So argues Aaron Pressman in this piece in BusinessWeek. He claims that "the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly." And follows up that "it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA," and "loans made under the CRA program were made in a more responsible way than other subprime loans."
I'm interested in hearing others' thoughts on these claims.
It did not have "everything" to do with it, but it's equally ridiculous to say it had "nothing" to do with it. The CRA-mandated borrowers represent the margin of the loan market, so when Jose the janitor goes to a CRA-covered lender for a no-money down ARM for a $300K house, then Fred the insurance salesman wants the same kind of deal, only for a $750K house, and a dozen mortgage brokerages will pop up in a week to give Fred that deal, and then the market inflates and the CRA-covered loans start inching up as well, and the death spiral begins.
Also, the idea that this suddenly popped up in 2004 is absurd. I first saw jacked appraisals showing up in 1999, and the truth is single-family housing has been the intended beneficiary of numerous government externalities that have inflated housing costs since the New Deal.
It is the EXACT SAME PHENOMENON as college tuition. And I've been seeing snippets here and there that Sallie Mae and the student loan industry may be next in line at the Fed.
The fact of the matter is that Fannie and Freddie were forced to buy 56% of their loans from "underserved" populations. Essentially, F&F created a market for shitty loans.
Likewise, the Federal Reserve created a housing bubble, which actually made it profitable for banks and subprime borrowers to act irresponsibly. If you can't pay for a loan but you know you'll be able to refinance or sell the house and the mortgage for even more than before, will you do it? If you're a bank and you know that if the borrower defaults you'll get a house worth even more than the mortgage, will you lend to them?
Come on people, it's basic economics.
Mises Community Natural Rights Discussion Group
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap