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The subprime crisis: Is government housing policy to blame?

  • Robert B. Avery
  • Kenneth P. Brevoort

A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, 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 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 been disproportionally served by CRA-covered institutions historically 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.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-36.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-36
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  1. repec:aei:rpaper:26126 is not listed on IDEAS
  2. repec:aei:rpbook:24944 is not listed on IDEAS
  3. Peter J. Wallison, 2011. "A dissent from the majority report of the financial crisis inquiry commission," Proceedings 1118, Federal Reserve Bank of Chicago.
  4. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2007. "Opportunities and Issues in Using HMDA Data," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 351-380.
  5. Peter J. Wallison, 2011. "Dissent from the Majority Report of the Financial Crisis Inquiry Commission," Books, American Enterprise Institute, number 50848, 7.
  6. Robert Avery & Marsha J. Courchane & Peter M. Zorn, 2009. "The CRA within a changing financial landscape," Monograph, Federal Reserve Bank of San Francisco, number 2009tcwacf.
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