Banks have ALWAYS given sub-prime loans. People with credit cards with 29% interest rates would be a sub-prime loan. This is a really great article about what sub-prime actually means, and why a bunch of the bubble loans, especially "Alt-A" loans, were absurd. (Note, it doesn't mean loans to low-income people or minorities.)
"The subprime loan securitization rate has grown from less than 30 percent in 1995 to over 58 percent in 2003. The securitization rate for conventional and jumbo loans has also increased over the same time period.5 For example, conventional securitization rates have increased from close to 50 percent in 1995-97 to more than 75 percent in 2003."
So by 1995, sub-prime loan securitization already existed, and the first CRA securities weren't issued until November 1997 according to this article:
Short answer, blaming the CRA even for securitization of sub-prime is wrong. During the 1990's EVERY kind of loan was securitized, including car and credit card and every possible grade of mortgage.
The CRA also does not require banks to issue loans that are "bad risks" (i.e. don't have a sufficiently high interest rate to cover the risk.) Somewhere I've got a link to a survey of banks by the Fed that basically says "yes, CRA loans are profitable or very profitable to our bank."
From the second article above, which is basically an ad for selling securitization services:
Three important bits:
"Under the Community Reinvestment Act guidelines, a bank gets credit for originating loans or buying on a whole loan basis; but you get no credit for holding the loans. Conversely, if you sell your loans through a securitization, a buyer can get CRA investment credit if a percentage of the loans is based in the buying bank's trade area."
and a bit earlier in the article:
"Was it banks seeking CRA investment credit? No, it wasn't. The overwhelming participants were money managers and insurance companies buying the loans strictly because of their investment appeal."
and a bit later:
"the credit scores were fairly evenly dispersed along the four standard quartile levels (620 or less, 620-659, 660-719, 720 or more)."
So they're not even necessarily to people with bad credit either. A school teacher, policeman, or fireman, who is earning half the median wage in San Francisco, with perfect credit, counts as a CRA loan.
And the only point of doing CRA securitization, compared to normal sub-prime securitization, is to let banks earn brownie-points so they don't have to pay blackmail to ACORN, etc.
There may be some effects of HUD pushing lenders to write more low-income loans, but that's _NOT_ part of CRA.
no subject
http://calculatedrisk.blogspot.com/2008/08/reflections-on-alt.html
And from this article at the St. Louis Fed:
http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf
"The subprime loan securitization
rate has grown from less than 30 percent in
1995 to over 58 percent in 2003. The securitization
rate for conventional and jumbo loans has
also increased over the same time period.5 For
example, conventional securitization rates have
increased from close to 50 percent in 1995-97 to
more than 75 percent in 2003."
So by 1995, sub-prime loan securitization already existed, and the first CRA securities weren't issued until November 1997 according to this article:
http://www.allbusiness.com/personal-finance/real-estate-mortgage-loans/677967-1.html
Short answer, blaming the CRA even for securitization of sub-prime is wrong. During the 1990's EVERY kind of loan was securitized, including car and credit card and every possible grade of mortgage.
The CRA also does not require banks to issue loans that are "bad risks" (i.e. don't have a sufficiently high interest rate to cover the risk.) Somewhere I've got a link to a survey of banks by the Fed that basically says "yes, CRA loans are profitable or very profitable to our bank."
From the second article above, which is basically an ad for selling securitization services:
Three important bits:
"Under the Community Reinvestment Act guidelines, a bank gets credit for originating loans or buying on a whole loan basis; but you get no credit for holding the loans. Conversely, if you sell your loans through a securitization, a buyer can get CRA investment credit if a percentage of the loans is based in the buying bank's trade area."
and a bit earlier in the article:
"Was it banks seeking CRA investment credit? No, it wasn't. The overwhelming participants were money managers and insurance companies buying the loans strictly because of their investment appeal."
and a bit later:
"the credit scores were fairly evenly dispersed along the four standard quartile levels (620 or less, 620-659, 660-719, 720 or more)."
So they're not even necessarily to people with bad credit either. A school teacher, policeman, or fireman, who is earning half the median wage in San Francisco, with perfect credit, counts as a CRA loan.
And the only point of doing CRA securitization, compared to normal sub-prime securitization, is to let banks earn brownie-points so they don't have to pay blackmail to ACORN, etc.
There may be some effects of HUD pushing lenders to write more low-income loans, but that's _NOT_ part of CRA.