Fingers usually point at Rep. Frank’s CRA
It is a common belief that subprime crisis was caused by the Community Reinvestment Act (CRA) which pushed for affordable housing and loan attainability. The Division of Research and Statistics of the Board of Governors of the Federal Reserve System has released their findings and claim that the cause of the crisis is neither the CRA nor the Government Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac.
Dr. Robert B. Avery and Dr. Kenneth P. Brevoort, both Senior Economists, studied the crisis whose conclusions may be contested by critics of the CRA (which are many and loud).
“We rely on two empirical approaches,” the study says. “In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA’s effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest.”
Their conclusion? “We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.”
Economists going wild- is the excitement premature?
The final sentence of the study notes, “To date, the data to conduct such analysis is not publicly available, and until it is, we may be unable to draw definitive conclusions on the role that the CRA and GSE affordable housing goals played in the subprime crisis.”
The Avery-Brevoort duo was willing to proclaim in their abstract and intro that the CRA and GSEs did not cause the subprime crisis, but their final conclusion is actually wide open, noting a lack of evidence one way or another. The chapter is not closed- history may still be written to state that the CRA and GSEs caused the subprime mortgage crisis.
Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.
