Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

Working Paper 2012-005A by Andra C. Ghent, Rubén Hernández-Murillo, and Michael T. Owyang

No. 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. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.

Category: Real Estate, Taxes and Policy, 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.

9 Responses to “Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?”

  1. guyotws says:

    Do you still have that $100k challenge?

  2. Frilton Miedman says:

    Sure, TBTF banks were somehow “forced” to con millions of home buyers into the belief that home prices would never stop rising and they should take out sub-prime liar loans…..they were then “forced” by the CRA to pay off ratings agencies to blatantly lie about CDO values and then pan them onto a deceived public, with no disclosure as to what percentage of CDO’s consited of sub-primes.

    I am sick to my stomach that anyone is left to defend the idea that the CRA caused it.

  3. Rick Caird says:

    Did anybody bother to actually read this paper? It seems to me to have gone to a lot of effort to show nothing. In essence, this “regression discontinuity approach” simply means that they took a cutoff number for CRA or affordable housing eligibility and took two very narrow bands around that number and looked to see if there were any appreciable differences in the originations of the mortgages. They did no analysis of mortgage performances.

    They list the various criteria on page 10, and then look at borrowers in the first range of [-2% to cutoff] value and the second range of [cutoff value to +2%]. The Null hypothesis is that they expect significant differences between these ranges with a substantial favoring of the lower range because it qualifies for CRA ticky marks. When they analyze these tiny ranges, they tell us:

    “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.”

    Well, of course not. Once these guys are in the door looking for a mortgage, the lender knows he can securitize the mortgage and they are both going to be sub prime mortgages. So, while the lender wants the ticky marks for meeting CRA and affordable housing goals, the fact he gives out a loan in the +2% range does not stop him from looking for and extending a loan to the next guy who might be in the CRA ticky mark zone. After all, because of securitization, the lender has infinite lendable funds.

    The other thing they do tell us, which I did not know, is if a GSE buys an MBS, even if includes loans the GSE could never have bought as whole loans, they get the ticky marks for any loan in the MBS that meets CRA and Affordable home standards. In fact the loan could be worth more than one ticky mark if it meets more than one criterion. That, I think, is probably more significant than the loan cutoff figures for the origination of mortgages and is why the GSE’s has so much garbage on its books. The authors come out and say”

    “Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.”

    But, they also say:

    “Although PLMBS accounted for only one third of Fannie Mae’s business, they accounted for more than 70% of their credit losses through the end of 2010 (CBO, 2010). In this paper, we do not dispute the role of PLMBS in the GSEs’ downfall. “

    But, they do not show that the PLMBS were not the reason the GSE’s bought lower quality MBS’s. They kind of assert it, but that is about all.

    So basically, all this work these guys did shows that lenders did not discriminate in a 4% range around the cutoffs. But, why were the lenders even talking to people in this class. They were talking to them because of securitization and because of CRA ticky marks. I thought the St Louis Fed did better work than most.

    Have at it Barry…….

  4. Zaylyn says:

    I get even sicker when I hear most of the Republican candidates claim that the financial crisis was caused by government housing policy and irresponsible home buyers.

  5. Frilton Miedman says:

    Zaylyn, that story might float if it weren’t for ground level, lower management employee’s and R.E. agents who can attest to the way banks were pushing sub-primes & no income loans, bank employee’s who were nervously joking that it was going to collapse, internal Emails inside ratings companies between employee’s baffled at why they were required to rate junk as triple A.

    I have a sibling in real estate whom back 5 years ago regularly commented to me that it was really weird how easy mortgage approvals had become, even to conspicuous applicants.

  6. theexpertisin says:

    Oh yes, indeed. As a practitioner in modest scale, I can attest that subsidized housing is as much a Big-Lobby racket as anything else conjured up in formerly smoke-filled backrooms in our nation’s political apparatus.

    Hundreds of billions of dollars in tax credits, much for shoddily constructed McApartments built to last the life of the credit are issued. Most to politically connected entities in the industry. Add in sweetheart deals for land, in-kind payoffs to big city political machines and sweetheart deals with bank financing arms and you have the essential ingredients of the multi-family cake.

    Tax credits are bought and sold in glitzy aftermarket packages. Boston Capital is a great case study for this aspect of subsidize housing. (D) Sen. George Mitchell, back in the early 90s, was influential in making tax credits a permanent fixture of the Federal budget. He was rewarded,with other political cronies, to influential and well paid positions in the industry shortly after his retirement from the Senate. Not illegal, but a teachable moment about the politicization of subsidied housing that is bought and dearly paid for by other’s tax dollars.

  7. Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

    Frilton,

    to your Point..note how ‘they’ are not asking..”Did Affordable Housing Legislation Contribute to the Home-Price ‘Bubble’?”

  8. Frilton Miedman says:

    The real question-

    “Did banks misleading an unsuspecting public into buying fraudulently rated, overpriced securities based on loans that were guaranteed to default while hiding & manipulating the data cause the housing bubble?”

    If it were housing alone, the crisis would have been over in 2008, it was the CDO/CDS fraud that made it so bad, and residually continues in the form of decimated middle class net worth, consumer debt, continued foreclosures, lost GDP growth and government debt as a result of the aftermath.

    I cringe at the stupidity coming from Paul Ryan & co – let’s just extract even more from the middle class to solve the problem of a depleted middle class.