ready to be insulted and even beaten by them, you may accept My message; if not, you would better renounce it."(Image below: Cassandra looks on as Troy burns. after her father the King and all the nobles of Troy ignored her forewarnings of that very fate, illustrating the common theme across the ages and around the world, of those who accurately foretell impending ruin, brought on by the poor judgement, self-destructive behavior, and willful blindness of the rulers and the people of a society, yet who are then completely ignored and ridiculed and sometimes even murdered simply for trying to warn their people of a coming disaster, in an effort to save them from it, if only they would take the hard but right choices that would be necessary to escape their own destruction, which they so seldom do)Cassandrahttps://en.wikipedia.org/wiki/Cassandra

This is an excellent question that people really need to know more about.When we solve a problem, after a while, we tend to forget what solved the problem and go back to what we used to do that caused the thing to go over the cliff in the first place.That was the 2008 mortgage and financial crisis, as it forgot the lessons of the Great Depression.History up to the Great DepressionIn the 1920’s, when the economy was booming and it seemed like the party would never stop, banks lent out a ton of money on credit, with the presumption that all that money would be paid back and that there was sufficient collateral to cover it.Except, there wasn’t.One of the biggest assets that people might own that a bank could recover is real property. As Will Rogers once noted: “Buy land. They ain’t makin’ any more of the stuff.” Real property was something that pretty much always appreciated in value.Prior to the early 1900’s, most people didn’t own their own homes. Most people rented. Many lived in tenements and apartments in cities, or lived as tenants on farms in rural areas. Land speculators often bought what was left of the government land grants as the frontier closed.But, in the 1920’s, that began to change as banks felt more confident in lending credit for new construction. There were significant speculation bubbles. People bought property and built homes on future credit that wasn’t based on anything but hope.And as the stock market ticked ever higher and higher, banks bet on it. With the deposit money of their customers.And then the Stock Market Crash of 1929 hit.Banks that were significantly overleveraged and undercapitalized were hit hard. Many just failed, and those who had their deposits at banks that became insolvent just lost everything. There was no deposit insurance. If your bank went under, you were screwed out of your entire savings.And if you lost your job, that meant you also lost any means of continuing to pay back that home loan.Additionally, there were suddenly vast quantities of new construction for sale… that nobody could afford any longer. That drove down property values everywhere.Suddenly, your property that was worth $10,000 last year might now only be worth $5,000. But you might still owe $8,000 - what we call “underwater.” If you default or declare bankruptcy, the bank loses. And you’re out on the street.And then, what could the bank do with the house? How could they sell it? Nobody was buying. So, the bank suddenly has a ton of illiquid assets.More foreclosures in a neighborhood continues to lower the property values further, and the destructive cycle just ends up repeating itself.The Hoover administration tried economic protectionism. At the administration’s pushing, Congress passed the Smoot-Hawley Act of 1930, which imposed schedules of high tariffs on over twenty thousand types of imported goods, to protect American business, by golly.It backfired spectacularly and greatly exacerbated the worsening Depression.Weather conditions didn’t help. A severe drought ravaged the Midwest and Great Plains starting in 1930. Farmers had been using what in retrospect were poor farming practices, tearing down line fences and forest windbreaks and not planting cover crops for winters. The thin layer of good topsoil in the Great Plains turned to dust and became an ecological nightmare.Farms started going under as crops failed. The Smoot-Hawley tariffs only made things worse.Additionally, the money supply dried up. The banks that survived, like J.P. Morgan Chase, just turned off the credit spigot to stay afloat. They stopped lending. Why? Again: illiquid assets. The banks were holding on to all these properties and other assets that they couldn’t sell. And people didn’t trust the banks because so many had lost everything depositing their savings there. Because the banks couldn’t sell anything they had, and nobody would give them any cash, they didn’t have any money to give out.Part of the problem was the gold standard. Under the Federal Reserve Act, at least 40% of the money in circulation had to be backed by gold reserves held by the federal government. So, there was no modern tool of being able to print more money to help increase liquidity.On top of that, gold became more expensive. Mortgages often had clauses that allowed banks to demand repayment in gold because of the gold standard. By 1932, that resulted in a disparity in payment between the dollar and the value of gold that meant that if a debtor was forced to repay in gold, it could cost him as much as $1.69 for every dollar he owed. This led to more bankruptcies and foreclosures still.Because of the tariffs, the lack of money supply, the collapse of agriculture, and lack of consumer spending, rampant deflation initially set in. This made exported American goods increasingly more expensive for overseas importers, even where other nations had not instituted retaliatory tariffs of their own. Manufacturing began to collapse. The steel industry followed.And the Depression spiraled out of control.When Roosevelt took over from Hoover in 1932, the nation was becoming increasingly desperate.The New DealRoosevelt ran on a radical new idea that he called “The New Deal.” The premise was that the government would intervene in the economy and prop it up through deficit spending and government borrowing. The New Deal would create government programs to put people back to work and get people back to farming and building things, and that eventually, once people got back on their feet, the government could take those supports out.Various New Deal reforms were leveled at the financial sector to try to get the credit flowing again.One reform was put on the banks directly: the Glass-Steagall Act. One of the problems with the banking crisis was that banks could gamble with depositor’s money. The Glass-Steagall Act separated investment banks from commercial banks. Investment banks are gamblers. These deal with stock and bonds and venture capital and hedge funds and Wall Street. Commercial banks are the Savings and Loan where you put your nest egg. The Glass Steagall Act put a firewall between the two. The idea was that Wall Street could melt to the ground and Main Street wouldn’t go with it.Keep this in mind. It will be important later.Another was to protect depositors. Commercial banks would be required to pay into a new Federal Deposit Insurance Corporation: the FDIC, which would make sure that depositors would get paid back if the bank collapsed. That encouraged people to trust banks again. People would deposit their money, and banks could use that money to start giving out loans again.A third was to help reduce the risk of default on certain types of loans through surety agreements. Sureties had been around forever: they’re a promise to pay a debt if the original debtor defaults.The Federal government aimed these programs at home loans in particular, to try to reduce the homelessness problem. And so, in 1938 with the National Housing Act, the government formed the Federal National Mortgage Association, or FNMA. FNMA, or “Fannie Mae,” would buy the mortgages from the banks, who would continue to “service” the mortgages. From the perspective of the consumer, it looked just like their ordinary transaction: get a loan from the bank, pay the bank. The bank kept some money for “service fees,” and the Feds took over the loan, and importantly: the risk of default. This created a secondary market for mortgages for the first time in history.But Fannie would only buy that mortgage if it met certain criteria, such as debt to income ratios, term of the loan, and more. If banks wanted to make other loans, that was fine, but Fannie wouldn’t buy them.And the program basically worked. Banks started lending again. Credit slowly started to thaw out. Banks started getting more liquidity in their balance sheets. People started being able to buy homes again.After World War II, the housing market took off again, fueled in part by the GI Bill and a push for suburbanization and the creation of easily duplicated, cheap ranch houses on a standardized template.But in the background still driving things along was always Fannie Mae and the prime 30 year fixed-rate mortgage, which had become as much a part of the standardized American experience as baseball. Housing prices rose steadily home ownership became a stable part of the American economy. Virtually every person in the country could see a viable path to owning their own home.By the 1960’s, FNMA owned more than 90% of the residential mortgages in the United States and individual home ownership had risen to the highest levels ever recorded. This led to the greatest expansion of the middle class in history.So, of course, like all wildly successful government programs, we had to fix it.PrivatizationIn 1954, FNMA was semi-privatized into a public-private hybrid where the government owned the preferred stock (with better voting rights within the corporation,) and the public held the common stock (which gave dividends, but inferior voting rights).And in 1968, Fannie Mae was privatized entirely, with a small slice of it (known as Ginnie Mae) carved off to maintain Federal Housing Authority loans, Veterans Administration loans, and Farmer’s Home Administration mortgage insurance. Because Fannie Mae had a near monopoly on the secondary mortgage market, the government created the Federal Home Loan Mortgage Corporation to compete with it: Freddie Mac.By 1981, Fannie and Freddie were doing well as private companies, and Fannie came up with a great idea that had been done in limited settings: pass-through mortgage derivatives. They would bundle up various mortgages and sell them as a type of bond to investors. Investors loved the idea. The housing market had been extremely stable for nearly fifty years and offered a modest, but highly reliable return. And so the commercial home loan mortgage backed security was born.Keep this in mind. It will be important later.The Savings and Loan CrisisBy the early 1980’s, the economy had been stable for 30 years (more or less,) and thanks to the Glass-Steagall Act, commercial banks were doing okay even with the “stagflation” of the 1970’s. Home prices continued to rise about on par with wage growth.But one type of commercial banks, the Savings and Loan banks, wanted to do better than okay. S&L’s were the kind of bank in It’s a Wonderful Life. S&L’s were specifically singled out in federal legislation, like credit unions, for a single purpose: to promote and facilitate home ownership, small businesses, car loans, that sort of stuff.A business-friendly Congress agreed. They passed two laws in 1980 (signed by Jimmy Carter) and 1982 (Signed by Ronald Reagan) that allowed banks to offer a variety of new savings and lending options, including the Adjustable Rate Mortgage, and dramatically reduced the oversight of these banks.Adjustable rate mortgages work by locking in a fixed rate for a short term, and then after that initial term, the mortgage rate would re-adjust every additional term after that. If the prime interest rates set by the Federal Reserve stayed high, lenders would get hammered.But S&L’s had a fix in mind for consumers: just keep refinancing your home every time the first term is up. Home prices would just always continue to rise, right? They could collect closing costs every couple of years, and consumers remained essentially chained to them in debt with a steady stream of revenue that would always be secured if something happened. It was perfect.Keep these types of mortgages in mind. It will be important later.By the mid-1980’s, the lack of oversight allowed S&L’s to start making riskier and riskier decisions, offering certificates of deposit with wild interest rates, as much as eight to ten percent. They were exempted from FDIC oversight, while still keeping deposits federally insured (what could go wrong there, right?)And then the Federal Reserve, in an effort to reduce inflation, raised short-term interest rates, which sent ripple effects through these S&L’s, who had been made very vulnerable to that particular issue through these bad decisions, lack of appropriate capitalization, and overpromising depositors.By 1992, almost a third of savings and loan banks nationwide had collapsed.This crisis led to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which put back some of the same oversights that had been taken off because people wanted to make more money, particularly better capitalization rules (which were tied to risk,) increased deposit insurance premiums and brought back some FDIC oversight, and reduced these banks’ portfolio caps in non-residential mortgages.Keep this in mind. It will be important later.The Repeal of Glass-SteagallRemember how back in the 30’s, in the midst of the Great Depression, we instituted that firewall between investment banks and commercial banks?Again, it worked so well, we had to fix it.Starting in the 1960’s, the federal regulators began to start to allow commercial banks to get back into the securities game again. The list was limited, and was supposed to stay in relatively safe stuff.This accelerated under Reagan’s policy of deregulation, and continued under Clinton in the 1990’s. By 1999, Bill Clinton declared that Glass-Steagall no longer served any meaningful purpose, and most people had declared it dead well before that. The law was officially repealed in 1999 with the Gramm-Leach-Bliley Act.Immediately, investment and commercial banks start merging again. Bear Stearns, Lehman Brothers, Citibank, all of these investment banks start buying out the commercial banks or merging.And there’s a culture difference between those.Remember: investment banks are gamblers. These are the Wall Street guys. They’re risk takers. They’re hedge fund managers. These are your Gordon Gekko type guys. Commercial banks are Main Street guys. They’re generally conservative, George Bailey types.And the investment banker culture won out over the course of the 2000’s. George Bailey starts snorting coke and putting on Ray Bans with a blazer and jeans.Sub-Prime, NINJA, and ARM LoansIn the early 1990’s, affordable housing started to become a greater and greater issue. George H.W. Bush signed legislation in late 1992 amending Fannie and Freddie’s charters to push them to make loans to people with lesser means than the traditional prime criteria. The Clinton Administration continued pushing Fannie and Freddie to accept more low and moderate income earners.That meant taking on riskier loans.The Clinton administration put rules in place in 2000 to curb predatory lending practices, and rules that disallowed those risky loans from counting towards their low-income targets.The Bush administration took those predatory lending rules off in 2004, and allowed those risky, “sub-prime” mortgages to count towards the low-income targets set by Housing and Urban Development.Remember those ARM mortgages?Heh, heh. This is getting long, and you probably glossed over that, didn’t you? I told you it was going to be important.Banks started making riskier and riskier loans, often those ARM loans. They could meet their HUD targets and make tons of money. And again: the gravy train was endless, right? The housing market had not lost value for over fifty years, even in the recessions of the 70’s and 80’s.So, they put more people in houses. Bigger houses. More expensive houses. The economy was doing good. New construction was hot. Contractors couldn’t build the McMansions fast enough.Banks started a race to the bottom with these sub-prime loans, getting all the way to NINJA loans: No Income, No Job, No Assets required. You’re a homeless person selling Etsy products out of your car? You’re already prequalified on a quarter-million subdivision home with a quarter-acre. Congratulations.As long as you could afford the payments, you were in.De-regulationIn the early 2000’s, the Bush administration wanted to keep the economy going. There was a low-level recession from March 2001 to November 2001 following the dot-com crash. The administration lifted a number of securities and financial sector oversight rules. One of those rules was about capitalization.Remember that? I told you that was going to be important.Capitalization requirements are how much reserve cash a bank needs to keep on hand to prevent collapse if something happens, against their liability sheets. Remember: that’s how banks got in trouble before the Great Depression and again right before the Savings and Loan Crisis. They took on too many liabilities and didn’t have enough capital to actually pay it all out.The Bush administration relaxed the rules on required capitalization and what assets could count as capital. Some of those assets turned out not to be very useful.Collateralized Debt Obligations and the Mortgage Backed SecurityRemember, back in 1981, when Fannie starts issuing those mortgage backed securities, re-selling them as bonds with a low, but reliable interest rate?That gets more complicated after 2004–2005 with the increased use of a financial tool called the collateralized debt obligation. Basically, a CDO is just a promise to pay investors in a sequence based on the cash flow from something the CDO invests in. The rate of return was tied to how risky the CDO was.In the 70’s and 80’s, CDOs were pretty safe, mundane things. They were basically like index funds; they invested in a lot of stuff and did okay. But by the mid-2000’s, CDOs were becoming riskier and riskier, while providing more and more reward. CDOs bought up mortgages like crazy, because they had increasingly higher interest rates as the subprime mortgages started taking off.But people were nervous about investing solely in these high-risk CDOs. And so, investment banks that bought up those mortgage-backed securities started to bundle together some high-risk mortgages with some regular, low-risk mortgages and promising that they were safer.And then some investment banks started to lie about how many of those high-risk mortgages were in them. Why? Again: the housing market was super-stable and always going up. Those loans only looked high-risk on paper, right? I mean, those debtors could always just keep refinancing every couple of years.So banks bought up those assets and added them to their capitalization sheets.You see it, right? You see the problem here? Not yet?Keep this in mind. It will be important in just a minute.The CollapseI remember being in college in the early 2000’s, and asking the loan officer at our local bank how some of the people I knew were making maybe $10–12 an hour could afford these massive homes and boats and jet skis and campers. My parents were teachers; they weren’t doing bad, but we couldn’t afford all that and I knew they were doing better than some of those people. The loan officer shook his head and said, “They can’t. They can afford the payments.”Some of those people didn’t have furniture in their homes. If they had a party, they rented furniture for a couple days. I’m serious. That was a thing. Many of them were in deep, crippling credit card debt, paying off the balances of one with another, and justifying it with the idea that it would be okay when the next raise kicked in.It was a classic speculation bubble.Then in late 2006–2007, that bubble burst.The housing market became oversupplied. People stopped buying the new construction and the existing homes as much. And home values started to drop.And suddenly, because home values plateaued and then dropped, so too did the little bit of equity that many of these purchasers, in debt up to their eyeballs, had in their homes. Without more equity, they couldn’t refinance. And because they could’t refinance, those ARM loans or other loans kicked in, and the interest rates on them skyrocketed.And suddenly, they couldn’t make the payments anymore.And then they went into default on their mortgages.Followed by foreclosure.And often bankruptcy.It turned into a vicious cycle. Once one or two neighbors end up losing their homes in foreclosure, it affects the property values of everyone else around those properties like a contagion. Healthier borrowers started to become impacted as property values declined and now they couldn’t refinance.In 2007, lenders foreclosed on 79% more homes than in 2006: 1.3 million foreclosures. In 2008, this skyrocketed another 81% still: 2.3 million. By August of 2008, nearly one in ten mortgages nationally were in default and foreclosure proceedings. By one year later, this had risen to over 14% nationally.The RecessionRemember, the financial sector had heavily invested in all of those housing market securities. They thought they were safe. They thought that the housing market would never go anywhere but up. They built their whole foundation on it.And they had relied on those securities to meet their capitalization requirements.Securities that suddenly turned out to be nearly worthless.Huge banks ran out of liquid cash almost immediately. This is what happened to Bear Stearns, Lehman Brothers, Goldman Sachs, Citibank, and more. They were suddenly holding on to billions upon billions of dollars of assets that were either worthless, or completely frozen. They couldn’t sell the bits of stuff that was even worth anything.And because their assets weren’t liquid, they didn’t have money to lend anymore.And that lack of credit is what grinds the economy to a halt.That impacted every sector of business in the United States. Which impacted every sector of business in the world. And that meant that businesses started having to lay people off because they couldn’t get the money to keep paying them.And then because those people lost their jobs, they started to default on their mortgages. Which rippled through the CDO market again.This was why it was so critical for the Federal Reserve to buy those toxic assets and provide the banks with liquid cash in their place. They had to get the credit flowing again to re-start the gears of the economy. Without it, we almost certainly would have seen a full repeat of the Great Depression.And that brings us to today.That’s the abbreviated, oversimplified explanation. It’s more complicated than this, and there’s other factors that contributed, but that’s kind of the main story in basic terms. That’s roughly how 10 million homes went into foreclosure.And we still haven’t fully recovered. Over twice as many people rent as opposed to own. Less than one-third of people who have lost a home in foreclosure in the last decade will be able to repurchase another again. Roughly 2/3ds of those people who lost their homes have so damaged their credit that they will never qualify again. Hundreds of thousands, if not millions more, were so emotionally traumatized by the experience that they simply refuse to go through it again.And that number of renters to owners is substantially higher for my generation, the Millenials, who have never seen any substantial portion of the post-2008 recovery. We still haven’t made up the wages that would allow us to save enough to purchase, even setting aside the massive increase in student debt we carry.75% of my generation wants to own a home. Less than 35% do.And, in case reading this wasn’t chilling enough for you, the present administration has been lifting some of the exact rules and regulations that were put into place after the 2008 collapse that were lifted in 2004 that were put in place after the 1980’s collapse after those were lifted. Because it worked so well the first two times.Mostly Standard Addendum and Disclaimer: read this before you comment.I welcome rational, reasoned debate on the merits with reliable, credible sources.But coming on here and calling me names, pissing and moaning about how biased I am, et cetera and BNBR violation and so forth, will result in a swift one-way frogmarch out the airlock. Doing the same to others will result in the same treatment.Essentially, act like an adult and don’t be a dick about it.Look, this is pretty oversimplified. Ph.D. theses have been written about this. I’m trying to make it at least remotely accessible to those with the patience to read it. Don’t be pedantic about it, please?Getting cute with me about my commenting rules and how my answer doesn’t follow my rules and blah, blah, whine, blah is getting old. Stay on topic or you’ll get to watch the debate from the outside.Same with whining about these rules and something something free speech and censorship.If you want to argue and you’re not sure how to not be a dick about it, just post a picture of a cute baby animal instead, all right? Your displeasure and disagreement will be duly noted. Pinkie swear.If you have to consider whether or not you’re over the line, the answer is most likely yes. I’ll just delete your comment and probably block you, and frankly, I won’t lose a minute of sleep over it.Debate responsibly.