The Subprime Crisis: Is Government Housing Policy to Blame?
Robert B. Avery
Board of Governors of the Federal Reserve System - Financial Studies Section
Kenneth P. Brevoort
Federal Reserve Board - Division of Research & Statistics
July 7, 2011
A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and government sponsored enterprises’ affordable housing goals, 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 type of 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 historically been served by CRA-covered institutions 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.
Number of Pages in PDF File: 46
Keywords: Community Reinvestment Act, CRA, Subprime Crisis, Government Sponsored Enterprises, GSE, Mortgages
JEL Classification: G21, K2, R00working papers series
Date posted: December 18, 2010 ; Last revised: July 10, 2011
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