In November 1999, the U.S. Congress asked the Board of Governors of the Federal Reserve System to conduct a comprehensive study of loans made under the Community Reinvestment Act of 1977. The Board’s study focused on the loans’ delinquency and default rates—their performance—as well as their profitability. This Commentary reports the results of the study.

Concerns about the availability of credit to lower-income borrowers and communities and to small businesses and farms are long-standing. Over the years, many government programs, such as those of the Federal Housing Administration, have been established to address these concerns. Regulation of private-sector activities also is intended to bolster such lending. The most prominent government regulatory effort to improve access to credit, the Community Reinvestment Act of 1977 (CRA), was designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, consistent with safe and sound operations.

Responding to the CRA, banking institutions have used various methods to expand lending to lower-income customers and those in lower-income neighborhoods, but their approaches fall into two broad types, both typically involving special marketing and outreach. In one approach, lenders have sought additional CRA-related customers who would qualify for market-priced loans using traditional standards of creditworthiness. In the other, lenders have gained customers by modifying their underwriting guidelines or loan pricing. Many banking institutions, especially the larger ones, have established or participate in special programs to foster lending.

Special lending programs vary widely but they often feature more flexible credit-underwriting guidelines than those used for other products; education and counseling for prospective borrowers; enhanced, targeted marketing of credit products; and coordination with a wide range of third parties, both private and public. In addition, some banking institutions offer pricing incentives for loans made under these programs and have established procedures to mitigate the credit risk associated with such loans.

Although the CRA’s effects on lending to lower-income populations and neighborhoods are difficult to assess, such lending has increased substantially over the past decade or so. For example, home- purchase lending to lower-income households has increased 86 percent since 1993 (compared to about 50 percent for higher-income households). Lending to borrowers in lower-income neighborhoods also has risen sharply (nearly 80 percent) since 1993.

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Barry rightly makes the point that the problem happened in other countries without FNM/FRE/CRA.

Plus, once again, all you wingnuts can’t seem to get it through your pea brains that the problem is that a $200,000 mortgage got turned into a $3 million CDO. That has nothing to do with the CRA.

Fanny/Freddy did relatively less of the risky stuff than the rest of the private mortgage industry. They are almost half of the total loans but the 270 billion is less than 20% of the risky loans in 2005-08.

Without Fanny/Freddy there would have been other even less regulated private companies to do fill the gap, and those would have taken on at least as much risky (high profit) stuff as Fanny and Freddy did.

The only difference is that without Fanny/Freddy there would not be anybody to securitize mortgages today and the housing market would be in total chaos, with pretty much no other byers than those who can pay the full price in cash.

CRE actually prescibes that an institutions CRE activities “should be undertaken in a safe and sound manner”. So without CRE the institutions subjected to CRE would have felt even more free to abandone all caution.

Sleazeballs Frank and Dodd had absolutely no power when these problems were created and expanded, so their existence or not would have made no difference.

Do you think they were the single most important reason for the housing boom and bust ? Is that your argument?”

~~~
No.

I don’t understand and/or know many elements.
For example, I don’t understand how mortgage originators, like CntryWide and WaMu, got into trouble. I thought that the only mortgages they had on books were new mortgages in pipeline to be sold to Fanny/Freddy or to securitizers.

I don’t understand how CMO got spread.

We have something close to a perfect storm.
I suspect -just a gut feeling on my part, a combination of Clinton/Bush administrations pushing Home ownership, Fanny/Freddy bribing politicians, politicians pushing bureaucrats, bureaucrats pushing banks, Greenspan easy money and new classes of derivatives not understood by anybody, all of it together caused the storm.

Missing one or two factors we probably would not have had the storm.

Without CRA or Fanny/Freddy or easy money or CMOs it would not have happened. [BR: it happend overseas w/o FNM/FRE/CRA!]

With better behavior of administrations and/or Congress, it may or may not have happened.

If there was no CRA – storm would not have happened.
If instead of sleazeballs, Frank and Dodd, we had better pols, it probably would not have happened.
If there was no Greenspan’s easy money, it would not have happened.
If Housing was not the only game in US economy, it probably would not have happened.
If Fanny/Freddy did not exist or were tightly regulated

Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers–more than three times as much as in all its earlier years combined,
according to company filings and industry data.

“We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”

~~~

BR: Yes, Fannie was an element in the Housing mess. Obviously not in the overseas housing markets, and obviously not for the prior 20 years — but they were a factor.

Do you think they were the single most important reason for the housing boom and bust ? Is that your argument?

Furthermore, if you read the Fed link, you’ll see they admit the study was done hastily (due to a Congressional deadline), and there were many problems with the study. For example:

“In principle, to assess a law or regulation’s influence on loan performance and profitability, one must measure its “marginal” effect; ideally, this would mean considering only the additional loans made because of the law. Such an assessment, however, is impossible in practice because one cannot specify the subset of loans that are made solely because of the CRA”

“In addition, we encountered some confusion as to the definition of a CRA loan. The definition was not well understood by all survey respondents, some of whom equated CRA loans with loans made under special lending programs.”

“We received responses from 143 of the 500 institutions to which we sent the survey (a 28.6 percent response rate). These responses and our follow-up telephone contacts revealed that banking institutions generally do not track profitability and performance separately for CRA-related lending, so our report emphasized qualitative results regarding profitability. Because fewer than half of the respondents answered quantitative questions on performance, one must be cautious when using these responses to draw qualitative inferences comparing the performance of CRA-related and other lending.”

Finally, the respondents did not unanimously claim profitability:

“A majority of CRA special lending programs were reported to be profitable or marginally profitable. About 25 percent of them were described as unprofitable or marginally unprofitable.”

Bloomberg (Sept. 22) — “The companies said they were urged to increase purchases of subprime debt by the Bush administration. The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year.

The updated goals “were significant enough to force them to go down the credit curve to meet them, which meant participating in some way or form in the higher-risk areas of the mortgage market,” said David Stevens, a former head of Freddie’s single- family mortgage business who now runs lenders affiliated with Long & Foster Real Estate Inc. in Fairfax, Virginia. That included “the subprime business.””