The Subprime Crisis: Is Government Housing Policy to Blame?

34 Pages Posted: 18 Dec 2010 Last revised: 31 Jul 2014

See all articles by Robert B. Avery

Robert B. Avery

Board of Governors of the Federal Reserve System - Financial Studies Section

Kenneth P. Brevoort


Date Written: July 27, 2014


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.

Keywords: Community Reinvestment Act, CRA, Subprime Crisis, Government Sponsored Enterprises, GSE, Mortgages

JEL Classification: G21, K2, R00

Suggested Citation

Avery, Robert B. and Brevoort, Kenneth, The Subprime Crisis: Is Government Housing Policy to Blame? (July 27, 2014). Review of Economics and Statistics, Forthcoming. Available at SSRN: or

Robert B. Avery

Board of Governors of the Federal Reserve System - Financial Studies Section ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2906 (Phone)
202-452-5295 (Fax)

Kenneth Brevoort (Contact Author)


No Address Available

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