Community Reinvestment Act Makes Bankers Stupid, According to AEI Research: Many people who are more expert than I in the housing market have already debunked the CRA myth. Here are just a few: Janet Yellen, Menzie Chinn, Randall Kroszner, Barry Ritholtz, David Goldstein and Kevin Hall, and Elizabeth Laderman and Carolina Reid. Mark Thoma does a good job keeping track of the debate.
One of the main arguments against the CRA-caused-the-crisis thesis is that the large majority of subprime loans, and delinquent subprime loans, and the housing bubble in general, had nothing to do with the CRA; it was done by lenders who are not governed bythe CRA, and was done in places like the exurbs of Las Vegas or the beachfront condos in Florida, not poor neighborhoods (which generally saw less price appreciation than average). So [Peter] Wallison [and Kevin Hassett and Lawrence White and others] comes up with a new argument: relaxed lending standards, encouraged by the CRA, caused lending standards to be relaxed in the rest of the housing market. Really, I’m not making this up.... [Wallison] concludes with this:
Although it is difficult to prove cause and effect, it seems highly likely that the lower lending standards banks were required to adopt under the CRA influenced what they and other lenders were willing to offer to borrowers in prime markets.
At its core, the argument is that the government forced lenders to make bad loans in one market, so they went and decided to make bad loans in other markets. Even conceding some of the premises for the sake of argument, this is illogical.... [I]f you (the bank) truly thought that you were being forced to make bad loans in one market, you would damned well keep those loans out of your other markets.... Wallison’s evidence is that flexible mortgage products became available to the prime market.... The most obvious explanation of that phenomenon is not that the CRA induced banks to make those products available to some customers, and that put them on a slippery slope to making them available to all customers, but that bank executives decided to make those products available to all customers. Still hoping to pin this on regulators, Wallison says, “Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers.” I don’t know where to start here: someone who is against regulation is trying to argue that the CRA tied the hands of regulators who otherwise would have clamped down on flexible mortgages to rich people?...
There is very little data available on the performance of loans made under the CRA. The subject has become so politicized in light of the housing meltdown and its effect on the general economy that most reports–favorable or unfavorable–should probably be discounted.
This is a very clear rhetorical tactic: when you can’t find data that you need to support your argument, say the data don’t exist, or that they are so politicized that they should be discounted.... Wallison does, however, cite one study:
One of the few studies of CRA lending in comparison to normal lending was done by the Federal Reserve Bank of Cleveland, which reported in 2000 that “respondents who did report differences [between regular and CRA housing loans] most often said they had lower prices or higher costs or credit losses for CRA-related home purchase and refinance loans than for others.”
This is the sentence immediately before the one Wallison cites, plus the one he does cite:
A large proportion of respondents in all bank-size categories reported that CRA-related and other home purchase and refinance loans have very similar origination and servicing costs, credit losses, and pricing on a per-institution basis. However, the respondents who did report differences most often said they had lower prices or higher costs or credit losses for CRA-related home purchase and refinance loans than for others.
Read that first sentence again: a large majority of banks say CRA loans do just fine. This is Wallison’s source I’m quoting. This is the best evidence Wallison can find, and presumably (since this is his specialty, not mine) he went looking for it. Not only does the plane not get off the ground, but the airline canceled the flight before boarding...