The American Interest
Analysis by Walter Russell Mead & Staff
Black and Blue: Subprime Crisis Hurts Blacks Worst

For nearly as long as the blue social model has existed, one of its strongest selling points has been its potential to improve racial equality in America. Programs like food stamps, affirmative action, Head Start and subsidized housing are aimed at poor and minority communities. Over time, the thinking goes, these will help put these communities on an equal footing and facilitate their rise into the middle class. Nearly fifty years later, however, the results of many of these programs have been much less than advertised, ranging from dubious to destructive. The Washington Post reports that, four years into the subprime housing crisis, black families have been hit the hardest:

 A Pew Research Center analysis last year found that the wealth of blacks plunged 53 percent during the recession, driven by falling home prices. The average net worth of a black household in 2009 was $5,677, according to the study, the lowest of any racial group. After years of record prosperity, homeownership rates among black Americans have plunged to the lowest level in 16 years. Unemployment has reached levels not seen since the 1980s.

Worse than this, however, is the damage to their credit scores:

During the recession, credit scores shifted downward for many consumers, regardless of race. According to a FICO analysis , nearly 50 million people saw their scores fall by more than 20 points during the height of the financial crisis. Lenders also tightened the spigot of credit, with the total volume of loans to consumers falling 9 percent over 2009, according to government data, though lending has rebounded somewhat.

Research by VantageScore found that the two biggest contributors to consumers’ deteriorating credit were the fall of home prices and unemployment. Activists say the demographic that has borne the brunt of those head winds are black Americans.

This is huge. Credit scores are poorly understood by most but extremely important to all. They determine one’s ability to buy a home, take out a college loan, and, increasingly, to get a job or receive a promotion. As these scores fall, many black families will be forced to put off major life events, including education for their children. It is possible to rebuild a broken credit score, but the process takes years, and the effects of this lost time will be felt long after the crisis has passed.

The mix of well-intentioned social engineering and Wall Street creativity that gave us the housing bubble and that put millions of blacks (temporarily) in homes that they couldn’t afford is one of the big disasters of American social policy history. That mix is quintessential blue model policy. When subprime loans were created, they seemed win-win: social engineers gained a program that would ostensibly improve the lot of the less fortunate while Wall Street earned large profits. As the mortgage crisis has shown, things rarely work out this way in practice. But policy makers continue to stick to this type of thinking (which is one of the reasons pensions are in such trouble).

The recession and the economic problems of the last four years maybe doing more damage to long-term prospects in black America than the Great Depression.

Published on July 9, 2012 11:00 am
  • thibaud

    Once again. Mr. Mead stretches the truth in order to fit his preconceived thesis. The reality is that MORE REGULATION – ie what Mead would call “social engineering” – would have greatly mitigated the collapse.

    Mortgages issued by banks to low-income borrowers under the Community Reinvestment Act (CRA) have done better, by a huge margin, than mortgages made by lenders whom the anti-regulatory zealots exempted from the CRA.

    Oops.

    While it’s fair to criticize as foolish the bipartisan policy of encouraging home ownership for 65% of the population when >50% had negative net worth, the most egregious policies were those that AVOIDED government intervention in the housing market.

    So for Mead to assign equal blame to “social engineering” as the cause of poor and minority Americans’ housing plight is yet again, a gross distortion of the data and the record.

    Here’s the analysis of the impact of the major regulatory innovation in the low-end mortgage lending market, the Community Reinvestment Act of 1995, of two economists from the Minneapolis Federal Reserve:

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4136

    “The data suggest that the link between independent mortgage companies and banks through direct secondary market transactions is weak, especially for lower-income loans. (See Table 3.) In 2006, only about 9 percent of independent mortgage company loan sales were to banking institutions.

    “And among these transactions, only 15 percent involved higher-priced loans to lower-income borrowers or neighborhoods. In other words, less than 2 percent of the mortgage originations sold by independent mortgage companies in 2006 were higher-priced, CRA-credit-eligible, and purchased by CRA-covered banking institutions.

    “… foreclosure filings have increased at a faster pace in middle- or higher-income areas than in lower-income areas that are the focus of the CRA.

    “Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.

  • soren

    It’s rather sad that there is absolutely no mention in blog post in how blacks called banks racist for not lending them money(Obama himself participated in this demagogery with some lawsuits) and then how banks “switched sides” and colluded with the government when it came to minority lending practices.

  • thibaud

    The Mead Infant(ilizing) Formula is becoming clear:

    1. Take a well-known policy failure and caricature the policies as “blue”, or “liberal,” or “social engineering” or bureaucratic / top-down centralized.

    2. Ignore all evidence that the regulations and “top-down” government forces were far outweighed by the opposite tendencies – eg, by powerful corporate interests gaining exemptions from said regulations, or local entities evading or ignoring federal policies.

    3. Ignore the positive results from regulation and government intervention.

    4. Ignore the private interests that captured the regulatory process for the policies’ shortcomings and blame the vaporous “blue model” for red model cronyism.

    5. Move on to the next issue, rinse and repeat.

  • Kenny

    “The mix of well-intentioned social engineering and Wall Street creativity that gave us the housing bubble and that put millions of blacks (temporarily) in homes that they couldn’t afford ..”

    And also, supposed well-intentioned affirmative action programs (racial quotas) similarly put countless blacks in jobs that they could competitively perform as well as the whites and orientals that were discriminated against.

    What’s the lesson in all this?

  • LarryReiser

    Unfortunately the current administration has doubled down on this losing policy as it sees an opportunity to further divide race and class in it’s goal of ever increasing central government control.

  • thibaud

    On this issue especially, Mr Mead’s distortions of the actual record are likely to cause real harm.

    Again, the foreclosure debacle is overwhelmingly a MIDDLE- and even UPPER MIDDLE-CLASS phenomenon.

    The truth that Mead suppresses here is that regulatory efforts on behalf of low-income minorities, especially the Community Reinvestment Act, SUCCEEDED in achieving a far LOWER foreclosure rate than the free-market, wild-west approach that was allowed for the likes of Countrywide and other lenders exempted from the CRA.

    And now we’re seeing the fruits of the disinformation seeds sown by Mr Mead’s disingenuous and ignorant post.

    Already, as of 1pm EDT, we have two ugly and racist comments that riff on Mead’s up-is-down, night-is-day inversion of reality.

    As he did a while back with his breathless, Drudge-like scare-mongering about urban flash mobs, Mr Mead is playing with fire. Very unfortunate that a professor of his standing chooses to distort the facts and encourage know-nothing race hatred.

  • Anthony

    WRM, thhe nation and its uplift forces (food stamps, affirmative action, head start, sub prime loans, etc.) and agencies – though well intentioned – never possessed the insight to assuage the economic disabilities of the black masses (the programs very rarely if ever envisaged any direct action by blacks to further their facilitation into the economics of America – blacks were objects of the uplift forces and agencies; and now the ideas are politically spent, least of all because the free-market economic system remains coercive.

    I think it is more than past time for American blacks to begin to shape their lives and cultural patterns not on myths and slogans but on truth and experience about themselves; more importantly, about how the world around them actually distributes its economic rewards and penalties.

    “There appear to be few records in history of any tribe or nation wher the largest share of economic goods and valued positions has not been claimed by those individuals and groups that were economically and politically strong and that had the most secure hold on society’s instruments of coercion.”

  • http://www.theparenttrigger.com Bruno Behrend

    The “credit score” issue is one that makes even a free market advocate cringe.

    The fact is that the debt industry (the one industry we’ve been leading on since Hamilton bailed out the states) has turned the entire nation into debt slaves, where our “credit score” is now an outward measure of our “value” to the debt industry.

    The entire world is now floating on debt, all which must be financed by some sort of productive activity. The ability to “roll it over” is ending.

    Thibaud’s case is not much stronger, as he touts CRA while excoriating the lack of regulation of financial companies. Further, the differential between CRA results and ‘less regulated’ cohorts is dwarfed by the real failures in the blue model (Detroit, IL, CA and other places where productive people are taxed to employ essentially useless public patronage systems.

    The fact is that any and all subsidies of home ownership has dramatically skewed investment.

    This has caused bubbles not only in housing, but also in education, property taxes, municipal borrowing, and a slew of industries that have become tied to real estate values climbing beyond any sustainable pace.

  • thibaud

    Bruno: agree with your point on the distortions created by our national, bipartisan consensus re. the mortgage interest subsidy. If you want to scrap that, then you’ll have to reconfigure not just the other institutions you mention but the financial basis underpinning tens of millions of Americans’ retirement prospects. I don’t think we want to go there.

    Also, the 2nd-biggest “subsidy of home ownership” that “dramatically skewed investment” in the spree era was the Fed’s cheap-money policy.

    Which was inaugurated an pursued with reckless abandon by that great libertarian hero, Alan Greenspan.

    In any case, that’s beside the point of this discussion, which, in best VM form, entails Mr Mead’s creation of an anti-gum’mint straw man using whatever scraps of evidence he can summon.

    Re. your comparison of local mortgage markets, the biggest systemic factor behind plunging home values has been the amount of regulation of the mortgage industry in a particular state.

    Where such regulation is lax – as in CA, NV, AZ – you have spectacular collapses that actually outweigh the price declines in Detroit and elsewhere that have more to do with industrial factors than real estate policy. Where such regulation has been relatively strong – most notably in Texas – you have relatively stable home prices and a much lower incidence of abuse.

    But hey, wild-west, free-’n’-easy CA has a “blue social model” while closely regulated TX is anti-”blue”. Yup.

  • Jacksonian Libertarian

    The “Law of Unintended Consequences” applies anytime the government tries to go around the markets to change outcomes. Government largess warps and perverts the only economic law that of “Supply and Demand” creating a new unintended market.

    For example: welfare while intended to help poor women with children, is an incentive which breaks up poor families, which leaves children with only one parent, and one parent children score lower on IQ tests, make up 50% of our prison populations, and achieve far less than two parent children or orphans. So a program that is supposed to help the poor, destroys the family, and creates criminals with stunted minds out of the children. Fathers are important for the mental and moral health of children; this has been known for millennia hence the negative connotations for Bastards, like the Bar Sinister and its use as a swear word. Before welfare Blacks grew up in normal families, and the black gangster culture common now, was nonexistent.

    Welfare means 60% of black children have only one parent, but all the poor are being damaged. When the Government shows up to your door and says “We’re from the Government, and we’re here to help you” the sane response is to run screaming in fear.

  • Anthony

    In line with thibaud’s reasoning that it’s economics – free market capitalism – blacks “in the tradition of many other ethnic outsiders who have achieved rank equal to the majority must also become competent in all the accepted forms of economic and political power that a democracy holds open to its citizens and protects for their benefit and advancement.” To which becomes a very strong answer to both ugly comments and distorted hatred.

  • An

    The housing bubble was not distributed geographically. And it was not blacks that were hit the hardest. I wish I could post the raw data with accompanying graphs in the comments, but I’ll attempt to put the salient points into words.

    1) Ideally the mortgage debt/ income ratio is 3/1. In Middle America, the bubble was not too terrible with debt/income ratios 4/1 in peak areas. Other parts of the country (i.e. LA, San Francisco) ratios were skewed up to 6/1 or even 7/1. Why was this the case? Stated Income loans and no-doc loans were available to everyone. And it can’t be population density. While a lot of people live in CA and Florida, the population density is similar in other metropolitan areas.

    2) Between 2005-2007, five states accounted for half of the subprime loans: California, Arizona, Nevada, Florida, and Michigan. Not coincidentally, these five states then accounted for half the foreclosures in the coming years. A graphical representation can be found here. But this reflects the current state of foreclosures and doesn’t show the numbers from ‘06-‘11.
    http://www.realtytrac.com/mapsearch/us.html

    3) A state map of foreclosures does not begin to show the true distribution of the foreclosure crisis. If you were to break everything down into the county level, you will see the foreclosures as a percentage of the entire housing stock are highest in counties where there are higher percentages of blacks and Hispanics. Of the 3,033 counties in the United States, 50 account for half the foreclosures today. If you look back in the 2009 numbers, 35 counties accounted for half the foreclosures. These counties are mostly listed in the states above, and again, heavily black and Hispanic. Also, I don’t have the time to do it, and I haven’t seen an economist out there who has, but you could break down these counties by census track (how the CRA is implemented) and compare the foreclosure rates on those CRA implemented areas vs. non-CRA. I’ll leave it up to the readers to guess which argument the facts support.

    4) My belief is the CRA is one part of the equation on the housing crisis. CRA regulations and funds were implemented in those 35 counties more than the national average but I believe the CRA is one symptom of greater regulatory environment.

    5) Somehow, the lead was buried on the single greatest bailout of any institution in the history of the world. Freddie Mac and Fannie Mae, government sponsored entities, have been given over $300 billion dollars to date (when you count up everything, not just direct monetary injections). The US taxpayer makes guarantees on their $10 trillion loan portfolio. Obviously, the need for such a substantial bailout means that these two GSEs made extremely poor decisions lending money. Today 97% of all home loans are originated through these entities and FHA, but in years past their power was just as great. Both institutions were created in the depression era and effectively control the mortgage market. As long as loans “conform” to their standards, banks could package the loans and sell them into the secondary market created and governed by the GSEs. Because of this lenders have had no incentive to gauge the quality of the borrower, as long as it fit the GSE guidelines, the lenders made their profit and hands off the risk to Freddie and Fannie. Banks did not portfolio the loans in the past living and dying with the payments given to them by the borrower. This is the template by which all securitization is based off. It also shows Warren Buffet is a genius having privatizing profits, and socializing losses. No wonder he became a Democrat when his father was a conservative Republican congressman who even refused his salary!

    6) Over the years through political influence, politicians of both parties were able to put political pressure on the GSEs to suit their political needs. Freddie and Fannie by the way, function politically much like government unions. They have funneled over tens of millions of dollars in political contributions over the past 30 years, largely to Democrats. Frank Raines, the long time CEO of Fannie Mae is a Democrat and party insider. This does not put Republicans off the hook. While Republican senators and President Bush in the mid 2000s warned of Fannie and Freddie’s solvency, it was a bipartisan push to expand the percentage of Americans owning homes. The consequences of giving money to people who are not responsible enough to pay it back is the world in which we live in.

  • Carol Simpson

    I guess we need to blame the Republicans’ favorite Democrat, Bill Clinton, for this.

  • Tom Gates

    thibaud,I urge you to read, with an open mind, Gretchen Morgenson’s, business writer for the NYT, your favorite newspaper, “Reckless Endangerment”,an objective analysis of the housing debacle. It is not a very well known book becuase unlike many others it does not lay the all the blame with wall street banks, though they get their share, but also the political system, the community organizers, the FED, fraud, etc. It is a penetrating overview and many of the factors that she raises that caused the housing bubble I see in the implementation of Obamacare, especially the political pay-offs and the fraud.

  • thibaud

    Tom G – I’ve read Morgenson’s stuff over the years, as well as various expert analyses such as that of the Minneapolis Federal Reserve economists which I linked to and excerpted, above. Of course the pigs feeding at the Fannie-Fred trough bear some of the blame, as does Wall Street’s securitization casino.

    But any fair, objective analysis of our housing meltdown would begin and end with the loosening of credit and of underwriting standards due to a multitude of decisions made by multiple actors, public and private, over two decades.

    Perhaps I’m wrong, but my own $0.02 is that this is part of a much larger story, one that Mead’s wrong-headed obsession with government gets exactly backwards.

    It was the retreat from sensible government intervention and regulation that got us into this mess.

    IMHO, the root of this was the decision by our elites in the mid-1990s, or shortly after the collapse of Clinton’s attempt to fix the broken health insurance system, to replace decades of bipartisan efforts to give support to working Americans with a bread-and-circus policy of cheap money, artificially cheap credit, and a flood of cheap Chinese-made consumer junk.

    In effect, our political class told Americans, We can’t give you secure access to health insurance for your family or prevent your wages from falling to Korean levels, but we’ll enable you to flip houses to each other using phony money and then fill your McMansions with lots of cheap stuff imported from China.

    Thus was started our elites’ default policy of pumping up serial asset bubbles as a way of covering for their failure to preserve a safety net and fund it properly with a progressive tax system.

    So blame Gingrich, blame Clinton’s economic team, blame Jim Johnson and his ilk, blame Bush pere et fils, blame Alan Greenspan, and save some for the finance wizards who assured us that securitization was harmless and that extremely high levels of consumer debt were nothing to worry about.

    But let’s stop pretending that bread and circuses are an apt substitute for that basic backstop enjoyed by every citizen of every advanced democracy save ours.

    I.e., secure access to decent health insurance paid for not by illusory windfalls from serial asset bubbles but by a progressive and transparent tax system.

  • John Balog

    The veneration of debt as a measure of both success and self worth is a destructive cultural influence on par with the various failed attempts at social control. For shame on you Dr Mead, for joining in the adulation of this poisonous metric rather than calling for its end. A society of debt slaves (and the Bible which you believe tells us that the borrower is slave to the lender) cannot truly be either free or prosperous.

  • Greg Fox

    Is it me or does [name of another discussant removed in the interests of comity removed -ed] just incite one invective after another. We are all grown ups here but it seems one insult after another to WRM, then followed up by a bogeyman or meme on how the progressive world operates without any logical explanation of cause an effect. Case in point, the assertion that health care is the cause of the housing crisis.

  • Felipe Ramirez

    @Thibaud I don’t believe you understand what you are writing. You kind of ramble on and on, picking stores here and there and throwing them together. You started about the CRA, and when some of the readers fought back with some facts, you jumped around to another topic. You made one post about the failed Clinton Medicare being responsible for the housing crisis. You also need to more respectful to people. I’ve read a lot of your posts on other pages of this blog.

  • http://Facingthehardtruths.com Stephen M. St. Onge

    I just love the liberal bait-and-switch here. The federal govt. encouraged poor people, especially minorities, to buy houses they couldn’t afford. Other govt. policies encouraged even more stupidity in the real estate market. The result was the housing bubble. Conclusion by liberals: it was the fault of the free market, the one that never had this problem before the govt. policies.

    Note to students of propaganda: the people defending the bad liberal policies don’t tell you what the default rate for those new loans is, or how it compared with default rates before their programs. As one of my teachers told me: ‘When asked to speak on a subject you don’t want to speak about, pretend to addresss the subject, but really talk about something else.’

  • thibaud

    [hostile and contemptuous remarks deleted. second warning to poster about ugly tone; repeated warnings have not yet resulted in appropriate behavior. one more such incident and no more comments from this contributor will be posted at this site.]

    For starters, the foreclosure debacle is overwhelmingly a middle-class problem.

    As regards black Americans and subprime lending, the Community Reinvestment Act was the most visible and most important of the government programs specifically aimed at increasing lower-income black Americans’ access to mortgages.

    The record is indisputable: mortgages that the CRA enabled had a significantly lower default rate than mortgages for middle-class US homeowners.

    The “blue” regulatory program actually HELPED blacks far more than did the unregulated, wild west mortgage lenders who saddled the rest of the nation with a far higher rate of junk mortgages ending in foreclosure.

    We’ve had more than enough lies and disinformation in the course of this whole sordid affair without yet more untruths being piled on by people who know better.

  • An

    @Thibaud

    It’s tough to follow your arguments as they come across as progressive hierography, but with reasoning that cannot be construed as either inductive, or deductive.

    Never in my life have I changed a man’s faith, so I am not going to jump with you from claim to claim. . Hopefully, you can see where we are coming from so these comments can be more cordial, respectful, and fruitful.

    Underwriting criteria for home loans vary from lender to lender but all involve these five points:
    1) Credit
    2) Employment History/Income
    3) Debt to Income Ratio (there are 2 DTI’s),
    4) Total Liabilities
    5) Savings

    The goal of CRA was to increase the percentage of minority home owners. Proponents of CRA argued lenders were redlining, avoiding minority neighborhoods because of race. They pointed to a lower percentage of minorities being awarded home loans than whites. In certain cases, that was proven to be true. But in the overwhelming situations when you compared minorities and whites given similar underwriting criteria, there was no difference. (Banks can’t afford to be racist, why turn away a borrower because of race to lend money to a white person with bad payment history. The results show up in bottom line and executives get canned.)The difference in home loans was due to minorities having lower income as well as deficiencies in the other 4 underwriting categories. The appropriate race classification of a neighborhood was determined via “census tracks.”

    The number of CRA “funded” home loans was miniscule in comparison to regulatory effect. Politicians do not want to be seen spending money, it’s better to get someone else to pay for it. (see mandates, unfunded.) The power behind CRA was not in the “funds” assigned to minority census tracks, but the penalties for not having enough minorities with home loans.

    If you read ACTUALLY read the CRA, you will see that lenders face severe penalties. To achieve a sufficient mass of minority home loans, underwriting standards were relaxed. Any losses were considered the “cost of doing business” and shifted to other borrowers through higher interest rates. Bottom-line, more loans were issued to minorities in fear of the CRA penalties than through CRA provided funds.

    I argued in an earlier comment that foreclosures in the United States were not distributed geographically. One-half of all foreclosures in the United States are in 5 states with high minority populations. On a county by county basis, 50% of all foreclosures in 2009 occurred in just 30 of our over 3000 counties. If you do the math, you will see percentage of minority foreclosure much higher than whites in the equivalent income bracket. No Doc and stated income loans were available to everyone. There are poor white and other minorities as well as poor Hispanics and Blacks. WRM call of social engineering is correct.

    And WRM is also correct in asserting, on balance, this has hurt minorities more than helped. By lowering borrowing standards, you have created more demand for housing which pushed up prices. Many of these deficient borrowers ended up defaulting, losing their house and savings, and destroying their credit. But in my opinion the worst effect is that we have destroyed the capital base of an entire generation of black and Hispanics in those areas. Those who did not default have higher housing payments consuming half or more of their gross earnings, eating into any disposable income that could have been put in savings, or used to better their lives.

  • Tom Gates

    Following up on what An said: Much of the pressure on providing these home loans to minorities were the result of a Boston Fed study that purportedly proved race based discrimination. Thta study was later proved to be statistically inaccurate and thanks to ur “objective” media, the Fed walked away from it. Think of Nader’s attack on the Corvair, later debunked. The damage was done and banks fought to make minority loans as AN said, the cost of doing business. Again Reckless Endangerment outlines the entire sad and sordid process, to include the one day “special” credit scares applicants got to make sure they could qualify for a No Doc mortgage

  • thibaud

    An, Tom – don’t listen to me. Just listen to this chorus of experts from the Fed, the FDIC, the BIS, the Comptroller of the Currency.

    Start with the analyses of Federal Reserve officials from around the country (and please do read the one from the Minneapolis Federal Reserve that I linked to at the outset of this thread):

    1. Fed Reserve Board Governor Randall Kroszner, “The Community Reinvestment Act and the Recent Mortgage Crisis”

    http://www.federalreserve.gov/newsevents/speech/kroszner20081203a.htm

    2. Federal Reserve Bank of San Francisco Chairman Janet Yellen:

    http://www.frbsf.org/news/speeches/2008/0331.html

    3. Federal Reserve Bank of Cleveland working paper:

    http://www.clevelandfed.org/research/workpaper/2007/wp0724.pdf

    Now consider the views of the Comptroller of the Currency, FDIC Chairman Sheila Bair, and analysts from the Bank of International Settlements:

    4. Office of the Comptroller of the Currency, “Comptroller Dugan Says CRA Not Responsible for Subprime Lending Abuses”. Remarks Before the Enterprise Annual Network Conference.

    Excerpt:

    “… the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA,” [Comptroller Dugan] added.

    “A recent study of 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported high cost loans made to lower-income borrowers within their CRA assessment areas.”

    http://www.occ.gov/news-issuances/news-releases/2008/nr-occ-2008-136.html

    5. FDIC Chairman Seila Bair, Conference before the New America Foundation (12/2008), “Did Low-income Homeownership Go Too Far?”

    http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html

    6. Bank of International Settlements BIS Working Papers, Luci Ellis. “The housing meltdown: Why did it happen in the United States?”

    http://www.bis.org/publ/work259.pdf?noframes=1

    And one more from the business press, for good measure:

    Pressman, Aaron. “Community Reinvestment Act had nothing to do with subprime crisis”

    http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

  • thibaud

    More recently (Aug-2011), the Federal Reserve’s own statisticians did a proper, thorough empirical study of CRA vs non-CRA lending in the same areas study and concluded:

    “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.”

    http://www.federalreserve.gov/pubs/feds/2011/201136/index.html

    / end excerpt

    Re. methodology, the Fed’s empirical study used two rigorous approaches, described here:

    “Many of the studies that argue that the CRA and GSE goals played a central role in precipitating the subprime crisis – as well as those papers that have argued against this view – have not relied on hard empirical evidence.

    “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 (Wallison, 2009; Liebowitz, 2008).

    “For example, some papers compare aggregated time series of loan volumes and pricing in areas favored by these regulations with areas that are not.

    “Loan volume differences by themselves, however, are insufficient to “prove” that the regulations contributed to the elevated mortgage delinquency observed during the crisis. Instead, a link from regulation to loan performance is necessary and here, with few exceptions, the evidence is scant.

    “In this paper, we examine whether a link exists between these programs and subsequent mortgage performance.

    “Our analysis relies on two empirical approaches. The first approach, which focuses primarily on the CRA, examines whether loan outcomes across low-to-moderate income (LMI) census tracts varied according to lending activity in the tract. Census tracts differ in the composition of lenders that have historically operated within the tract and these differences tend to persist over time.

    “Since the CRA only affects some institutions, this provides a quasi-natural experiment.

    “If the CRA caused depository institutions to reduce their underwriting standards in LMI tracts, then LMI tracts that have been disproportionally served by CRA-covered lenders historically should have experienced worse outcomes than otherwise similar tracts.

    “Our first approach tests this conjecture by examining the relationship between activity by CRA-covered lenders and loan outcomes.

    The second approach takes advantage of the fact that both the CRA and GSE goals rely on hard geographic rules that were fixed for most of the past ten years. These regulations favor loans made to borrowers in census tracts where the median family income is below a fixed threshold. If these regulations provided an incentive for – or perhaps even required – loans to be made that otherwise would not have been granted, then one might expect loans in the favored neighborhoods to perform worse, all else equal, than loans made in areas that were not favored by these regulations.

    “Using a regression discontinuity design, we test this conjecture in the region immediately surrounding the relevant thresholds for these regulations, where each regulation’s impact should be easiest to detect.”

    /end excerpt.

    Conclusion: hard evidence and careful empirical analysis do not support the contention that the CRA was a major contributor to the subprime crisis.

    Here’s the Fed, again:

    “VI. CONCLUSIONS

    “It is not hard to see why the CRA and GSE affordable housing goals are raised as causes or contributors to the subprime crisis. Both regulations favor lending to borrowers in lower-income census tracts which accounted for a disproportionate share of the growth in lending during the subprime buildup, a disproportionate share of higher-priced, piggyback, no-income, and high-PTI lending, and elevated mortgage delinquency rates.

    “However, a more nuanced look at the data, as conducted in this paper, suggests that this superficial association may be misleading.

    “Using a variety of indirect tests, we find little evidence to support the view that either the CRA or the GSE goals caused excessive or less prudent lending than otherwise would have taken place.

    “Our analysis examining the type of lenders extending credit to LMI census tracts found no evidence that tracts with proportionally more lending by CRA-covered lenders experienced worse outcomes, whether measured by delinquency rates, high-PTI loans, or higher-priced lending.

    “In fact, the evidence suggests that loan outcomes may have been marginally better in tracts that were served by more CRA-covered lenders than in similar tracts where CRA-covered institutions had less of a footprint.

    “Loan purchases by CRA-covered lenders also do not appear to have been associated with riskier lending. Additionally, this analysis found no evidence that either the CRA or the GSE goals contributed to house prices appreciation during the 2001-2006 subprime buildup.

    “Our regression discontinuity tests, which focus on lending and loan performance around the income levels used to determine whether loans are favored by the CRA and GSE goals, finds little evidence of an effect for either regulation, except for an increase in loan purchases by CRA-covered depositories in their assessment areas.

    “Both loan quality and performance are clearly related to census tract income with both improving as income rises. However, these relationships are evident for both favored and not-favored loans and there is no evidence of a discontinuity at the threshold points.

    “Data on loan volumes also fail to find evidence of a regulatory threshold effect; indeed, the share of loans originated by CRA-covered lenders in their assessment areas and the share of loans sold to the GSEs are higher in the tracts not favored by the regulations than in favored tracts. Though loan purchases by CRA-covered lenders appear to have been sensitive to the definition of a CRA-favored loan, there is no evidence that this affected the overall quality of loans originated….”