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Don’t Blame the Whole Housing Bubble on CRA

April 30, 2014 in Economics

By Ryan McMaken


Newly-released memos from the Clinton presidential library reveal a little more about the scope of the Community Reinvestment Act (CRA) activities in the years leading up to the collapse of the housing bubble.  For those unfamiliar with the home-loan industry, the Community Revinvestment Act was a 1977 act that “encourages” (with the threat of violence) banks and other lending institutions to make more home loans to low-income, non-white, and Hispanic households, and to reduce “redlining.”

As noted in this article (now popping up around the conservative press) about the new CRA revelations, former Treasury Secreatary Robert Rubin crows about the substantial increases in loans made to these households that have historically not qualified for loans.  The problem is that “CRA-approved loans defaulted about 15% more often” as a result of the “flexible lending” mandated by the feds. No one should be surprised that CRA loans go into default more often. While there is ample evidence that banks aren’t terribly fastidious in their underwriting (which is why they like to get the mediocre loans out of their portfolio and thus make them someone else’s problem ASAP), there was nevertheless a reason those riskier CRA loans weren’t being made in the first place.

So, CRA had a hand in helping create a sizable number of default-prone loans that contributed to the housing bubble that popped in 2008. The degree to which CRA was a major factor in the bubble is not clear, however, and while CRA should of course be repealed immediately,  I’m not sure CRA should really be the primary focus when we’re looking for explanations about the bubble or its collapse.

In the days following the collapse, however, conservative media zeroed in on CRA as a major cause of the housing bubble. This is likely due to a couple of reasons:

1. Conservative pundits don’t understand the business cycle or the role of central banks in it.

2. The CRA critique fits nicely into the conservative obsession with “multiculturalism” and the knee-jerk tribalism that dominates political discussion at the level of talk radio and TV-news punditry (not just among conservatives).

If we look at it more carefully, we can see “flexible” CRA loans as really just a sub-species of the general problem of housing bubbles:  malinvestment propelled by easy money  policies of the central bank. CRA certainly channels  the “flexible loans” to certain households and neighborhoods, but it seems unlikely that the malinvestments of the …read more


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