Wednesday, March 27, 2013

Study Confirms Diversity Recession Caused by CRA


A study released at the end of 2012 by the National Bureau of Economic Research asked, "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?"  The answer? "Yes, it did."

Even before the 2008 economic collapse brought on by the sub-prime mortgage crisis, affectionately called the diversity recession by those who understood and admitted to what was happening and the great recession by those who wanted to hide it or bury their heads in the sand, I've been warning about the destructive policies of forcing banks to make loans based on the color of skin of the borrower, rather than their credit worthiness.  Now, a peer review academic study from one of the most respected economic institutions in the country has confirmed that hypothesis.
"Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. "
As far back as the late 90's experts were warning about the looming banking crisis caused by changes to the CRA during the Clinton administration.  But this didn't stop the department of housing and urban development from pushing ahead.  Nor did it stop President Bush from pushing Fannie and Freddie into lowering down payment requirements for loans they would back.  It certainly didn't stop banks from expanding into the illegal immigrant market in order to meet CRA quotas.


The political class wants the public to believe that mortgage default swaps were the problem, but they were only the symptom.  According to the studay, "The effects [of CRA] are strongest during the time period when the market for private securitization was booming."  Meaning banks were turning to securitization more and more to try and hedge against mortgage defaults as the CRA and goverment threats forced them to make more risky subprime loans.

The problem for Americans is that even in the face of all the evidence and the academic studies backing up the analysis, the federal government continues to abuse the CRA and threaten banks into making more of these loans.

3 comments:

Anonymous said...

This article is completely off base. Don't be so naive, and don't let the banking industry deflect attention away from their unethical practices. Banks made a money hand-over-fist by making loans that were unethical and often deception. This type of article is a veiled attempt to pretend that encouraging "diversity" some how forces mainstream institutions to compromise standards. Not true! Banks encouraged people to take out loans they could not afford using deception and for one purpose, to increase their own profit margins.

Anonymous said...

Its not diversity that is to blame, it is forced diversity. Look at your argument, you say banks want to make money at all costs and the created these loans to exploit them. If true, why did the government have to modify CRA, why did HUD modify minority loan minimums and say credit score was an antiquated idea, why did Fannie and Freddie, government organixations, remove all down payment requirements and secure these risky loans?

I agree, banks do want to make money, which is prrcisely why the developed the credit rating system, a color blind system that scores individuals on their ability to repay loans. This credit rating system ended up excluding a lot ofinority borrowers, not because of their skin color, but because of their lower credit ratings.

Its simple cause and effect. We knoe the mortgage system was fine for more than a hundred years, then the clinton and bush admin started playung with cra and bank ratings to force banks to make loans to minority borrowers who lackes all means to pay back loans.

Facts are facts, even when they dont agree with your agenda.

Anonymous said...

Steve Sailer has been writing about the "diversity recession" for years. Here is a piece he wrote in 2008 that dovetails with what this blogger just posted.