Whenever there is a serious default rate that comes all at once like it did earlier last year in urban areas due to the CRA it affects housing prices as a whole in those markets. Rents go down dramatically as new inventory is suddenly placed on the market. This causes a domino effect. Typically investors are the second tier to default due to the fact that rents can no longer cover their mortgage payments. This adds even more inventory to the market causing prices to tumble further. As equity levels fall below certain levels those stupid enough to finance with ARMs see their monthly payments rise. Those on the market for a home suddenly find that they can no longer qualify for a mortgage with 5% down but instead must have 20%. Even though housing prices may be dramatically lower they may find that they can no longer afford to purchase a house, which further depresses the market.
Do you see how CRA can cause enough distortions in the housing market, first driving home values up by artificially stimulating demand, then driving home values off a cliff when the dead beats default, that even middle income and upper income investors are forced to default? It caused the housing bubble in the first place, added and abetted by less than sophisticated investors who didn't understand that real estate prices where getting to unrealistic levels or why. It was always just a matter of time before it all came unraveled.
Thanks, interesting post.
I think something like that did happen. I think a sane reform of the CRA, based on what we have learned from this economic crisis, would be a good thing, but with the Dems in charge a so-called "reform" of anything would only make things worse. The question is, how much of a factor was the CRA?
My gut tells me that measures such as the CRA are fundamentally dangerous. For example, Carter's original CRA was not as harmful as Carter's 1993 CRA modifications and zealous enforcement. (ACORN should be cut off, but watch what Obama/Pelosi/Reid tries next.) I don't believe that is the only cause of this crisis though.
On the other hand, removing regulations can also be harmful. In 2004 the SEC loosened the leverage rules, allowing some firm to go from maximum debt-to-net-capital ratio of 12 to 1, to much higher ratios. Only 5 were allowed to do that. Who were they? Surprise, surprise. Do Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley sound familiar? And now Paulson and Geithner look like foxes guarding the henhouse.
This is an extremely complex phenomenon, but economic libertarians will argue if there were no regulations at all, the problem would solve itself, while socialists, etc. will argue that 100% of the problem is the free market. I think both are wrong to see it in such absolute terms.