With the CRA, helped by the government loan machines Fannie and Freddie, marginal borrowers were mainstreamed shifting the whole lending curve.
Economists at the National Bureau of Economic Research concluded that banks undergoing CRA-related regulatory exams took additional mortgage lending risk. The authors of a study entitled "Did the Community Reinvestment Act Lead to Risky Lending?" compared "the lending behavior of banks undergoing CRA exams within a given census tract in a given month (the treatment group) to the behavior of banks operating in the same census tract-month that did not face these exams (the control group).
This comparison clearly indicates that adherence to the CRA led to riskier lending by banks." They concluded: "The evidence shows that around CRA examinations, when incentives to conform to CRA standards are particularly high, banks not only increase lending rates but also appear to originate loans that are markedly riskier." Loan delinquency averaged 15% higher in the treatment group than the control group one year after mortgage origination.
“Change happens at the margins. Gresham’s Law applies to bank loans as well as money. The CRA created an incentive to loan to poor credit risks. “Redlining” is logical. Bad assets and poor credit risks are anathema to sound lending.”
“With the CRA, helped by the government loan machines Fannie and Freddie, marginal borrowers were mainstreamed shifting the whole lending curve.”
Fannie and Freddie don’t make loans. They provide a secondary market and moreover they deal in low yield conforming paper.
The fuel for the bubble was trillions of dollars of non-conforming high yield paper written by Fannie and Freddie’s private sector rivals. Private sector lenders dominated the mortgage market during the bubble years and invented the NINJA loans, the option ARMS, the 100% plus loans, the whole gamut of very high risk paper.
Subprime mortgage lending to risky borrowers developed during the late 1990s by investment banks and pure mortgage lenders that were not covered by the CRA in any fashion. It was an immensely profitable business and they couldn’t have cared less about the CRA. Ameriquest, Argent, Countrywide pretty much invented the game and Wall Street was more than eager to fund it.
Orange County was ground zero of the subprime industry. I watched it develop and knew some of the players. Not one of them was ever concerned with what the government was doing. They had warehouse loans from Wall Street players who wanted high yield paper. They were writing all the crappy paper that they could because they were making thousands and thousands of dollars on each loan that they wrote. A kid right out of high school could get a job writing mortgages and make hundreds of thousands of dollars a year. It was easier to become a mortgage broker than to be a barber.