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.