Don't Blame the Whole Housing Bubble on CRA
Newly-released memos from the Clinton presidential library reveal a little more about the scope of the Community Reinvestment Act (CRA) activities in the years leading up to the collapse of the housing bubble. For those unfamiliar with the home-loan industry, the Community Revinvestment Act was a 1977 act that “encourages” (with the threat of violence) banks and other lending institutions to make more home loans to low-income, non-white, and Hispanic households, and to reduce “redlining.”
As noted in this article (now popping up around the conservative press) about the new CRA revelations, former Treasury Secreatary Robert Rubin crows about the substantial increases in loans made to these households that have historically not qualified for loans. The problem is that “CRA-approved loans defaulted about 15% more often” as a result of the “flexible lending” mandated by the feds. No one should be surprised that CRA loans go into default more often. While there is ample evidence that banks aren’t terribly fastidious in their underwriting (which is why they like to get the mediocre loans out of their portfolio and thus make them someone else’s problem ASAP), there was nevertheless a reason those riskier CRA loans weren’t being made in the first place.
So, CRA had a hand in helping create a sizable number of default-prone loans that contributed to the housing bubble that popped in 2008. The degree to which CRA was a major factor in the bubble is not clear, however, and while CRA should of course be repealed immediately, I’m not sure CRA should really be the primary focus when we’re looking for explanations about the bubble or its collapse.
In the days following the collapse, however, conservative media zeroed in on CRA as a major cause of the housing bubble. This is likely due to a couple of reasons:
1. Conservative pundits don’t understand the business cycle or the role of central banks in it.
2. The CRA critique fits nicely into the conservative obsession with “multiculturalism” and the knee-jerk tribalism that dominates political discussion at the level of talk radio and TV-news punditry (not just among conservatives).
If we look at it more carefully, we can see “flexible” CRA loans as really just a sub-species of the general problem of housing bubbles: malinvestment propelled by easy money policies of the central bank. CRA certainly channels the “flexible loans” to certain households and neighborhoods, but it seems unlikely that the malinvestments of the Clinton and Bush eras would have experienced even a major dent had CRA not existed. The focus in D.C. on homeownership during that era went well beyond merely promoting homeownership among non-whites.
Certainly, it’s not difficult to remember all the white, middle-class 26-year-old “investors” who were buying multiple houses during the height of the bubble, and who then foreclosed on most of them a few years later.
If we continue to look more closely at the industry, we might even find that it was the Fed’s bubble policies of low interest rates and easy money that made CRA’s expansion over the past 20 years possible. Without rock-bottom rates and a continual push by the feds to get as many people (of all races and ethnic groups) into homeownership as possible, the overall numbers would have been lower across the board, and the bubble itself would have been much smaller, CRA or not.
CRA certainly had its role in the housing bubble, and is undesirable for a variety of other reasons. But we’re likely on much shakier ground if we attempt to view it a primary driver of the housing bubble. For that we should look to central banks and Austrian explanations of the business cycle to find a much more complete answer.
For more, see “Yes, Greenspan Did It” by Stefan Karlsson
Tom Woods also makes similar assertions in his book Meltdown.