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Was legislating affordable housing the cause of the housing crash?

After years of many economists and lawmakers agreeing that affordable housing was the first domino that toppled, causing the rest to fall, a new working paper asserts that affordable housing did not contribute to the subprime securities boom, thus did not contribute to the crash.

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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:

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.

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21 Comments

21 Comments

  1. Roland Estrada

    March 26, 2012 at 10:11 pm

    As I’ve mentioned before, it was the general relaxing of mortgage standards and almost complete lack of oversight that led to the housing crisis. It’s easy to solely blame the financial sector for the mess. However, the banks only went as far as legislators would let them go – which was pretty far.

    The Federal Reserve paper is just another version of the same CYA that we’ve hearing from our pure-as-the-driven-snow legislators. The sheeple love it when the government hands out goodies of various types. But there is always, always a price to pay.

  2. Stan Brody

    March 27, 2012 at 8:05 am

    Insofar as over 60% of all loans were closed not by banks, but instead mortgage bankers, not bound by the act, the affordable housing act (CRA) played such a minor role in the overall housing crisis as to be a non-issue. However, as homeowners these people were most susceptible to any economic downturn… they were too often the first to lose their jobs, and thus going into default. The manner in which the (conspiratorial?) MBS’s were created and assembled played a far greater roll in this depression. The “rating” agencies knew in advance that the mortgage pools they were blessing were wrought with the very high probability of failure… A.I.G. wrote bogus (criminal) mortgage insurance policies (CDO’s); and the the ilk of Goldman Sachs knowing full well that the MBS’s, comprised of loan products they had created and had designed were doomed to eventually implode. Fannie and Freddie, under the very same social pressure to comply as are teenagers, were very late to the game in lowering their overall standards allowing them to buy sub-prime mortgage pools… But along with the CRA both are the whipping dogs of an inept media leading the Cacophony of Condescending Conceited Clueless Clowns of Congress by its nose…

    Simple math tells us that, using the HUD actuarial for long term appreciation and based on the number of homes with negative equity… the number of existing REO’s… the number of homes already in the foreclosure process … and the government’s own projections for those programs such as HARP2… without an understanding that the only way out is principle write down… recovery cannot occur before 2022… the number of problem loans are far to massive… HARP2 is akin to going to the hospital with a heart attack and being treated for an ingrown toenail…

  3. James

    March 28, 2012 at 3:11 pm

    Why is this even a question? It’s the most preposterous assertion I’ve heard, without any merit. If it weren’t for publicly-subsidized affordable housing, the crash would have been even worse. Subsidized housing had much lower default rates than market rate housing because it was highly regulated and market rate housing was not.

    • DFerr

      March 28, 2012 at 10:23 pm

      Commonly agreed upon? Perhaps commonly repeated without verification, but I don’t believe that economists agree on this at all.

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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