I am in the middle of a rather verbose 'conversation' with an aquaintance, and his most recent response to me contained the following paragraph:
Evidently you have fallen victim to recent propaganda about the Community
Reinvestment Act. The CRA actually restrained subprime lending. I urge you
to study the Fed's data on this matter. Most subprime lenders were exempt
from the CRA. Of the top 25 subprime lenders in 2006, only one was subject
to the CRA. Banks regulated by the CRA were much less likely to make
subprime loans than unregulated lenders were. More than 80% of subprime
loans were from banks unregulated by the CRA. Banks regulated by the CRA
were twice as likely to keep loans in their portfolios instead of reselling
them as mortgage-backed securities. Neighborhoods with higher
concentrations of CRA-regulated banks have lower foreclosure rates.
Subprime lending was rare for 20 years after Congress passed the CRA, then
rose sharply when other regulations were lifted. All the data supporting
these statements is available from the Fed and other authoritative sources.
I would appreciate any resources (links) or opinions regarding the veracity of his assertions from the august community here.
The CRA was not the primary cause of the subprime lending crisis but it was a contributing factor. The credit crisis involves more that subprime loans and this is why Fannie Mae and Freddie Mac are in trouble.
Most of the CRA loans that were sold in the secondary market were sold to Fannie Mae. In 2004, Fannie Mae increased the loan-to-value ratio for these loans to 103% of the estimated market value of the home. This means that someone could now buy one of these homes for $100,000 and receive an additional $3,000 at closing (less closing costs) without spending any of their own money. This is far higher than the historically more common 80% loan-to-value ratio, where the buyer is required to provide 20% of the purchase price. In a situation similar to the S&L crisis in the 1980's, it was not the CRA alone that contributed to the crisis but the CRA coupled with a 103% LTV.
While neighborhoods with higher concentrations of CRA-regulated banks may have lower foreclosure rates, these rates would be even lower without the CRA.