CRA Thought Experiment

Given how thoroughly the “CRA caused everything” meme has been debunked, you have to wonder why some poor souls are still pushing this discredited political talking point (other than as linkbait).

I’ve already spilled too many pixels debunking Phil Gramm‘s attempt to shift blame from his radical deregulation to other parties (see partial list at bottom). Oh, and I dropped another 322 pages explaining the actual causes of the crisis.

And yet, these attempts at misplaced fault continue.

So this morning, I want to try a completely different approach — the opposite of our usual data driven, analytical framework. Rather than show more facts, data and specific details, instead, I want to do a little thought experiment.

Imagine, if you will, that the discredited far right meme is actually correct: Assume that the CRA was a prime cause of the mortgage, credit and housing related crises.

Yes, he typed, it was all the CRA’s fault. (Stay with me here).

Assume arguendo that CRA legislation forced banks into making high risk, ill advised loans. And, let’s further assume a huge percentage of these government mandated mortgages have gone bad. The buyers who could not legitimately afford these homes or otherwise qualify for other mortgages have defaulted, and these houses are either in default, foreclosure or REOs.

What would this alternative nation look like?

Given the giant US housing boom and bust, this thought experiment would have several obvious and inevitable outcomes from CRA forced lending:

1) Home sales in CRA communities would have led the national home market higher, with sales gains (as a percentage) increasing even more than the national median;

2) Prices of CRA funded properties should have risen even more than the rest of the nation as sales ramped up.

3) After the market peaked and reversed, Distressed Sales in CRA regions should lead the national market downwards.  Foreclosures and REOS should be much higher in CRA neighborhoods than the national median.

4) We should have reams of evidence detailing how CRA mandated loans have defaulted in vastly disproportionate numbers versus the national default rates;

5) CRA Banks that were funding these mortgages should be failing in ever greater numbers, far more than the average bank;

6) Portfolios of large national TARP banks should be strewn with toxic CRA defaults; securitizers that purchased these mortgages should have compiled list of defaulted CRA properties;

7) Bank execs likely would have been complaining to the Bush White House from 2002-08 about these CRA mandates; The many finance executives who testified to Congress, would also have spelled out that CRA was a direct cause, with compelling evidence backing their claims.

So much for THAT thought experiment: None of these outcomes have occurred.


In reality, the precise opposite of what a CRA-induced collapse should have looked like is what occurred. The 345 mortgage brokers that imploded were non-banks, not covered by the CRA legislation.  The vast majority of CRA covered banks are actually healthy.

dcp_52aa00241The biggest foreclosure areas aren’t Harlem or Chicago’s South side or DC slums or inner city Philly; Rather, it hs been non-CRA regions — the Sand States — such as southern California, Las Vegas, Arizona, and South Florida. The closest thing to an inner city foreclosure story is Detroit —  and maybe the bankruptcy of GM and Chrysler actually had something to do with that.


I spent a year of my life researching and writing in painstaking details what the actual causes of the crisis were. I put together all of the moving parts as to what the actual causes were — and wrote them up in Bailout Nation, to wit: Irresponsibly ultra-low rates that led to a huge housing boom; a failure by the Fed to supervise non-bank lenders; An abdication of lending standards by both banks and non-banks; Radical deregulation of financial markets; the now discredited belief that markets can self-regulate; a shadow derivative market allowed to operate unlike every other financial product; Compensation schemes that rewarded short term risk taking over long term profitibility; Increases in leverage to the major investment houses from 12-to-1 to 35-to-1; These were the causes of the collapse — not some 1977 legislation.

Its not simply that the overwhelming amount of evidence points to many factors outside of the CRA, the actual results of CRA were minor. Relative to these other ginormous factors, the CRA impact is all but irrelevant.  And to date, nobody has produced any data based evidence that the CRA was relevant to the crisis. Not one shred.

Until that evidence is produced, the CRA remains a marker, one that separates proponents of intellectually honest debate versus the parrots of partisan talking points, not worthy of your time or effort.


Kroszner CRA & the Mortgage Crisis (December 3rd, 2008)

Federal Reserve Director on the CRA (October 4th, 2008)

FDIC Chairman Sheila Bair on CRA: NOT Guilty (December 5th, 2008)

Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs (October 2nd, 2008)

George Bush: Goal Increase Minority Homeowners by 5.5 Million in a Decade (October 14th, 2008)

How Lending Standard Changes Led to the Housing Boom/Bust (October 21st, 2008)

Other Sources:
Subprime Suspects
Daniel Gross
Slate, Tuesday, Oct. 7, 2008, at 2:08 PM ET

National Real Estate Trends
1,962,567 Foreclosure Homes | $172,170 Average Foreclosure Sales Price

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