Wednesday, December 3, 2008

Kroszner: "It's not the CRA."

"we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA."

I've seen quite a bit of writing in the blogosphere, pointing to the Community Reinvestment Act (CRA) as the, if not one of the, causes of our current financial crisis. Ridiculous as it may seem, some are very adamant about the impacts of the CRA. Fed Govenor Randall Kroszner, today, spoke on the results of a study by the fed to investigate those allegations.

The findings clearly show that the CRA could not have had a significant impact.
"First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken..."

Given the stories about lenders giving loans to whom ever they could without regard to standards, affirmed in my personal experience in mortgage origination, it's hard to see how anyone could blame a program like the CRA as been the root of the problem.

Our nation has been experiencing an economic decline since some time in 2002. We've shipped many of our jobs over seas to locations with lower, if non existent, labor and environmental quality practices. An expansion of credit made possible through accelerated regulatory liberalization in our financial industry masked a decline. We've now reached a point where the benefits of industry and production are exceeded by the levels of debt we've incurred.

This strong debt contraction is a necessary reaction to correct potentially 30 years of financial abuse. The idea that bailing out lending institutions so they can continue lending in the face of an already over leveraged economy makes little or no sense.

Given this idea, that we are facing the consequences of over-leveraging (or that we're just bankrupt) it seems impossible to point to something the size of the CRA, especially in light of the comparison of CRA eligible loans in default to non CRA loans, as the source of our current financial troubles.

[Kroszner's Speech]