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Market Forces or CRA-induced Externalities: What Accounts for the Increase in Mortgage Lending to Lower-Income Communities?

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  • Raphael W. Bostic
  • Brian J. Surette

Abstract

This paper examines whether CRA incentives were influential regarding the large increase in lending to lower-income communities through the 1990s and early 2000s. The approach capitalizes on the fact that, because the CRA does not apply to all lenders in all locations, the regulations establish market conditions that approximate a natural experiment. We examine mortgage lending activities during 1994-1995, 1996-1997, 1998-1999, and 2000-2001 and compare the level and the change in lower-incomecommunity lending across lenders subject to CRA incentives to varying degrees, controlling for a number of economic and lender characteristics. While the results provide clear support for the view that the CRA has been influential, models that focus on changes in activity over time directly support the view that market forces or some other factors, rather than the incentives established via the CRA, are more important in explaining the observed trends. Taken together, the results provide a mixed picture regarding the importance of the CRA. The results suggest that CRA covered institutions continue to have higher levels and shares of lending to lower-income communities, but that the recent increases in such lending appear to be more a function of market forces than regulation.

Suggested Citation

  • Raphael W. Bostic & Brian J. Surette, 2004. "Market Forces or CRA-induced Externalities: What Accounts for the Increase in Mortgage Lending to Lower-Income Communities?," Working Paper 8592, USC Lusk Center for Real Estate.
    • Handle: RePEc:luk:wpaper:8592
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    File URL: http://lusk.usc.edu/sites/default/files/working_papers/wp_2004-1013.pdf
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    References listed on IDEAS

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    1. Marsha J. Courchane & Brian J. Surette & Peter M. Zorn, 2004. "Subprime Borrowers: Mortgage Transitions and Outcomes," The Journal of Real Estate Finance and Economics, Springer, vol. 29(4), pages 365-392, December.
    2. Douglas Evanoff & Lewis Segal, 1997. "Strategic Responses to Bank Regulation: Evidence From HMDA Data," Journal of Financial Services Research, Springer;Western Finance Association, vol. 11(1), pages 69-93, February.
    3. Bostic, Raphael W & Surette, Brian J, 2001. "Have the Doors Opened Wider? Trends in Homeownership Rates by Race and Income," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 411-434, November.
    4. Paul Calem & Jonathan Hershaff & Susan Wachter, 2004. "Neighborhood patterns of subprime lending: Evidence from disparate cities," Housing Policy Debate, Taylor & Francis Journals, vol. 15(3), pages 603-622.
    5. 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.), vol. 85(Feb), pages 81-102, February.
    6. Glenn B. Canner & Elizabeth Laderman & Wayne Passmore, 1999. "The role of specialized lenders in extending mortgages to lower-income and minority homebuyers," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 85(Nov), pages 709-726, November.
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    Cited by:

    1. Neil Bhutta, 2011. "The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods," Journal of Law and Economics, University of Chicago Press, vol. 54(4), pages 953-983.
    2. Neil Bhutta, 2008. "Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods," Finance and Economics Discussion Series 2008-61, Board of Governors of the Federal Reserve System (U.S.).

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