Momentum Trading
This Week in Journamalism

The WSJ News Pages Weigh in: Don't Blame CRA (The Sequel)

Of all the bizarre things coming out of the Republican Party and the Austrian economics fashion is the claim that the financial crisis is the result of government regulation that forced banks to lend to poor people--especially to poor brown and black people.

Here the WSJ news pages weigh in on this most ridiculous and bad-faith of claims:

Real Time Economics : Don't Blame CRA (The Sequel): A pair of economists from the Federal Reserve Bank of San Francisco added another piece of evidence to the case that the 1977 Community Reinvestment Act wasn’t the cause, or even a major contributor, to the subprime mortgage debacle.

In a paper focused on California that was presented at a Fed conference on housing and mortgages in Washington, D.C., Elizabeth Laderman and Carolina Reid say the data “should help to quell if not fully lay to rest the arguments that the CRA caused the current subprime lending boom by requiring banks to lend irresponsibly in low and moderate-income lenders.” Fed governor Randall Kroszner made a similar case earlier this week.

Among the specific findings in “Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown”:

  • Overall, lending to low and moderate income communities comprised only a small share of toal lending by CRA lenders, even during the height of the California subprime lending boom.
  • Loans originated by lenders regulated under CRA in general were “significantly less likely to be in foreclosure” than those originated by independent mortgage companies that weren’t covered by CRA.
  • Loans made by CRA lenders within their geographic assessment areas covered by the law were “half as likely to go into foreclosure” as those made by the independent mortgage companies.
  • 28% of loans made by CRA lenders in low income areas within their geographic assessment areas were fixed-rate loans, compared with 18.2% of loans made by independent mortgage companies in low income areas.
  • 12% of the loans made by CRA lenders in these areas were high-priced loans, a technical definition of subprime, compared with 29% of the loans made by those lenders outside their assessment areas and 52.4% of loans made by independent mortgage companies in low-income areas.

Real Time Economics : Fed's Kroszner: Don't Blame CRA: Federal Reserve governor Randall Kroszner, a conservative economist on leave from a teaching post at the University of Chicago Booth Graduate School of Business, says the Community Reinvestment Act isn’t to blame for the subprime mess, despite some accusations to the contrary.

“First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together… we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis,” he said in a speech today in Washington.

The Community Reinvestment Act, which dates to the 1970s, was crafted to combat discrimination and red-lining. It requires regulators to press banks to lend to low-income and minority neighborhoods. Kroszner’s speech summarized research the Fed has been doing on two basic questions: (1) What share of subprime loans were related to CRA? Answer: “Loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage crisis.” (2) How have CRA-related subprime loans performed relative to other loans. Answer: “[D]elinquency rates were high in all neighborhood income groups, and that CRA-related subprime loans performed in a comparable manner to other subprime loans.”

Fed economists found that about 60% of higher-priced loan originations — the technical definition of subrpime — went to middle- or higher-income borrowers or neighborhoods who aren’t targeted by CRA. More than 20% of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by institutions that aren’t banks — and aren’t covered by CRA.

The “striking result,” Kroszner said: “Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.”

“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.” Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions.