The Wrong Right Wing Stuff

right wingI inadvertently stepped on a right wing meme back last September when I implied that Fannie and Freddie did their share in contributing to the current financial meltdown. I used figures to show that the problems in the mortgage market were occurring equally in the subprime as well as the prime market. What happened is that I said was associated with the oft -repeated Republican talking point that the CRA (Community Reinvestment Act) caused the meltdown in the mortgage. I still think that was a wild shark jump, but I was called things I won’t repeat here because of that big leap.  I was channel surfing last night and heard Glenn Beck (Mr. Emotional Basketcase) repeat this nonsense yet again. So, let me use real research to put clip the right wings off of that one.

Today’s WSJ overviewed a study by the Minneapolis Fed (yes, the peer reviewed, use data kind, not the say what you want to get ratings type of study) and concluded that the CRA did not contribute to the mortgage market meltdown. Let me just add here that I worked for the Fed and the Minneapolis Fed has one of the more conservative research agendas and economists.  Most famously, they’re home to Robert Lucas and Thomas Sargent’s work on Rational Expectations.  These guys are freshwater economists.

At the center of much of the shouting is the the Community Reinvestment Act (CRA), a 1970s-era law that pushed banks to lend to low-income households. Some — mostly conservatives — contend that the government program, coupled with securitization from Fannie Mae and Freddie Mac, played a role in the surge in risky home lending that formed the root of the financial crisis. Liberals counter that the Fannie/Freddie/CRA argument is a red herring that tries to pin a market failure on government interference.

A report from the Federal Reserve Bank of Minneapolis took a look at data on subprime — referred to as “high-priced” — loan originations and performance at CRA-regulated lenders and their affiliates and institutions not covered by the law. Here’s one of the central findings:

In total, of all the higher-priced loans, only 6 percent were extended by CRA-regulated lenders (and their affiliates) to either lower-income borrowers or neighborhoods in the lenders’ CRA assessment areas, which are the local geographies that are the primary focus for CRA evaluation purposes. The small share of subprime lending in 2005 and 2006 that can be linked to the CRA suggests it is very unlikely the CRA could have played a substantial role in the subprime crisis.

This report doesn’t represent the first time the Fed has tried to bat down the notion that the CRA played an important role in the subprime mess. Late last year, then Fed Governor Randall Kroszner, a University of Chicago economist and former Bush administration official, echoed the findings of the report saying only about 6% of all subprime mortgages to low-income households trace back to banks that had to meet CRA standards. (Although this Investor’s Business Daily editorial is skeptical.)

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