I haven't heard a single serious economist say the CRA had anything to do with the bubble and quite a few have laughed at the suggestion. (I'd make snide comparisons to other unsound theories pushed by the Republicans, but I'm going to keep this purely factual. But debunking it for the 37th time has gotten tedious.)
In no particular order:
A) Sub-prime always existed. People with questionable credit history, but decent income, etc. could pay higher rates and get a loan. This is not a CRA phenomenon. (The banks just wouldn't offer them to people in "that part of town.")
A2) Sub-prime has limited correlation with income or neighborhood. A person with limited income can have some assets and a good credit score. A doctor with a great income can have a bankruptcy and crummy credit. A baseball super-star spending in excess of his salary can be a terrible credit risk and have a negative net worth. A small business loan (over half the CRA loans are small business) can be "prime", even if it is for a business in a poor neighborhood.
B) Banks have generally been more willing to issue credit to questionable borrowers in the last 20 or 30 years, but this has been across the entire credit spectrum. i.e. credit cards and auto loans which are not part of CRA, in addition to mortgages and small business loans. This is not a CRA phenomenon.
C) Redlining (not giving loans to people who live in certain neighborhoods) really was happening. Even when the applicants were "prime". Now that banks are being "forced" to make loans to people in CRA neighborhoods, over 25% of the CRA loans are "prime", and almost 90% are loans under terms offered to any customer. (The other 10%, representing less than 1% of bank loans in the late '90s, involved having charities co-signing for loans and other special community outreach programs, that have been "profitable" according to a survey by the federal reserve.)
D) Sub-prime loans were being securitized before the 1995 law changes. The 1995 law changes allowed banks to securitize the CRA loans and sell them to each other to earn "CRA rating points" rather than actually having to make the loans themselves. This was mostly a non-issue and CRA loans represent very few of the sub-prime mortgages.
E) Over half of the sub-prime loans issued during the bubble were by organizations not governed by the CRA. i.e. mortgage brokers. These are also generally going bad faster than loans originated by the banks.
E2) There was widespread fraud, including collusion with appraisers, by many mortgage brokers, especially in the bubble areas.
F) Sub-prime mortgages expanded to almost 30% of the loans issued in 2006. This was largely because almost no one, even with good credit, had the income to purchase a house with a prime loan in the bubble markets (i.e. California.) So they resorted to various "Alt-A" (i.e. not prime) and true sub-prime mortgages to get loans, betting that house prices would spiral ever higher. These loans, especially the large ones, were not in "CRA" neighborhoods (i.e. the bad part of town) and were not to poor people (i.e. income below half the median). They were to people of moderate to above average income, buying nice houses in the 'burbs and exurbs, who still couldn't qualify for a regular mortgage.
G) All asset classes had their risk premiums driven down during the bubble (esp 2004-2006), due to lots of free cash, and no good sources of return. This included all the leveraged buyouts, which jacked stock prices further, commercial real estate (which is starting to crash), junk bonds, etc. Sub-prime interest rates dropping to really low levels, and not compensating for the risk, was a symptom of the entire credit bubble. (And even prime mortgage interest rates dropped to absurd levels, which made houses more affordable and drove up prices.)
G2) We had lots of free cash because the fed lowered interest rates to 1%, and almost simultaneously in 2004, the SEC permitted the big 5 investment banks to borrow an extra $2T. (They permitted the leverage ratio to increase from 12:1 to 30:1.) (See recent press releases and related articles by the SEC.)
no subject
In no particular order:
A) Sub-prime always existed. People with questionable credit history, but decent income, etc. could pay higher rates and get a loan. This is not a CRA phenomenon. (The banks just wouldn't offer them to people in "that part of town.")
A2) Sub-prime has limited correlation with income or neighborhood. A person with limited income can have some assets and a good credit score. A doctor with a great income can have a bankruptcy and crummy credit. A baseball super-star spending in excess of his salary can be a terrible credit risk and have a negative net worth. A small business loan (over half the CRA loans are small business) can be "prime", even if it is for a business in a poor neighborhood.
B) Banks have generally been more willing to issue credit to questionable borrowers in the last 20 or 30 years, but this has been across the entire credit spectrum. i.e. credit cards and auto loans which are not part of CRA, in addition to mortgages and small business loans. This is not a CRA phenomenon.
C) Redlining (not giving loans to people who live in certain neighborhoods) really was happening. Even when the applicants were "prime". Now that banks are being "forced" to make loans to people in CRA neighborhoods, over 25% of the CRA loans are "prime", and almost 90% are loans under terms offered to any customer. (The other 10%, representing less than 1% of bank loans in the late '90s, involved having charities co-signing for loans and other special community outreach programs, that have been "profitable" according to a survey by the federal reserve.)
D) Sub-prime loans were being securitized before the 1995 law changes. The 1995 law changes allowed banks to securitize the CRA loans and sell them to each other to earn "CRA rating points" rather than actually having to make the loans themselves. This was mostly a non-issue and CRA loans represent very few of the sub-prime mortgages.
E) Over half of the sub-prime loans issued during the bubble were by organizations not governed by the CRA. i.e. mortgage brokers. These are also generally going bad faster than loans originated by the banks.
E2) There was widespread fraud, including collusion with appraisers, by many mortgage brokers, especially in the bubble areas.
F) Sub-prime mortgages expanded to almost 30% of the loans issued in 2006. This was largely because almost no one, even with good credit, had the income to purchase a house with a prime loan in the bubble markets (i.e. California.) So they resorted to various "Alt-A" (i.e. not prime) and true sub-prime mortgages to get loans, betting that house prices would spiral ever higher. These loans, especially the large ones, were not in "CRA" neighborhoods (i.e. the bad part of town) and were not to poor people (i.e. income below half the median). They were to people of moderate to above average income, buying nice houses in the 'burbs and exurbs, who still couldn't qualify for a regular mortgage.
G) All asset classes had their risk premiums driven down during the bubble (esp 2004-2006), due to lots of free cash, and no good sources of return. This included all the leveraged buyouts, which jacked stock prices further, commercial real estate (which is starting to crash), junk bonds, etc. Sub-prime interest rates dropping to really low levels, and not compensating for the risk, was a symptom of the entire credit bubble. (And even prime mortgage interest rates dropped to absurd levels, which made houses more affordable and drove up prices.)
G2) We had lots of free cash because the fed lowered interest rates to 1%, and almost simultaneously in 2004, the SEC permitted the big 5 investment banks to borrow an extra $2T. (They permitted the leverage ratio to increase from 12:1 to 30:1.) (See recent press releases and related articles by the SEC.)