Fed Lays CRA/GSE Blame Game to Waste in New Report

by Houston Agent

Government housing programs have been repeat contestants on the financial crisis blame game, but that may finally end, thanks to a Federal Reserve report.

The financial crisis may have occurred in the fall of 2008, but that has not stopped economists and policy analysts from continuing to offer their perspectives on what ultimately caused the greatest monetary scare since the bank failures of the Great Depression.

Hypotheses abound, but one particularly pernicious idea has been that the the Community Reinvestment Act (CRA), a government initiative to allow low-income individuals the chance to buy homes, and the various government-sponsored entities (GSEs) such as Fannie Mae and Freddie Mac, were principally responsible for the crisis. A new report from the Federal Reserve confronts that claim – and lays it to waste.

“We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis,” write the report’s authors, Robert B. Avery and Kenneth P. Brevoort, both senior economists at the Fed.

The main problem with criticisms of the CRA and GSEs, Avery and Brevoort write, is how little actual data and analysis is used when compiling such critiques.

“Many of the studies that argue that the CRA and GSE goals played a central role in precipitating the subprime crisis … have not relied on hard empirical evidence,” they write. “Instead, they have pointed to a general association between the existence of the CRA/GSE goals and the overall increase in lending to lower-income borrowers and neighborhoods during the buildup to the crisis.”

And very bold claims have been made using such studies. For instance, Pete Wallison, one of the 10 members on the Financial Crisis Inquiry Commission, argued in a 100-page dissent from the commission that government housing policies were the “sine qua non of the financial crisis,” or, essential component.

Strange, then, that such certainty brewed from papers and comments that featured virtually no study on mortgage performance of the particular housing markets that received the most attention from the CRA and GSEs.

Avery and Brevoort did just that, and found no such link between the collapse of Lehman Brothers and other mortgage giants and government home initiatives. In fact, their findings were probably more positive than either had anticipated.

“Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending,” they wrote.

So not only were those programs blameless for the crisis, but they also created lending environments that are safer and less volatile than the norm.

The full 30-page report can be read here.

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