Thursday, December 23, 2010

Avery & Brevoort on Lender Regulation and the Subprime Crisis

Robert B. Avery & Kenneth P. Brevoort (Federal Reserve) have posted The Subprime Crisis: How Much Did Lender Regulation Matter?  The abstract:

The recent subprime crisis has spawned a growing literature suggesting that regulatory preferences for lower-income borrowers and neighborhoods, embodied by the Community Reinvestment Act (CRA) and affordable housing goals for the Government Sponsored Enterprises, Fannie Mae and Freddie Mac (GSEs), may have caused or contributed to the crisis. For the most part, the empirical analyses presented in this literature have been based on associations between aggregated national trends. In this paper we examine more directly the links between these regulations and outcomes in the mortgage market, including measures of loan quality and delinquency rates. Our analysis has two components. The first component focuses mainly on the CRA. We argue that historical legacies create significant variations in the type of lenders that serve otherwise equal neighborhoods and that, because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the impact of the CRA. The second component of our analysis uses all lenders but takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations and which are not. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility. We argue that if the CRA or GSE goals had an impact, it should be clearest at this point. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA show less, not more, evidence of risky lending or ultimately higher mortgage delinquency rates. Similarly, the threshold tests show no evidence of a regulatory effect.

Matt Festa

http://lawprofessors.typepad.com/land_use/2010/12/avery-brevoort-on-lender-regulation-and-the-subprime-crisis.html

Community Economic Development, Federal Government, Financial Crisis, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions, Scholarship | Permalink

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