It's not the CRA

by Russ Roberts on September 22, 2008

in Government Intervention

Mark Thoma explains why the CRA is not the cause of the current crisis. This is from April, 2008. He summarizes a post of Ezra Klein’s arguing that the CRA started in 1977, the banks covered by it weren’t a big part of the mortgage market, etc:

Now, however, conservatives are trying to argue that it’s behind the crisis: If
the CRA hadn’t been pushing these banks to make all these unsafe loans, then
the birds would still sing…

As Robert Gordon

shows
, however, this is crap. First, there’s the timing. CRA came in 1977.
The crisis came in 2007. Indeed, by 2004, the Bush administration had weakened
the CRA — and after that (though not, presumably, because of it), bubble
lending really took off. Further, CRA only governs a certain class of federally
insured banks. Problem is, half of the subprime loans came from mortgage
companies with no CRA involvement at all. Another 25%-30% came from companies
with very little CRA exposure. For those who left their abacus at home, that’s
80% of the loans which were fully or largely outside CRA jurisdiction. More
than that, the non-CRA mortgage firms made subprime loans at twice the rate of
CRA-covered firms. Which basically leaves a stake in the heart of this
particular theory. Indeed, until now, some conservatives have been moaning that
no one is talking about the CRA part because it’s so racially charged.
Poppycock. It’s just a false charge…

Here is the Gordon analysis:

In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry
of CRA activity, but, as noted by the New America Foundation’s Ellen Seidman
(and by Harvard’s Joint Center), that activity "largely came to an end by
2001." In late 2004, the Bush administration announced plans to sharply weaken
CRA regulations, pulling small and mid-sized banks out from under the law’s
toughest standards. Yet sub-prime lending continued, and even intensified — at
the very time when activity under CRA had slowed and the law had weakened…

OK. The CRA didn’t CAUSE the crisis. But it sure contributed. More on this point down the road. And while the CRA activity may have "come to an end by 2001," that was around the time that Fannie and Freddie started getting into the subprime market.

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