A controversial assertion
In a fresh working paper from the Federal Reserve Bank of St. Louis, Andra C. Ghent, Rubén Hernández-Murillo, and Michael T. Owyang study whether or not affordable housing legislation contributed to the subprime securities boom, thus the housing crash.
The paper entitled “Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?” and the first word of the findings is “No.”
The fed stated, “In this paper we use a regression discontinuity approach to investigate whether affordable housing policies influenced origination or affected prices of subprime mortgages. We use merged loan-level data on non-prime securitized mortgages with individual- and neighborhood-level data for California and Florida. We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises? (GSEs) affordable housing goals or the Community Reinvestment Act.”
The result? The paper said, “the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.”
This working paper is sure to be highly controversial given the very common belief held by many lawmakers and economists that the push for affordable housing weakened the market and did, in fact, lead to a boom in subprime securities. While there are dozens of other theories, this is one that is commonly agreed upon.
So how can it be true?
Rather than speculate, the Federal Reserve Bank of St. Louis “examined the effect of affordable housing legislation on the volume, pricing, and performance of subprime mortgages originated in California and Florida in 2004 through 2006. Using a regression discontinuity approach, we found no evidence that the affordable housing goals of the CRA or of the GSEs affected any of these outcome measures.”
They continue, “While it is unquestionable that Fannie Mae and Freddie Mac held substantial amounts of subprime mortgages, and that their holdings of these securities played a significant role in their demise, the evidence in this paper refutes the claim that the affordable housing mandates were responsible for the risk-taking behavior of these two institutions.”
It is interesting that the paper makes a national assertion based exclusively on two states, two of the hardest hit by the recession. If an economist were to say that home sales were down 22 percent because of poor sales in California and Florida, would that economist not be castigated for poor forecasting? Would it be responsible if the National Association of Realtors reported that home prices were unaffected by the recession because Idaho home prices and Montana home prices were up 32 percent since the recession began?
While there will be critics and supporters of this working paper, the assertions are fascinating, nonetheless.
The full working paper: