Mortgage Crisis – Not Brown People’s Fault

admin — Fri, 02 Jan 2009 15:25:20 +0000

Some conventional wisdom I frequently hear blames the mortgage crisis (and therefore the state of the Economy) on the push to lend to minorities and people in “bad neighborhoods”. I think we can safely stop spreading this myth, especially as it relates to the Community Reinvestment Act (CRA):

Only 12% of the CRA-Made loans were sub-prime (29% of non-CRA-regulated loans were sub-prime)
CRA-made loans were half as likely to go into foreclosure than non-CRA regulated loans made in the same geographic areas
Of all the sub-prime loans made, 60% went to medium-to-high income borrowers or non CRA geographies.

(Source – Wall Street Journal & Dr. Brad DeLong, UC-Berkeley )

On the other hand, deregulation of the finance industry encouraged banks, including Fannie Mae and Freddy Mac, to purchase non-CRA sub-prime loans from CRA geographies so they could count toward their CRA requirements. In this situation, you have the unregulated origination, re-packaging, and resale of sub-prime loans where due diligence is discouraged and moral hazard is encouraged. It’s one thing for a bank to evaluate the income and risk of an individual and choose to lend to low income borrowers who can pay the loan back. It’s another thing to make such loans without doing due-diligence since you know you’re just going to re-package and sell it off, making it someone else’s problem.

It’s a failure of regulation, not a crisis of lending to poor people. Even illegal immigrants are less likely to default on their loans than the average US Citizen.

Peeling Onion » Minorities

Mortgage Crisis – Not Brown People’s Fault