Did the CRA cause the housing crash?

Did the CRA induce banks to behave irresponsibly and contribute to the housing bubble and subsequent crash? A new study offers an answer.

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

File that under “Duh”.

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2 Responses to Did the CRA cause the housing crash?

  1. RJ says:

    Sure it did, just as sure as God made little green apples.

    Of course the TV show Flip this House started a lot of folks thinking no house value never decreased, and it was so easy to purchase a home (CRA) then resale it at great markups, and the “home equity loan” program pushed by retail creditors sure didn’t help,

    next in line is student loan program, makes me wonder how many gazillion they are gonna pay out to pay off loans for gender studies or sockpuppeting for dummies or liberal arts degrees

  2. notamobster says:

    First two sentences says it all. Yes, people (and businesses run by people) respond to incentives.