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Lending in low- and moderate-income neighborhoods in California: the performance of CRA lending during the subprime meltdown

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  • Elizabeth Laderman
  • Carolina Reid
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    Abstract

    The current scale of mortgage delinquencies and foreclosures - particularly in the subprime market - has sparked a renewed debate over the Community Reinvestment Act (CRA) and the regulations governing home mortgage lending. On one side, detractors argue that the CRA helped to precipitate the current crisis by encouraging lending in low- and moderate-income neighborhoods (Walker 2008). On the other side, advocates of the CRA point to a number of reasons why the regulation shouldn’t be blamed for the current subprime crisis. ; What has been missing in this debate has been an empirical examination of the performance of loans made by institutions regulated under the CRA, versus those made by independent mortgage banks. The ability to conduct this research has been limited by the lack of a dataset that links information on loan origination with information on loan performance. In this study, we use a unique dataset that joins lender and origination information from the Home Mortgage Disclosure Act (HMDA) reports with data on loan performance from Lender Processing Services, Inc. Applied Analytics (LPS).2 We thus have access to information on borrower characteristics (including race, income, and credit score), loan characteristics (including its loan-to-value ratio, whether it was a fixed or adjustable rate mortgage, and the existence of a prepayment penalty), institutional characteristics (whether the lending institution was regulated under the CRA and the loan source), and loan performance (delinquency and foreclosure).

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    File URL: http://www.frbsf.org/community-development/files/wp08-051.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of San Francisco in its series Community Development Investment Center Working Paper with number 2008-05.

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    Date of creation: 2008
    Date of revision:
    Handle: RePEc:fip:fedfcw:2008-05

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    Keywords: Bank loans ; Community development;

    This paper has been announced in the following NEP Reports:

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    1. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
    2. Jessica Holmes & Jonathan Isham & Ryan Petersen & Paul M. Sommers, 2007. "Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from the Automobile Loan Market," Social Science Quarterly, Southwestern Social Science Association, vol. 88(2), pages 585-597.
    3. Eric S. Belsky & Michael Schill & Anthony Yezer, 2001. "The effect of the Community Reinvestment Act of bank and thrift home purchase mortgage lending," Proceedings 794, Federal Reserve Bank of Chicago.
    4. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
    5. Yuliya Demyanyk & Otto Van Hemert, 2008. "Understanding the subprime mortgage crisis," Proceedings 1092, Federal Reserve Bank of Chicago.
    6. Douglas D. Evanoff & Lewis M. Segal, 1996. "CRA and fair lending regulations: resulting trends in mortgage lending," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 19-46.
    7. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1999. "Trends in home purchase lending: consolidation and the Community Reinvestment Act," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 81-102.
    8. Bocian, Debbie Gruenstein & Ernst, Keith S. & Li, Wei, 2008. "Race, ethnicity and subprime home loan pricing," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 110-124.
    9. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2006. "Higher-priced home lending and the 2005 HMDA data," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages A123-A166.
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    Cited by:
    1. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2011. "The role of neighborhood characteristics in mortgage default risk: evidence from New York City," MPRA Paper 33941, University Library of Munich, Germany.
    2. Drew Dahl, 2010. "Does flexibility hinder financial regulation? The case of CRA enforcement in the USA," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(3), pages 193-200, July.

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