As a Realtor, it is still rare that I don't see the effects of the great housing bubble crash upon many of my clients. For some, the result is only a smaller check when they sell their home. For others? It's having to bring a big ol' chunky check to closing .... and for yet other people, it is catastrophic. You haven't lived until you explain to someone that their $100,000 downpayment has vanished, and that you know that they no longer have a job and so their home will be a "short sale," with voluminous paperwork required, their credit deeply harmed and their house ultimately selling for a fraction of what they paid.
Many have blamed Evil Wall Street and Eviler Still Banks and We Nasty Real Estate Agents. I will admit that this overall horror had many fathers (and mothers).
Too many, however, to not realize where much of the finger of blame truly ought to be aimed: our federal government.
The federal government just may have played something of a role in inducing, even strong-arming, banks to take risks they otherwise would have avoided. Specifically, the Community Reinvestment Act and related policy pressures are pointed to as culprits, part of a government effort to extend home-ownership in lower-income neighborhoods. Now comes a new study from the National Bureau of Economic Research that says, quite bluntly. that the CRA played a major role.
In the academic world, mealy-mouthed delivery of even powerful conclusions is the norm, so it's refreshing to see authors Sumit Agarwal, Efraim Benmelech, Nittai Bergman, Amit Seru answer the title's question, "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?," with the clear, "Yes, it did. ... We find that adherence to the act led to riskier lending by banks."
"We want your CRA loans because they help us meet our housing goals," Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant's affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. "We will buy them from your portfolios or package them into securities."
She described "CRA-friendly products" as mortgages with less than "3% down" and "flexible underwriting."
From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.