Mortgage loans with no down payment, no income verification and other “creative” financial arrangements abounded. Although this was done under pressures begun in the name of the poor and minorities, people who were neither could also get these mortgage loans.
With mortgage loans widely available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disaster.
While this might sound scary, it’s muddling the issue to make it look like it was all the government’s fault. Randall Kroszner, who’s actually done some empirical work on this, has this to say:
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.
Kroszner asks two very basic questions.
1. What percentage of subprime loans were related to the CRA ?
2. How did CRA related subprime loans perform relative to other loans?
What does the evidence say? On question one, 60% of high price loans went to middle or higher income borrowers (people not covered under the CRA) and more than 20% of loans extended to lower income borrowers were given by nonbank institutions (institutions not covered by the CRA). Kroszner concludes with:
Putting together these facts provides a striking result: Only 6 percent 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.
On question two, the rates for all subprime loans delinquent after 90 days or more was high regardless of income. There was no real difference in loan performance for subprime loans in Zip codes/communities that were just below or just above the income threshold for the CRA, which isn’t consistent with the assertion that the CRA was at the root of the crisis.
So in conclusion, there is no real evidence to suggest that the CRA was a major cause of the housing bubble that lead to the Great Recession. Rather than push banks to give bad loans, the CRA was created to encourage banks to find new lending opportunities in various communities as well as undertake such lending in a sound manner. The fact is, our country has a history of discrimination against various ethnic and social groups that is in ingrained in many of our public and private institutions. Financial seclusion leads to concentrated poverty, a very serious issue, and programs like the CRA can help alleviate that problem.