How an Anti-Redlining Law Fed the Housing Bubble
McClanahan, E Thomas, Tribune-Review/Pittsburgh Tribune-Review
One of the major points of contention in the aftermath of the housing debacle was whether the Community Reinvestment Act -- an anti-redlining law -- contributed to the disaster.
Defenders of the law insisted it did not. But it's harder for backers to support that conclusion now, after the release of a working paper by the National Bureau of Economic Research. Its authors get straight to the point.
"Did the Community Reinvestment Act (CRA) Lead to Risky Lending?" they ask. "Yes, it did. We find that adherence to the act led to riskier lending by banks."
The act required banks to serve depositors from all neighborhoods in their operating areas, including those of low and moderate income. The report's economists found that lending to borrowers in census tracts of modest means increased around the time of a bank's regulatory exam -- and more of those loans went bad.
Quoting from the study: "There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts."
Boiled down, the process was as follows:
- Banks were required to make affordable-housing loans under the act.
- Congress then forced Fannie Mae and Freddie Mac to buy an increasing proportion of those loans, effectively imposing quotas on the two government-sponsored mortgage giants.
- Many of the loans were subprime or otherwise dubious.
- Fan and Fred were required to "affirmatively" support bank CRA lending and, to do this, had to lower their credit standards. …