One story of the housing crisis is this: Government programs that helped low-income households buy homes led to widespread defaults on the subprime loans they held, triggering the whole financial crisis.
For example, Lawrence Kudlow and Stephen Moore, who have both been appointed economic advisers to Donald Trump, argue that the financial crisis and recession were caused by policies implemented by Bill Clinton and designed to end discrimination in home loans, known as “lining”, in poor areas. In particular, they argue that the Community Reinvestment Act (ARC), legislated in 1977, is to blame:
“Under the leadership of Clinton’s Housing and Urban Development (HUD) Secretary Andrew Cuomo, Community Reinvestment Act regulators have given banks higher ratings for home loans made in ‘credit-deprived’ areas. Banks were effectively rewarded for abandoning strong underwriting standards and granting loans to those at high risk of default.
Additionally, in Clinton’s drive to provide home loans to low-income borrowers, Fannie Mae and Freddie Mac adopted a common practice to virtually end credit documentation, low credit scores were ignored, and bad credit ratings were ignored. income and employment history were also put aside. The term “subprime” has become common. What an understatement. … Tragically, when prices fell, low-income people who really couldn’t afford these mortgages under normal credit standards suffered massive foreclosures and personal bankruptcies.
“Much of the story of the financial crisis has been that this [loan] the origination process was interrupted and, as a result, many marginal and non-viable borrowers gained access to finance. In our opinion, the facts do not match this account. … To call this crisis a subprime crisis is a misnomer. In fact, it was a major crisis.
There are other reasons to doubt that subprime borrowers were responsible for the financial crisis. On the one hand, a large number of subprime mortgages originate from non-CRA banks, and “None of the more than 300 mortgage originators who imploded were a custodian bank covered by the CRA.
As stated in a study by McClatchy of 2008, “US Federal Reserve data shows that over 84% of subprime mortgages in 2006 were issued by private lending institutions;” “Private companies made nearly 83% of subprime loans to low- and moderate-income borrowers that year;” and “only one of the top 25 subprime lenders in 2006 was directly subject to the housing law which is criticized by conservative critics.”
A second question to ask is: why, if ARC and subprime loans were the problem, did a very similar real estate bubble and financial crisis occur in many other countries that did not have legislation? like this one?
A third argument, the one cited by Kudlow and Moore, is that the drop in lending standards by Fannie and Freddie brought about by CRA requirements has helped fuel subprime lending. But again, this argument does not stand up to scrutiny.
As Barry Ritholtz highlighted in 2011, “The relative market share of Fannie Mae and Freddie Mac has gone from a peak of 57% of all new mortgage originations in 2003 to 37% as the bubble developed in 2005-06.”
The reason Fannie and Freddie were losing market share was that lending standards on mortgages issued by private lenders were falling. Fannie and Freddie eventually adjusted some of their loan terms to avoid further loss of market share, but it is very clear that they were followers, not leaders, in the erosion. lending standards.
Finally, if subprime loans were the problem, Ritholtz noted, “the real estate boom would have taken place in the ARC regions … Also, default rates in these areas should have been worse than in others. regions. What happened was exactly the opposite: Suburbs have exploded and exploded and been subject to foreclosure in far greater numbers than inner cities. “
The attack on the CRA started in 2007 and quickly spread to conservative news outlets. It was easily adopted because it echoed a standard conservative theme. Democrat-backed government policies aimed at helping the poor are misguided, and as always when the left tries to help, the ARC has ended up doing more harm than good.
Best of all, it was also a way of blaming Bill Clinton and more recently – as with Kudlow and Moore – of trying to get Hillary Clinton involved as well.
But when it comes to the financial crisis, the government was not the problem. It was the lack of government, in particular the inability to impose the necessary regulatory structure on the shadow banking system.
I can’t fully blame Republicans for the failure to regulate the financial system, as Democrats have also supported reduced regulation based on the idea that markets, especially those with so much at stake, are self-regulating.
What I can say is that the Conservatives seem to have learned little from the experience in large part because they ignore what the hard evidence says and instead adopt political arguments. That’s not the only issue where this is true, and I don’t see how that will change with Mr. Trump as president.
For more of this strong evidence, see: