A new study by the Federal Reserve Bank of St. Louis explodes the conservative myth that federal policies encouraging banks to loan money to minorities and lower-income borrowers are what caused the housing crisis and the collapse of the mortgage industry. From the abstract:
We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.
ThinkProgress provides more detail:
Here’s what really happened. During the housing bubble of the mid-2000s, over-leveraged shadow banks packaged risky subprime mortgage loans into securities and passed them along to consumers that were often unaware or misinformed of the underlying risks. It was the poor performance of these private-label securities — not those issued by Fannie and Freddie — that led to the financial meltdown, according to the bipartisan Financial Crisis Inquiry Commission.
Since their inception, the Community Reinvestment Act and affordable housing goals have helped millions of creditworthy low-income and minority families access affordable mortgages. Most high-risk subprime loans were originated by non-bank lenders not subject to CRA, and the loans were usually issued to middle- and high-income borrowers that did not qualify for CRA. It’s also important to note that Fannie and Freddie did not securitize subprime mortgages.
I was in the mortgage business at the time all this went down. I can tell you that the dramatic loosening of subprime mortgage criteria that helped precipitate the foreclosure crisis — you wouldn’t believe the loans that got approved, almost always by non-bank mortgage lenders — was not caused by the government encouraging broader home ownership. It was brought on by mortgage companies jumping on the gravy train. By selling bundled mortgage securities on the secondary market at incredible rates of profit — 7, 8, 9 points sometimes — the lenders could easily pass all the risk of bad loans on to those who purchased those securities. In most cases, as long as the borrower didn’t default in the first six months, the bad loans didn’t come back to them; whoever purchased the mortgage was stuck with it.
In the early part of the last decade, the entire industry was on the gravy train, making money as fast as possible because the derivatives market was completely unregulated (because Clinton and his appointees actively prevented such regulation). It was a financial wild west for a few years. That is why the government is responsible for it, not because they were encouraging banks to lend money to lower income and minority homeowners.