The Subprime Crisis: Is Government Housing Policy to Blame?

Robert B. Avery*
Senior Economist


Kenneth P. Brevoort
Senior Economist

Division of Research and Statistics
Board of Governors of the Federal Reserve System
Washington, DC 20551

August 3, 2011


Abstract below; full document after the jump . . .



A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality.

We rely on two empirical approaches. 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.

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.

CRA GSE 201136pap

Category: Bailouts, Real Estate, Really, really bad calls, Regulation, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “The Subprime Crisis: Is Government Housing Policy to Blame?”

  1. ilsm says:

    Thanks Barry,

    If I were a bankster who deposits require premia I would be mad for two reasons: the report is fairly accurate (unlike the treatment from 1995) and the CRA is no cause, two it should not take all that paper and expensive analysis to get there.

    Blaming CRA is “bait and switch”, the usual for con artists.

    What about the sub-prime crisis?

    The conduct of the criminal banksters’ rating tools lying about the risky assets in the “tranches”.

    A root cause can be recognized with 5 or fewer directed “why’s”.

    1. So, why were the tranches so much more risky than advertised? The mortgages were badly written.

    2. Why were the mortgages badly written? The assessments/risk meters were fraudulent.

    3. Why the need for fraudulent risk assessments? The banks had too much money to lend and needed the appearance of 6% APY on so called solid 30 year assets to get up the huge leverage.

    4. Why the need for such returns? Greed and lack of due diligence on the holders of huge sums of money leveraged to the extreme.

    5. Why the extreme leverage? The central bank and are crocked with the banksters.

    In short the music stopped and the tax payer and econ0omy was holding the bag.

    5 whys can be used to figure out the cause of airplane crashes and production line messes.

    Why not occupy wall st.

  2. [...] while Fannie and Freddie exacerbated the meltdown and behaved as irresponsibly as any Wall Streeter, there is absolutely no connection between the meltdown and the Community Reinvestment Act.  I have never been able to figure out how folks jumped the shark to make this connection, but it [...]

  3. ByteMe says:

    You know the wingnuts will ignore it or claim it’s biased because it came from the Fed, right?

    Facts don’t matter, only power.

  4. DeDude says:

    No they will claim it is biased because it didn’t reach the right conclusion. If a fed paper reached the “right” conclusion the wingnuts would declare it the God given truth.

  5. pjschgo says:

    Avery and Brevoort are educated academics, which obviously makes them Elitists. Also, their conclusions do not coincide with my pre-conceived biases, so they’re obviously Socialists as well.

  6. [...] The Subprime Crisis: Was it Government Housing Policy? – Big Picture [...]