Relation to 2008 financial crisis
See also:
Subprime mortgage crisis and
Global financial crisis of 2008–2009
Some economists, politicians and other commentators have charged that the CRA contributed in part to the
2008 financial crisis by encouraging banks to make unsafe loans. Economists from the
Federal Reserve and the
FDIC, dispute this contention. The Federal Reserve, having examined the evidence, holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis
[98]. At the FDIC, Chair Sheila Bair delivered remarks noting that the majority of subprime loans originated from lenders not regulated by the CRA, calling it a "scapegoat" and declaring it "NOT guilty."
[99]
Economist
Stan Liebowitz wrote in the
New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA.
[93] In a commentary for
CNN, Congressman
Ron Paul, who serves on the
United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."
[100] In a
Wall Street Journal opinion piece,
Austrian school economist
Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.
[101]
However, many others dispute that the CRA was a significant cause of the subprime crisis. 2008
Nobel Prize in Economics winner
Paul Krugman states that the notion "has been refuted up, down, and sideways."
[102] He also noted in November 2009 that 55% of commercial real estate loans were currently underwater, despite being completely unaffected by the CRA.
[103] According to
San Francisco Federal Reserve Bank Governor
Randall Kroszner, the claim that "the law pushed banking institutions to undertake high-risk mortgage lending" was contrary to their experience, and that no empirical evidence had been presented to support the claim.
[98] In a
Bank for International Settlements (BIS) working paper, economist Luci Ellis concluded that "there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust," relying partly on evidence that the housing bust has been a largely exurban event.
[104] Others have also concluded that the CRA did not contribute to the financial crisis, for example,
FDIC Chairman Sheila Bair,
[99] Comptroller of the Currency John C. Dugan,
[105] Tim Westrich of the
Center for American Progress,
[106] Robert Gordon of the
American Prospect,
[107] Ellen Seidman of the
New America Foundation,
[108] Daniel Gross of
Slate,
[109] and Aaron Pressman from
BusinessWeek.
[110]
Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton,
[65][111] stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made "perhaps one in four" sub-prime loans, and that "the worst and most widespread abuses occurred in the institutions with the least federal oversight".
[112] According to Janet L. Yellen, President of the
Federal Reserve Bank of San Francisco, independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.
[113] A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.
[114] Emre Ergungor of the
Federal Reserve Bank of Cleveland found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.
[115]
During a 2008
House Committee on Oversight and Government Reform hearing on the role of Fannie Mae and Freddie Mac in the financial crisis, including in relation to the Community Reinvestment Act, asked if the CRA provided the “fuel” for increasing subprime loans, former Fannie Mae CEO
Franklin Raines said it might have been a catalyst encouraging bad behavior, but it was difficult to know. Raines also cited information that only a small percentage of risky loans originated as a result of the CRA. Bob McTeer, president of the Dallas Federal Reserve Bank from 1991 to 2004, said “There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.” He also said “When a bank made a decision to purchase mortgaged-backed securities, they would somehow determine if some of them were in zip codes covered by the CRA, and therefore they could get CRA credit.”
[116][117]