Government Policy, Race, and Mortgage Defaults

Are we really going to argue whether the housing crisis is the result of the CRA? I’m hearing a lot of things like this, where “community organizers” and the Clinton Administration are responsible for the subprime lending of the past seven years as a result of government actions to increase home ownership among the poor.

I’m going to outsource this one: This is the must-read debunking the claim. However I think we should go one step further. The prospect article claims that the CRA/ACORN and other community investments had nothing to do with the housing crisis. As far as I read the analysis of the current data CRA loans performed quite well both for the banks, the people, and the general communities. They seem to have dampened the effects of the housing crisis, not increased it.

I’ve been watching the “CRA as Subprime Cause” argument since it first started trickling out year and a half ago (notice the muffled laughter at the first suggestion of it) – it makes no sense. It’s important to know the problem with subprimes. Fly-by-night shadow banks (check out some of the pseudo-names of banks on this list) could lend out bad-faith loans because they would then resell them on the securities market. They didn’t have to hold the risk of the money they lent – this is an open invitation to moral hazard. More importantly, Wall Street’s demand for loans were outstripping the normal rate of mortgage acquisition, leading to even more bad faith loans. The CRA could securitize their loans, sure, but they still had to maintain standards for back trading that the subprime securities didn’t.

I’m not against thinking this in principle, but I need data. What is most notable about the current arguments against the CRA is how lacking they are in data (much less models or in-depth financial analysis). I’ve been looking around – the best I see is stuff like this economics professor quoting an anonymous friend: “Mortage originators not subject to the CRA (presumably because they are not registered banks or thrifts) will still be subject to market pressures to make sub-prime loans. If banks and thrifts are pressured by CRA regulators . . . into making sub-prime loans, competitive pressures will encourage the non-CRA regulated institutions to make similar loans. Otherwise they will see their balance sheets decline relative to these other institutions.” That’s completely backwards. The Nash Equilibrium that would form in his model would have CRA-affiliated banks with higher origination of subprimes than non-CRA originators (in the short period, with a match following), but we see the exact opposite from the record.

I have no problem thinking of subprime loans as effects of projected state power. But I just don’t see it here. Bush said he wanted to increase the number of poor homeowners – but he says a lot of stuff that he isn’t responsible for. I need a mechanism that allowed these banks to act in an environment where they could make crap loans and resell them on the secondary markets. That strikes me more related to demands of global capital and what was believed to be an increase in risk management, rather than government policy. Going back and forth in a comments section here with a proponent of this line of reasoning, Steve Sailer, the best I get is that there was, in several of Bush’s speeches, a signal to Bush’s regulators to not stop this. Expecting regulators (mount up!) to have fixed this problem strikes me a bit like expecting the Fantastic Four to have stopped it; I think that this being something that could have been fought with major overhauls of the financial lending system – a move nobody was looking to make. And it overlooks that easy credit-as-replacement-of-wage-increases was everywhere among the working and middle classes too – not just the poor.

Though I do understand how this massive, systematic market failure has led to people grasping at straws to explain it.

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One Response to Government Policy, Race, and Mortgage Defaults

  1. Pingback: More on the CRA « Rortybomb

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