The role of Community Reinvestment Act in the "Global Financial Crisis" has been an ongoing debate that effectively revolves around the debate about potential unintended consequences from government actions in encouraging home ownership and lending (with the CRA being the current topic). A late 2012 paper concludes the CRA did encourage risky lending. The paper follows-up on the FCIC report and its discussion(s) of the CRA's contribution (or lack thereof) in the Crisis with the Majority report dismissing any significant link between the CRA and the crisis, but Wallison's dissent suggesting otherwise. See Did the Community Reinvestment Act (CRA) Lead to Risky Lending? (10/1/2012) by Sumit Agarwal, Effi Benmelech, Nittai Bergman, and Amit Seru (NBER version)Some additional links and excerpts of note (on both sides) include the following.
"Yes, it did... We find that adherence to the act led to riskier lending by banks ... The effects are strongest during the time period when the market for private securitization was booming."
"Krugman (2010) argues that “the Community Reinvestment Act of 1977 was irrelevant to the subprime boom.”
"Most empirical studies find that the CRA had little or no effect when looking into a battery of dependent variables (e.g., Dahl, Evanoff, and Spivey 2000 and Kroszner 2008). This lack of results makes it hard to conclude whether the CRA truly had no impact on lending standards or, alternatively, whether the empirical approaches used employed insufficient variation to identify the causal effect of the act. In this paper we attempt to fill this gap ... By tracing out banks’ responses to CRA evaluations in terms of both the quality and the quantity of mortgages originated, we show clearly that the CRA did lead to riskier lending."
"In interpreting our results, it should be stressed that while we find that the Community Reinvestment Act led to increased origination rates of risky loans, it may still be an efficient policy due to other, desirable consequences. Perhaps most important of these is the provision of credit to potential borrowers who would otherwise have been denied access to credit markets for reasons such as redlining or pure discrimination. However, by showing the costs that are associated with the regulation, we provide evidence that can help inform the debate on the overall desirability of CRA."
Gary Karz, CFA
- 1/6/2013 The Blame the Community Reinvestment Act Industry by Dean Baker
- 12/12/2012 James Pethokoukis comments
- 12/11/2012 What Does the New Community Reinvestment Act (CRA) Paper Tell Us? by Mike Konczal
- 12/10/2012 Did the Community Reinvestment Act (CRA) Lead to Risky Lending? by Tyler Cowen
- 12/10/2012 Noah Smith comments
- 1/27/2011 Financial Crisis Inquiry Commission Final Report (includes Dissenting Views By Peter J. Wallison)
- 6/3/2010 Things Everyone In Chicago Knows by Paul Krugman
- 6/2/2010 Bankers have been sold short by market distortions by Raghuram Rajan
- 6/26/2009 The Phony Time-Gap Alibi For The Community Reinvestment Act (John Carney)
- 3/1/2009 Did the CRA cause the mortgage market meltdown? by Neil Bhutta and Glenn Canner"On balance, the evidence runs counter to the contention that the CRA lies at the root of the current mortgage crisis."
- 12/5/2008 FDIC's Bair Sets to Shatter CRA "Myth
- 12/3/2008 The Community Reinvestment Act and the Recent Mortgage Crisis by Randall Kroszner"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."
- The Community Reinvestment Act at Wikipedia (with extensive background and additional links).
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