Subprime

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…

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4closureFraud.org

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Did the Community Reinvestment Act Lead to Risky Lending?