CRA and the Housing Bubble: Did the Community Reinvestment Act Lead to Risky Lending?


CRA and the Housing Bubble: Did the Community Reinvestment Act Lead to Risky Lending?

There’s an interesting new paper out on the role of the Community Reinvestment Act and the housing bubble. The paper, called “Did the Community Reinvestment Act (CRA) Lead to Risky Lending?” is by Sumit Agrawal, Efraim Benmelech, Nittai Bergman, and Amit Seru (ABBS). It is a serious economic analysis, which is a major departure from much of the post-2008 grumbling about the CRA. By exploiting the differences in lending behavior within census tracts between banks that are undergoing CRA exams and those that aren’t, ABBS find that undergoing a CRA exam is correlated with a rise in mortgage lending and that those loans perform more poorly than those made in the same census tract by institutions not undergoing CRA exams. In other words, the CRA encouraged more lending and as a result it resulted in less prudent lending.

There’s already some smart commentary on the paper from Mike Konczal. I would add this. There are two separate issues with the CRA. The first is whether CRA caused the bubble, and the second is whether CRA is a good idea generally. My take from ABBS is that the answer to the first question is clearly no–indeed, it seems to provide further evidence of the key role of private-label securitization–while the second question is unanswered.

Assuming ABBS’s analysis is correct, the paper shows pretty clearly that the CRA did not play a significant role in fomenting the housing bubble. While the CRA may have lead to more risky lending, what is most striking about the paper’s findings are how small in magnitude the CRA’s effects are. While ABBS find statistically significant impacts, the magnitudes are really small:  5% more lending in the six quarters surrounding a CRA exam and 15% higher default rate.  That’s not a 15% default rate.  That means a 1.15% default rate instead of a 1% default rate or a 6.9% default rate instead of a 6% default rate. This sort of change is a drop in the bucket relative to what happened during the housing bubble.

More here…

Copy of the paper below…



Did the Community Reinvestment Act Lead to Risky Lending?


4 Responses to “CRA and the Housing Bubble: Did the Community Reinvestment Act Lead to Risky Lending?”
  1. lies is all they tell says:

    it lead to putting anyone that had a pulse approved for a mortgage. no thought went into when these adjustable mortgages would adjust 2 years down the line and NO one would be able to adjust. and they new it. for example my sisters adjustable rate mortgage in 2005 adjusted in 2007 to her entire paycheck 2100k. unable to finance by design she left her home. sad she didnt know about foreclosure defense then nor have the money if she did. then once all these subprime mortgages hit bottom all the jobs in the construction sector were lost. this is where folks like me whose were affording their mortgages all along, found ut they were fraudulently put in a “stated income loan” so then when there was a job loss the pain would be felt. sad to live in a world like this. hard to be positive for your kids but we must. how does anyone have a conscience to put people in homes then take them away? the poor people that do not know what has happened how horrible. now that we know about these crimes how do we fix it
    thanks and merry christmas and happy new year

  2. Sarah says:

    No. However, this bs is often repeated that the Banks were somehow “forced” to lend to the “unworthy.” The Government forced no bank to prey on people, the Banksters did it for themselves, and universally blame the big bad “Government”. It’s a huge lie. If anything, it reveals how much our Government and media are simply bought off. Banksters knew precisely what they were doing, Countrywide, New Century, Chevy Chase, et al.

    • lies is all they tell says:

      you could include wells fargo as well
      i have wells fargo bank NA foreclosing and wells fargo home mortgage servicer still that does not know wells faergo bank na has already proceed with foreclosure i have been denied a mod i didnt apply for. thats part fo the false claims act lieing to our government to make money. they get 3k per application. if they are all sending out packets of modification paper work and then denial letters to follow that is fraud.. how do we report this. i am in a foreclosure and have a lawyer. sad they continue to lie and steal and cheat in our noame. god help us. they do not beleive we will do anything.

    • neidermeyer says:

      I read this report on another site a day or two ago ,, bottom line ,, the CRA lead to FedGov guarantees that FMN would buy any old crapola the banks could deliver (not CRA related loans , any loan) ,, The CRA and the people it helped weren’t responsible ,, the banks abusing the FNM/FRE policy changes and the banking comittees in Congress failing to stop the abuse was the problem.

      We don’t have enough lamp posts in D.C. and Manhattan for all the criminals.

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