Clusterstock's John Carney has the Community Reinvestment Act stuck in his craw again, and like a pitbull refuses to let go even after being smacked on the snout -- in Carney's case, the smacks came from the Big Picture's Barry Ritholtz, Reuters' Felix Salmon and most recently by a blogger simply known as Mike at Rortybomb. However, Carney's latest example supporting the CRA conspiracy (a Federal Reserve Bank of St. Louis report) in fact could support the reasons CRA, a 1977 law intended to fight discriminatory lending practices at banks, was not a contributing factor to the credit crisis.
Simply put, the report, which by the way never makes reference to CRA, states that lending standards between 1998 and 2007 did not deteriorate, leading Carney to conclude that Clinton administration efforts to enforce the CRA in the 1990s meant standards were already lowered by the time the real estate bubble began this decade.
However, an entirely different conclusion could be made from the study -- one that debunks the CRA myth. Most who dismiss the CRA conspiracy argue that it was nonbank finance companies that drove the subprime markets that helped inflate real estate values and therefore create a bubble. Such firms were not party to CRA regulation, nor are they part of the Federal Reserve system -- meaning their loans may not be included in the Fed report. In other words, banks kept standards in place when lending directly to consumers, while other mortgage lenders may have lowered their standards.
CRA conspiracy theorists may ask then: How did the banks take on all the bad debt? One possible explanation is that the banks purchased the mortgages when the finance companies securitized them. - Matthew Wurtzel
See Carney's story from Clusterstock
See report from the Federal Reserve Bank of St. Louis
See Ritholtz's challenge to Carney from the Big Picture
See story from Rortybomb
See Felix's online discussion with Carney from Reuters' Macroprudential
Continue reading below
Matt,
Nice try, but no dice. The Fed study covers the subprime market in general and not just CRA covered banks. "We show that while it is possible that underwriting standards in this market were poor to begin with, deterioration in underwriting post-2004 cannot be the explanation for collapse of subprime mortgage market," the study's authors explain.
In short, either you have to maintain that lax lending standards didn't contribute to the crisis or that they were already in place.
And, yes, it's true that the study doesn't mention the CRA.