On this we agree: CRA loans weren’t the bad loans

By Felix Salmon
June 26, 2009

John Carney and I, not content with blogging the CRA, ended up IMing about it as well this afternoon. Here’s one of the more interesting bits of the conversation, in which Carney concedes that CRA loans performed rather well, and that it was banks’ move into non-CRA subprime loans which was the real problem. Which really makes his recent crusade against the CRA all the more puzzling.

Felix Salmon: You have no evidence at all for a causal relationship between lending to lmi [low and middle-income] borrowers and inflating the subprime/housing bubble

John Carney: Oh, I’m not at that claim yet.
I’m only at loose lending standards.

FS: but only for lmi, which was not the locus of the problem

JC: I don’t think you get the bubble without the Fed holding down interest rates and a global savings glut
You would have had loose lending standards but not a huge demand for mortgage products.
It was when the investor demand combined with loose lending standards that you got the bubble.
So I’ve been explaining how we had loose standards all set up when the money started pouring in to mortgages.

FS: but how do you explain how the loose lending standards jumped the wall over to non-CRA loans?

JC: Because the CRA loans were performing so well!


JC: So, ironically, the poor were paying off their loans so well that bankers made similar loans to the relatively wealthy.
And that blew up the world.

FS: So really the CRA worked — it got banks to make good loans to people who would pay them back
and then the banks, fools that they were, started extrapolating

JC: I don’t have data on that.
But, yes.
Bankers believed they were working.
There’s also another angle: CRA meant banks who believed in loose lending standards grew, while the stingy types didn’t.

FS: Or maybe it was the banks which were making good loans who grew…

JC: Well, those who didn’t do big LMI lending were barred from growing.

FS: Um, I am vaguely familiar with CRA requirements. “Big” is putting it a bit strongly I think.

JC: Bigger?
Anyway, there was a lot of pressure to acheive an O rating

FS: CRA is actually pretty weak, any halfways-decent bank should be in compliance anyway

JC: That’s an entertaining argument that was strenously denied by CRA supporters until recently. They stressed its effectivensss.
search “CRA” on the Brookings Institute website

FS: It was effective precisely because it acted in banks’ self-interest

JC: Again, I agree that banks agree with you. I still haven’t seen the data to know (a) if it was in their self-interest and (b) whether that was just a function of rising prices.

FS: But you’ll agree that there’s a very strong possibility that the consequences of CRA were positive for banks, and for lmi borrowers,
and that it was non-CRA lending which caused substantially all of the problems

JC: Oh, sure. As long as they confined their loosey lending standards to CRA loans, they’d probably have been okay. Even if those were loss making, it wouldn’t have been catastrophic.
The broad application of CRA standards was a disaster.

FS: well, no. If banks had underwritten their subprime loans with the same assiduousness they applied to their lmi borrowers, there wouldn’t have been a problem. There was never any such things as a NINJA CRA loan

JC: Well, there’s also the problem that to make CRA loans you had to market them, which brought in borrowers who wanted No Money Down but weren’t CRA candidates.

FS: that’s a real stretch
I don’t think there was ever any lack of demand for CRA loans which had to be countered by lots of marketing for these things
if you wanted to make more CRA loans, you could always just call up your local CDFI
much easier

JC: I think you over-estimate the ease of making CRA loans.
It was hard!

FS: the underwriting is hard. Finding the borrowers in the first place is easy
as someone who sits on the board of a cdcu with effectively zero marketing budget, I can assure you of that


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