It Wasn't the CRA

I still hear the charge that the Community Reinvestment Act caused the financial crisis, so, one more time, it didn't:

Kroszner: CRA & the Mortgage Crisis, by Barry Ritholtz: Sayeth the man:

“Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. In the remainder of my remarks, I will discuss some of our experiences with the CRA. I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis . . .

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”

Be sure to read the entire speech by the Fed Governor here. He discusses the result of an exhaustive data analysis performed by the various Fed Banks looking into the CRA issue... Of course,... the usual parade of reality challenged nitwits won’t be interested in any hard data or professional analyses. The full 233 page report is available here.

Remember where this came from, it was an attempt by conservatives to blame the financial crisis on government help given to low income households:

Did Liberals Cause the Sub-Prime Crisis?, by Robert Gordon, TAP: The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve.

The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a Washington Times column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a New York Post op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On The National Review's blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-mandated -- political correctness."

Last week, a more careful expression of the idea hit The Washington Post, in an article on former Sen. Phil Gramm's influence over John McCain. ... [T]he Brookings Institution's Robert Litan ... suggested that the 1990s enhancement of CRA, which was achieved over Gramm's fierce opposition, may have contributed to the current crisis. "If the CRA had not been so aggressively pushed," Litan said, "it is conceivable things would not be quite as bad. People have to be honest about that." ...

The revisionists say the problem wasn't too little regulation; but too much, via CRA. ...

For more debunking:

• Private sector loans, not Fannie or Freddie, triggered crisis, McClatchy
• It Wasn't the Community Reinvestment Act
• Yet Again, It Wasn't the Community Reinvestment Act...

It's disappointing that there are people who still believe this is true. The people blaming the CRA for the financial crisis did not undertake a careful analysis of the data, then draw conclusions. If they had, and if they had done so honestly, they would have known that the charge against the CRA was false. A careful analysis of the data wasn't the goal, however, this was a political effort and a scapegoat that fit their ideological and sociological pre(mis)conceptions was all that was needed.

Update: Evidence from another study, Don't Blame CRA (The Sequel) - Real Time Economics.

Comments

says...

I suppose you don't believe in UFOs, either.

[Cyril Morong]

Larry White disputes Kroszner's view. You can read what White says here

http://divisionoflabour.com/archives/005376.php

[Proximate]

Even if the CRA was not the proximate cause of the crises, unfunded mandates are not the best way to provide a service. Too many unintended consequences result from haphazard implementation. Set up a GSE for the targeted population. Then costs and benefits can be closely monitored and controlled.

[culuriel]

Larry White's analysis is not impressive. He states that 8% is a significant number. As opposed to 92%? Not impressed. He then also states the positive reviews of the CRA in the late 90's, early 00's persuaded lenders to start a round of non-CRA required sub-prime mortgages? He's reaching.

[Patricia Shannon]

http://www.mcclatchydc.com/251/story/53802.html

Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

[Patricia Shannon]

http://economistsview.typepad.com/economistsview/2008/04/yet-again-it-wa.html

CRA only governs a certain class of federally insured banks. Problem is, half of the subprime loans came from mortgage companies with no CRA involvement at all. Another 25%-30% came from companies with very little CRA exposure. For those who left their abacus at home, that's 80% of the loans which were fully or largely outside CRA jurisdiction. More than that, the non-CRA mortgage firms made subprime loans at twice the rate of CRA-covered firms.

[Patricia Shannon]

If the CRA required banks to make so many risky loans, all the banks would be bankrupt. This is not the case.

The people who believe the CRA caused the subprime crisis are probably the people who still believe Obama is a Muslim (not that there would be anything wrong with that, just that it's not true.)

[roger]

The problem, of course, is that the excellent CRA program, which was very well vetted and regulated, wasn't used as a model for sub-prime. Instead, it was Phil Gramm's rightwing idea of social insurance - allowing unregulated lenders to lend in any way they want to to anybody they want to - which won the day, leading, of course, to the meltdown. Not that this should be any surprise - over the two hundred fifty years of capitalism, any time a program is launched on Gramm-like lines, it always leads to a bogus boom and a real bust. Libertarians are like people who think alcohol doesn't make you drunk, and who, when it is pointed out that people who drink a lot of alcohol in one setting get drunk, claim that it isn't the alcohol, but the impurities in the alcohol. Similarly, in a setting in which government regulation all but vanishes, they still claim that little bit of regulation, or the threat of regulation, or perhaps the fact that the dictionary includes regulation as a term, led to the meltdown. Such is the turn from logic to neurosis.

[Patricia Shannon]

http://www.mcclatchydc.com/100/story/57036.html

Since there are still idiots and claiming Obama wasn't born in the U.S. (he was, in Hawaii), there's no surprise people are still blaming the CRA for our economic crisis.

[Patricia Shannon]

http://www.mcclatchydc.com/100/story/57036.html

Still, legions of anti-Obama bloggers are so convinced he was born in Kenya that they’ve filed more than a dozen lawsuits nationwide.

They cite the Constitution’s requirement that presidents be "natural born citizens." They want the election declared void if Obama doesn’t deliver an original birth certificate — subject to an inspection by forensic experts — to be sure.

One litigant’s U.S. Supreme Court filing is scheduled to be discussed in private by the justices later this week.

Justice Clarence Thomas distributed to his colleagues a request that the high court weigh in before the Electoral College makes Obama’s victory official later this month. The justices may decide in a Friday conference whether to hear or cast away a lawsuit dismissed in a lower court and appealed by a retired New Jersey lawyer named Leo C. Donofrio, who also has his own Web site.

Aren't we lucky Georgia chose Republican Saxby Chambliss to continue in office, in the runoff day before yesterday. He'll help make sure we continue to get quality justices like this on the supreme court. (very heavy sarcasm)

[kthomas]

Blaming others is part and parcell of the right. Telling the truth is simply not their forte.

[kthomas]

Patricia, let them. It will be fun wathcing Uncle Clarence make a fool out of himself.

[Holly W.]

There's a difference between subprime loans and exotic loans, isn't there? Nothing in the CRA says you had to give up checking income, or encourage people to take out "exploding mortgages" rather than sensible fixed-rate loans.

My husband saw a news item on TV about how many small, local banks are more solvent than the big banks because they weren't "sophisticated" enough to be granting exotic mortgages. But aren't these exactly the banks that should have been subject to the CRA? And yet they kept making loans more or less the old-fashioned way.

[rehctaw]

New Deal, Great Society, S&L looting, Welfare Reform, Compassionate Conservatism, Now CRA and sub-prime.

There's a steady, unerring trail of diversion of intended benefits for private profit and gain. Always blaming the poor, the uneducated, the powerless. Who, if they were behind it, would no longer be poor.

Looting social spending either by outright fraud or parasitic bureaucracy has been raised to an art form by the opportunistic infectious disease known as the GOP.

says...

Keep an eye on FHA loans for a few years.

Fortunately, former subprime mortgage outfits can change their names and now mediate FHA loans to unqualified borrowers using the exact same lending standards as before. That way, they can make big bucks, keep the housing market active, and hopefully perpetuate sky-high foreclosure rates for a few more years. The CRA doesn't have anything to do with it.

[bill]

wasn't the repealling of the glass-steagel act responsible, for enabling the creation of unregulated derivatives, which were then invested in with borrowed money, as well as retirement and pension funds?

[bill]

the fragility of the high risk derivatives only needed a stiff breeze to begin to topple and take down everything connected with them like a row of dominoes

[bill]

they only looked like an impressive structure from the outside, as they were intended to, the people on the inside knew what they were building and why. the smoke and mirrors kept the greedy thieves from being seen while they gutted our economy. next chapter more missing money from other fed institutions. KILL THE BANKSTERS.