New study: CRA promoted risky lending.

[Quantum Windbag]

Can I say d'uh?

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

"We want your CRA loans because they help us meet our housing goals," Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant's affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. "We will buy them from your portfolios or package them into securities."
She described "CRA-friendly products" as mortgages with less than "3% down" and "flexible underwriting."
From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.

New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com



New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com

 

[bigrebnc1775]

Can I say d'uh?

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

"We want your CRA loans because they help us meet our housing goals," Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant's affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. "We will buy them from your portfolios or package them into securities."
She described "CRA-friendly products" as mortgages with less than "3% down" and "flexible underwriting."
From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.

New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com



New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com

OH boy this thread should attract a magnitude of liberal wrath.

Nice.

 

[Care4all]

Can I say d'uh?

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

"We want your CRA loans because they help us meet our housing goals," Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant's affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. "We will buy them from your portfolios or package them into securities."
She described "CRA-friendly products" as mortgages with less than "3% down" and "flexible underwriting."
From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.

New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com



New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com

I dunno? Can you say duh?

Assuming ABBS's analysis is correct, the paper shows pretty clearly that the CRA did not play a significant role in fomenting the housing bubble. While the CRA may have lead to more risky lending, what is most striking about the paper's findings are how small in magnitude the CRA's effects are. While ABBS find statistically significant impacts, the magnitudes are really small: 5% more lending in the six quarters surrounding a CRA exam and 15% higher default rate. That's not a 15% default rate. That means a 1.15% default rate instead of a 1% default rate or a 6.9% default rate instead of a 6% default rate. This sort of change is a drop in the bucket relative to what happened during the housing bubble.

To this small magnitude we can run a cross-check against the "other bubble"--commercial real estate. The CRA has little application to commercial lending; low-to-moderate income individuals aren't taking out commercial loans. Yet there was a near identical bubble in commercial real estate. The implication of the CRA's non-involvement in the commercial real estate bubble was that it probably did not play much of a role in the parallel residential real estate bubble. Instead, ABBS find that the effects of the CRA in both lending volume and defaults were greatly elevated during the 2004-2006 period, when the private-label securitization market was in full bloom. That suggests that the CRA by itself had a much more minor effect, but the ability to shift risk to MBS investors changed the effect of the CRA. The role of private-label securitization in the bubble also tracks with the commercial real estate market, where there is only private label securitization and where securitization really took off at the same time as the start of the bubble.

CRA and the Housing Bubble - Credit Slips

 

[Quantum Windbag]

Can I say d'uh?

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com



New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com

I dunno? Can you say duh?

Assuming ABBS's analysis is correct, the paper shows pretty clearly that the CRA did not play a significant role in fomenting the housing bubble. While the CRA may have lead to more risky lending, what is most striking about the paper's findings are how small in magnitude the CRA's effects are. While ABBS find statistically significant impacts, the magnitudes are really small: 5% more lending in the six quarters surrounding a CRA exam and 15% higher default rate. That's not a 15% default rate. That means a 1.15% default rate instead of a 1% default rate or a 6.9% default rate instead of a 6% default rate. This sort of change is a drop in the bucket relative to what happened during the housing bubble.

To this small magnitude we can run a cross-check against the "other bubble"--commercial real estate. The CRA has little application to commercial lending; low-to-moderate income individuals aren't taking out commercial loans. Yet there was a near identical bubble in commercial real estate. The implication of the CRA's non-involvement in the commercial real estate bubble was that it probably did not play much of a role in the parallel residential real estate bubble. Instead, ABBS find that the effects of the CRA in both lending volume and defaults were greatly elevated during the 2004-2006 period, when the private-label securitization market was in full bloom. That suggests that the CRA by itself had a much more minor effect, but the ability to shift risk to MBS investors changed the effect of the CRA. The role of private-label securitization in the bubble also tracks with the commercial real estate market, where there is only private label securitization and where securitization really took off at the same time as the start of the bubble.

CRA and the Housing Bubble - Credit Slips

Your study argues that, since there was a commercial boom, the CRA didn't cause the residential boom. Mine points out that banks actually increased risky lending because of the CRA. Unless you can show a parallel increase in risky lending in the commercial market, which your article admits does not exist, mine trumps the assumptions in yours.

In other words, we are actually talking about two different things.

 

[EdwardBaiamonte]

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

I seems much of the government was organized to get people into homes the Republican free market said they could not afford. At the heart of it was the Fed whose open policy was to stimulate the housing market with lots of easy money in the wake of 9/11 and a long term sluggish economy! CRA was tiny part of the entire liberal effort.

 

[Toro]

Your study argues that, since there was a commercial boom, the CRA didn't cause the residential boom. Mine points out that banks actually increased risky lending because of the CRA. Unless you can show a parallel increase in risky lending in the commercial market, which your article admits does not exist, mine trumps the assumptions in yours.

In other words, we are actually talking about two different things.

Abstract:
Two parallel real estate bubbles emerged in the United States between 2004 and 2008, one in residential real estate, the other in commercial real estate. The residential real estate bubble has received a great deal of popular, scholarly, and policy attention. The commercial real estate bubble, in contrast, has largely been ignored.

This Article explores the causes of the commercial real estate bubble. It shows that the commercial real estate price bubble was accompanied by a change in the source of commercial real estate financing. Starting in 1998, securitization became an increasingly significant part of commercial real estate financing. The commercial mortgage securitization market underwent a major shift in 2004, however, as the traditional buyers of subordinated commercial real estate debt were outbid by collateralized debt obligations (CDOs). Savvy, sophisticated, experienced commercial mortgage securitization investors were thus replaced by investors who merely wanted “product” to securitize. The result was a noticeable decline in underwriting standards in commercial mortgage backed securities that contributed to the commercial real estate price bubble.

The commercial real estate bubble holds important lessons for understanding the residential real estate bubble. Unlike the residential market, there is almost no government involvement in commercial real estate. The existence of the parallel commercial real estate bubble presents a strong challenge to explanations of the residential bubble that focus on government affordable housing policy, the Community Reinvestment Act, and the role of Fannie Mae and Freddie Mac. Instead, the changes in commercial real estate financing closely mirror changes in the residential real estate financing, which shifted from regulated government-sponsored securitization to unregulated private securitization. This indicates that changes in the securitization market contributed to the problems in both the commercial and residential real estate markets.

The Commercial Real Estate Bubble by Adam Levitin, Susan Wachter :: SSRN

 

[Sallow]

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

I seems much of the government was organized to get people into homes the Republican free market said they could not afford. At the heart of it was the Fed whose open policy was to stimulate the housing market with lots of easy money in the wake of 9/11 and a long term sluggish economy! CRA was tiny part of the entire liberal effort.

You really have absolutely no idea what you are talking about.

 

[EdwardBaiamonte]

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

I seems much of the government was organized to get people into homes the Republican free market said they could not afford. At the heart of it was the Fed whose open policy was to stimulate the housing market with lots of easy money in the wake of 9/11 and a long term sluggish economy! CRA was tiny part of the entire liberal effort.

You really have absolutely no idea what you are talking about.

if true present your evidence or rationale or admit as a liberal you lack the IQ to do so

 

[Quantum Windbag]

Your study argues that, since there was a commercial boom, the CRA didn't cause the residential boom. Mine points out that banks actually increased risky lending because of the CRA. Unless you can show a parallel increase in risky lending in the commercial market, which your article admits does not exist, mine trumps the assumptions in yours.

In other words, we are actually talking about two different things.

Abstract:
Two parallel real estate bubbles emerged in the United States between 2004 and 2008, one in residential real estate, the other in commercial real estate. The residential real estate bubble has received a great deal of popular, scholarly, and policy attention. The commercial real estate bubble, in contrast, has largely been ignored.

This Article explores the causes of the commercial real estate bubble. It shows that the commercial real estate price bubble was accompanied by a change in the source of commercial real estate financing. Starting in 1998, securitization became an increasingly significant part of commercial real estate financing. The commercial mortgage securitization market underwent a major shift in 2004, however, as the traditional buyers of subordinated commercial real estate debt were outbid by collateralized debt obligations (CDOs). Savvy, sophisticated, experienced commercial mortgage securitization investors were thus replaced by investors who merely wanted “product” to securitize. The result was a noticeable decline in underwriting standards in commercial mortgage backed securities that contributed to the commercial real estate price bubble.

The commercial real estate bubble holds important lessons for understanding the residential real estate bubble. Unlike the residential market, there is almost no government involvement in commercial real estate. The existence of the parallel commercial real estate bubble presents a strong challenge to explanations of the residential bubble that focus on government affordable housing policy, the Community Reinvestment Act, and the role of Fannie Mae and Freddie Mac. Instead, the changes in commercial real estate financing closely mirror changes in the residential real estate financing, which shifted from regulated government-sponsored securitization to unregulated private securitization. This indicates that changes in the securitization market contributed to the problems in both the commercial and residential real estate markets.

The Commercial Real Estate Bubble by Adam Levitin, Susan Wachter :: SSRN

The study I posted shows that the CRA contributed to, but was not the primary cause of, the residential real estate bubble. The other study is about the commercial real estate bubble, and points out that the CRA had no affect on it, something I am not arguing. I am simply pointing out that they are not interrelated if we are discussing the CRA, which I am.

 

[boedicca]

Duh^Infinity

 

[PoliticalChic]

Can I say d'uh?

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

I am sure the usual suspects are going to blame the greedy bankers, even if none of them can explain how bankers get rich by lending money to people who can't pay it back.

And, of course, Fannie and Freddie had nothing to do with it.

"We want your CRA loans because they help us meet our housing goals," Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant's affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. "We will buy them from your portfolios or package them into securities."
She described "CRA-friendly products" as mortgages with less than "3% down" and "flexible underwriting."
From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.

New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com



New Study Blames Community Reinvestment Act For Mortgage Defaults - Investors.com

Yes, the CRA Is Toxic
So why is Congress thinking about expanding it?
Yes, the CRA Is Toxic by Edward Pinto, City Journal Autumn 2009

1. The question of how well CRA loans have performed is of vital importance because of the trillions of dollars in such lending. During the first 15 years of the act’s existence, total announced commitments under the CRA totaled $9 billion. But starting in 1992, volume exploded. Over the next 16 years, from 1992 to 2008, announced CRA commitments totaled $6 trillion. And incredible though it may seem, the same federal regulators who forced the CRA on banks have neglected to track the performance of trillions of dollars of loans made to satisfy it. But there is a strong prima facie case that they constitute toxic lending—that is, lending that leads to unsustainable loans, resulting in an unacceptable level of foreclosures.

2. …approximately 50 percent of CRA loans for single-family residences were nevertheless made to borrowers who made down payments of 5 percent or less or had low credit scores—characteristics that indicated high credit risk. Whether or not anyone called these loans “subprime,” in other words, the chances are good that many of them have defaulted or remain at high risk of doing so.



To the point...just as this weeks statistics on single mother families proved Dan Quayle correct....
...do you think the Left will ever admit that Liberal policy caused the mortgage meltdown?

 

[Toro]

Your study argues that, since there was a commercial boom, the CRA didn't cause the residential boom. Mine points out that banks actually increased risky lending because of the CRA. Unless you can show a parallel increase in risky lending in the commercial market, which your article admits does not exist, mine trumps the assumptions in yours.

In other words, we are actually talking about two different things.

Abstract:
Two parallel real estate bubbles emerged in the United States between 2004 and 2008, one in residential real estate, the other in commercial real estate. The residential real estate bubble has received a great deal of popular, scholarly, and policy attention. The commercial real estate bubble, in contrast, has largely been ignored.

This Article explores the causes of the commercial real estate bubble. It shows that the commercial real estate price bubble was accompanied by a change in the source of commercial real estate financing. Starting in 1998, securitization became an increasingly significant part of commercial real estate financing. The commercial mortgage securitization market underwent a major shift in 2004, however, as the traditional buyers of subordinated commercial real estate debt were outbid by collateralized debt obligations (CDOs). Savvy, sophisticated, experienced commercial mortgage securitization investors were thus replaced by investors who merely wanted “product” to securitize. The result was a noticeable decline in underwriting standards in commercial mortgage backed securities that contributed to the commercial real estate price bubble.

The commercial real estate bubble holds important lessons for understanding the residential real estate bubble. Unlike the residential market, there is almost no government involvement in commercial real estate. The existence of the parallel commercial real estate bubble presents a strong challenge to explanations of the residential bubble that focus on government affordable housing policy, the Community Reinvestment Act, and the role of Fannie Mae and Freddie Mac. Instead, the changes in commercial real estate financing closely mirror changes in the residential real estate financing, which shifted from regulated government-sponsored securitization to unregulated private securitization. This indicates that changes in the securitization market contributed to the problems in both the commercial and residential real estate markets.

The Commercial Real Estate Bubble by Adam Levitin, Susan Wachter :: SSRN

The study I posted shows that the CRA contributed to, but was not the primary cause of, the residential real estate bubble. The other study is about the commercial real estate bubble, and points out that the CRA had no affect on it, something I am not arguing. I am simply pointing out that they are not interrelated if we are discussing the CRA, which I am.

That study is telling you there was "a parallel increase in risky lending in the commercial market." It's axiomatic that in any credit bubble, there is an increase in risky lending.

 

[Quantum Windbag]

The Commercial Real Estate Bubble by Adam Levitin, Susan Wachter :: SSRN

The study I posted shows that the CRA contributed to, but was not the primary cause of, the residential real estate bubble. The other study is about the commercial real estate bubble, and points out that the CRA had no affect on it, something I am not arguing. I am simply pointing out that they are not interrelated if we are discussing the CRA, which I am.

That study is telling you there was "a parallel increase in risky lending in the commercial market." It's axiomatic that in any credit bubble, there is an increase in risky lending.

They are two different markets, yes or no?

If they are different markets, we can easily show that different factors apply in them and a direct comparison between the two in an attempt to prove that the lack of a single factor in one market proves that it does not impact the other market is false.

By the way, do you have any evidence that there was a commercial real estate bubble at all, or that it burst as a result of risky lending practices? I haven't seen anything beyond Krugman's linking of the prices in the commercial market to those in the residential, which appears to be more of a result of diverting resources toward residential construction than a result of a bubble created by risky lending. The actual spending in commercial construction remained relatively steady compared with the residential market, and did not drop nearly as drastically as it did in the residential market.

Source.

 

[Toro]

They are two different markets, yes or no?

If they are different markets, we can easily show that different factors apply in them and a direct comparison between the two in an attempt to prove that the lack of a single factor in one market proves that it does not impact the other market is false.

They are different in the same way that gold and silver are different but are affected by similar factors.

That's why one must understand cause and effect. Credit that was gushing into the residential real estate market bled into the CRE sector as well.

By the way, do you have any evidence that there was a commercial real estate bubble at all, or that it burst as a result of risky lending practices? I haven't seen anything beyond Krugman's linking of the prices in the commercial market to those in the residential, which appears to be more of a result of diverting resources toward residential construction than a result of a bubble created by risky lending. The actual spending in commercial construction remained relatively steady compared with the residential market, and did not drop nearly as drastically as it did in the residential market.

Source.

Your image shows that at its peak CRE spending was nearly double its normalized run rate. Proportionally, it rose almost as much as residential real estate.

Whether or not CRE was in a true bubble, it was certainly ridiculously over-valued. Cap rates were at all time lows.

I remember the time well. People were doing crazy things. Cap rates on trophy properties in midtown Manhattan like the GM building were being sold at less than 3%. Transactions such as Peter Cooper Village were so high that rents couldn't cover interest expense let alone anything else. Strip malls in suburban Florida were being transacted at less than 6%. It was madness.

 

[Toro]

Also, you can see that CRE prices were cut nearly in half in real terms, as it did for residential RE fell.

 

[EdwardBaiamonte]

...do you think the Left will ever admit that Liberal policy caused the mortgage meltdown?

no!!!! somehow they believe that the government was not involved in the housing market. They have a brainwashed Nazi-like abilty to ignore the patently obvious. They are dangerously stupid and they are the majority party.