“Did the Community Reinvestment Act (CRA) Lead to Risky Lending?”

The first sentence of the abstract of this paper reads “Yes, it did.”  Please don’t take this as support for whackier theories of the cause of the crisis, but as to whether this was an amplifying mechanism, well it seems it was.  I have never myself been obsessed with this question, or pushing the significant relevance of the CRA theories, but earlier this received so much attention in the blogosphere, and it led to so many excoriations, I thought I would pass this new result along.

An ungated copy is here.


The comments should be entertaining.

Entertaining, but I bet easy to predict. Hopefully the paper makes clear the Countrywides and GMAC financials of the world weren't subject to the CRA and the deposit taking banks that made bulk financing for loans in other states couldn't satisfy their CRA requirements with those loans. Not that that matters much to this crowd.

That's a different question.

Countrywide bragged loud and long about how much of its business consisted of mortgage loans to ethnic minorities. I think we can take them at their word.


'I think we can take them at their word.'

And we did - to the tune of billions and billions in fraud (and billions, and billions...), for which essentially no one, not even the orange man himself, was ever jailed, even though a clear paper trial of their crimes existed.

Just an excerpt from 2011 -

'Steve Kroft: Do you believe that there are people at Countrywide who belong behind bars?

Eileen Foster: Yes.

Kroft: Do you want to give me their names?

Foster: No.

Kroft: Would you give their names to a grand jury if you were asked?

Foster: Yes.

But Eileen Foster has never been asked - and never spoken to the Justice Department - even though she was Countrywide's executive vice president in charge of fraud investigations. At the height of the housing bubble, Countrywide Financial was the largest mortgage lender in the country and the loans it made were among the worst, a third ending up in foreclosure or default, many because of mortgage fraud.

It was Foster's job to monitor and investigate allegations of fraud against Countrywide employees and make sure they were reported to the board of directors and the Treasury Department.

Kroft: How much fraud was there at Countrywide?

Foster: From what I saw, the types of things I saw, it was-- it appeared systemic. It, it wasn't just one individual or two or three individuals, it was branches of individuals, it was regions of individuals.

Kroft: What you seem to be saying was it was just a way of doing business?

Foster: Yes.

In 2007, Foster sent a team to the Boston area to search several branch offices of Countrywide's subprime division - the division that lent to borrowers with poor credit. The investigators rummaged through the office's recycling bins and found evidence that Countrywide loan officers were forging and manipulating borrowers' income and asset statements to help them get loans they weren't qualified for and couldn't afford.

Foster: All of the-- the recycle bins, whenever we looked through those they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed and then the-- you know, the creation thrown-- thrown in the recycle bin.'


In 1994, the Clinton Administration threatened to extend the CRA, with its onerous paperwork requirements, to Countrywide and other nonbank mortgage lenders, unless they started lending to lower income and minority borrowers like they were covered by the CRA. Angelo Mozilo of Countrywide flew to Washington and signed an agreement to do that with Clinton's HUD secretary Henry Cisneros.

Over time, Mozilo became convinced that Cisneros was right: there was a huge amount of money to be made off of CRA-style lending to the working class and minorities, especially to lower income Hispanics, including, shall we say, the less-documented. For example, on January 14, 2005, soon after reaching an agreement with Daniel Mudd of Fannie Mae, Countrywide issued this historic press release, which kicked the Housing Bubble into its terminal phase:

"Countrywide Expands Commitment to $1 Trillion in Home Loans to Minority and Lower-Income Borrowers ...

ORLANDO, Fla., Jan. 14 /PRNewswire/ -- Countrywide Home Loans, Inc., a national leader in expanding homeownership across America, today announced an extension of its We House America(R) initiative to fund $1 trillion in home loans to minorities and lower-income borrowers and communities through 2010.

"The $1 Trillion We House America Challenge, expanded from $600 billion announced in 2003, embodies Countrywide's long-standing commitment to lead the mortgage industry in closing the homeownership gap for minority and lower-income families and communities," said Countrywide Financial Corporation Chairman and CEO Angelo Mozilo, who announced the initiative at the International Builders' Show in Orlando.

"For several years now, Countrywide has been a leading lender to minorities and lower-income households," Mozilo said. "I am proud of our lending record and pleased to announce the expansion of our lending commitment to $1 trillion. The We House America program has already placed 2.4 million families into homes, and we expect to nearly triple that number by 2010."

To help reach the $1 trillion funding goal, Countrywide will build on its existing comprehensive programs and policies that have made it the industry leader. The company will continue to develop innovative programs emphasizing non-traditional lending criteria, thus helping to address challenges Mozilo has made to the industry, such as calling for improved underwriting systems that eliminate the over-reliance on traditional credit scores that can mask a borrower's true credit-worthiness. Countrywide is already responding to this challenge with the launch last year of its successful Optimum Loan program. That program addresses major obstacles for hard-to-qualify borrowers, such as allowing for non-occupant co-borrowers, other secondary income, and pooled funds for down payments. ...

"To ensure that this objective is achieved, we intend to expand upon our existing partnerships with specific community groups," Mozilo said. "We have also called upon one of our esteemed directors, the Honorable Henry Cisneros, former Secretary of Housing and Urban Development and a former mayor of San Antonio. Henry will put to use his long and respected experience as an advocate for affordable housing who understands the benefits to communities of homeownership. He has graciously agreed to lend his support and expertise to this effort with the goal of assuring Countrywide's continued leadership in innovative, responsible and flexible mortgage products."

Secretary Cisneros said of the initiative, "Countrywide's $1 trillion commitment is very tangible proof of this company's commitment to fair, affordable and responsible lending. This company is leading the industry in closing the homeownership gap through ambitious lending commitments, innovative programs, and a strong corporate culture that constantly looks for ways to improve. This is an exciting initiative for Countrywide and I am looking forward to being part of this important effort."

Countrywide formalized its commitment to affordable lending more than a decade ago by launching We House America, an initiative to provide increased homeownership opportunities for all Americans. The previous commitment covered the years of 2001 through 2010 and has provided $341 billion of home loans as of December 31, 2004. The company is now extending the goal to $1 trillion by 2010.


A trillion here, a trillion there, pretty soon you are talking about real money.

Countrywide's loan terms were nothing like the terms on real CRA loans - borrowing the downpayment for example which is not allowed on real CRA loans, and teaser rates which are also not allowed.

So, why is the government praising him for doing this?

Let's not be coy and claim the letter of the law and not some of the spirit and possible spirit doesn't encourage companies to do thing. We saw banks that did not want to merge end up merging due to government pressure, or taking funds.

It's important to note that the CRA was only one of a zillion government efforts to promote minority lending. Most folks on the "minority lending contributed to the financial crisis" side of the argument, use the CRA as a short hand to refer to all of these efforts. Its actually sort of refreshing to see the CRA itself implicated.

Some good points about the indirect consequences of CRA and other government "encouragement". I just hope that the economics discourse doesn't conflate the authors' argument regarding CRA effect on lending standards with a separate argument about CRA effect the mortgage MARKET.

Another interesting observation is that the reduced standards were only apparent ex post. What could be the reason for that? Could it be outright fraud; a hidden set of metrics for internal use; or a set of metrics picked up by CRA policies? The authors noted that richness of documentation represented the only significant ex ante distinction.

The biggest effect of the CRA is on bank mergers & acquisitions. When reviewing potential mergers, the government takes CRA compliance into account, and asks for input from the late ACORN and its more professional counterparts such as the Greenlining Institute.

This process put a thumb on the scale of what kind of executives flourished in home lending. If you were pessimistic about the ability to repay mortgages of the government's favored kinds of borrowers, well, you didn't have a big future in this industry, so it would behoove you to move into a different segment of the financial world. This filter effect helped leave mortgage lending full of optimists about minority and lower income borrowers, such as Kerry Killinger of WaMu and Angelo Mozilo of Countrywide.

This is the effect that amplified government policy. With a little incentive and leverage on M&A the gov't bred massive lending institutions with a disposition to led recklessly. This process of "artificial selection" created the monster lending institutions the fueled the boom. That's why the study misses the mountain for the mole hill.

The problem with arguments over the causes of the Housing Bubble/Bust is that the usual partisan and ideological frameworks are of little help.

For example, Republicans want to blame Democrats, so they focus on the CRA and Fannie Mae, but those are only pieces of the puzzle.

You might think that Democrats would focus on the large role played by George W. Bush's catastrophic undermining of traditional credit standards (down payment and documentation requirements) in the name of promoting diversity and racial equality in home ownership rates, but that would interfere with the successful tactic of tarring Republicans as racist.

Libertarians want to figure out some way that it was all the government's fault, but lots of private businessmen went hog wild.

Liberals want to blame a lack of government regulation, but the hog-wild businessmen were doing what government regulators had been encouraging them to do since 1968: lend more to minorities and lower income borrowers.

The reality was that members of the Overclass exploited the notions of Diversity and Fighting Racism for their own selfish ends, but that is far too disturbing a concept to catch on.

There is an awful lot of blame to go around. An interesting data point is that after the whole thing fell apart, those who figured out beforehand how awful it was and set themselves up to profit were either ignored or demonized. To this day important people say that no one could have seen it coming. Wrong. Some did. And we look for reasons not to pay any attention to them.

No one rational would choose Peter Schiff over Peter Orszag to design 1/6th of the economy, would they? That is why my prediction that this malaise won't end until there is nothing left to lose is still holding up.

Sailer makes a good point here, there were many villains in the housing bubble, and no 'side' gets to blame the other 'side'. But his last sentence about the Overclass (I like the dramatic capitals) is silly and overwrought (but pure Steve).

I was a bubble. In a bubble people lose their minds, because for a time everyone who loses their mind makes money and the prudent ones get left behind. In a bubble people come up with all kinds of justifications for dumb behavior, because for a time that behavior gets positive feedback and results. Lowering lending standards was one big part of the bubble, and it would have happened with or without any government nudging to 'help' minorities. In fact most bubbles end up popping when the leverage on the asset class gets out of hand, so all it takes is one dip to start the unravelling.

In the bubble before (tech stocks) same thing happened, lots of dumb money got thrown at less and less worthy recipients, until the bell rang. That bubble was less damaging to the global economy because tech stocks aren't nearly as central to the economy as banking. It was mostly an equity not a debt bubble.

"It" was a bubble. Heh.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

- Your friendly neighborhoos staid banker, July 2007

Sure, bubbles always more or less happen soon or later, but their frequency and severity are not absolutely inevitable. The mantra "Bubble happen" is not a good excuse for avoiding thinking rigorously about what caused the Sand State housing bubble. Why did this bubble happen to happen where long-running government policy promoting minority and lower income lending and massive demographic change intersected? Pure coincidence?

Yes, but some of the villains are from the government which technically taxpayers should be able to hold accountable. For the banksters, they would have gone bankrupt if they bet wrongly, except...the government.

So, see it sort of comes back to...the government.

Does anyone care who lost big money on pets.com?
No, because no one bailed them out.

The gov't track record is worse. While some in the private sector backed reckless lending, everyone in the gov't sector was on board. While everyone in the private sector "got religion" in 2007, the government continued reckless lending and continues to this day. Here's one person in the private MBS/ABS market's analysis:

Steve Sailor blah blah blah lower average IQ blah blah blah I speak truth to power.

The CRA is like catnip to loons like him. Can't believe we only got a few thousand words from the guy so far.

Excellent contributions, guys!

head in ground syndrome: the very moloko plus of contemporary liberalism!

More like soaked in the tsunami of rhetoric.

"The comments should be entertaining."

They are entertaining and quite informative. The "truth is complex" meme is well developed by several authors. At most web sites, you either get polarized versions of "Fannie and Freddie did it" vs. "greedy bankers screwed us". Indeed, many sites (Ritholtz, De Long) simply delete any comment that doesn't toe the party line. That makes MR somewhat unique.

excerpt page 5:

"In interpreting our results, it should be stressed that while we find that the Community Reinvestment Act led to increased origination rates of risky loans, it may still be an efficient policy due to other, desirable consequences. Perhaps most important of these is the provision of credit to potential borrowers who would otherwise have been denied access to credit markets for reasons such as redlining or pure discrimination. However, by showing the costs that are associated with the regulation, we provide evidence that can help inform the debate on the overall desirability of CRA."

"In interpreting our results, it should be stressed that we are not racists, and if you actually take our results for what they are worth, you may be a racist."

Sheesh. Nice use of the word 'efficient' to mean 'righteous.'

Taste-based discrimination IS inefficient. If markets fail to address the inefficiency, governments may choose to step in. This paper argues this intervention was not costless, but it does not compare its cost to the cost of discrimination. Baselines matter. They mean efficient not righteous.

Skin flint banker, more than likely white: "we can't lend to those people because they can't afford it, and we will go bankrupt".

Enlightened righteous one: "we must lend to those people for the good of us all" then go bankrupt. Except it all ends well because the Fed is buying MBS off the fools who hold them.

I find the situation amusing. At some time in the future someone may have a very good laugh over the foolishness of it all, assuming that it doesn't end like the last depression did in world war.

One thing that taste-based discrimination is not is profitable. You seem to be saying that the government had to intervene because firms and lenders were leaving money on the table just to stick it to the coloreds—and that they'd found a way to stop anyone else from exploiting the resulting spread. I find this implausible. This racism problem we have either runs very deep indeed, or else it's a fantasy.

In 1991, the Boston Fed released a hugely influential study showing that it was harder for blacks and Hispanics to get mortgages, thus proving discrimination.

Peter Brimelow at Forbes contacted the Boston Fed economists and asked if blacks and Hispanics therefore had lower default rates. Oops. They hadn't checked. And ... no, minorities didn't have lower default rates.

But, who cares about reality checks? The Boston Fed study was cited to justify much legislation, regulation, and expansion of programs. The head of the Boston Fed, Richard Syron, parlayed the acclaim of this study into the CEO job at Freddie Mac, where he made $38 million in compensation before Freddie went bust.

"But, who cares about reality checks?" Many people. Google search gives a more balanced sampling of the study and it's follow up analysis. http://www.google.com/search?q=1992+boston+fed+study&ie=UTF-8&oe=UTF-8&hl=en&client=safari Also race is not a sufficient statistic...though it seems to be a popular fantasy.

Claudia, do I really have to comb through a bunch of pdfs and articles to figure out what you want to say, or can you summarize?

Cliff, welcome to my thought process. I had never heard of this study (back then I was in high school and happily didn't even know what an economist was). While there are plenty of problematic economic studies, I thought Steve's argument sounded a bit harsh. So some googling turned up an number of links. I did not read them all carefully either. From the bits I read, it seems clear that this was a controversial study. Nevertheless follow up studies which corrected some errors and used alternate specifications came to a similar conclusion. There were differences in mortgage credit by race that could not be explained by borrower risk characteristics.

My point about sufficient statistics is simply that race (or gender or zip code) does not tell lenders all they need to know about a borrower. On average, blacks may be a worse risk than whites (due to socioeconomic reasons) but that does not mean all blacks are bad risks for profitable lending. You need to base a credit decision on more than race. I gave a guest lecture a few weeks ago at American U on gender difference in credit markets and investment decisions. I stressed the importance of looking at the reasons why a difference exists before caling it taste-based discrimination and looking for a policy remedy. I don't know enough about CRA to comment intelligently on it but I was just trying insert some balancing arguments here.

Here's a graph of foreclosure rates on subprime loans in Massachusetts from 1998-2006 for blacks, Hispanics, and whites:


The black foreclosure rate averaged about 2 times the white rate and the Hispanic foreclosure rate was abouty 1.5 times the white rate. That's in the pleasant years of 1998-2006, not the Housing Bust years that followed.

" Also race is not a sufficient statistic…though it seems to be a popular fantasy."

You're not stupid and you've been around here long enough to know that steve isn't that stupid, so why write this?

Careless, I have as much right to say whatever I want to say here as Steve does. Personally, I am not impressed with the empirics he brings to bear and I hear a lot of rhetoric here that sounds like pseudo sufficient statistics. I agree with him that race matters, gender matters, ethnicity matters ... but it's not all that matters and often, in my opinion, it's a side show. It bugs me when it gets elevated from side show to the main event. So I write. It's just another perspective.

Redlining refers to drawing lines around geographic areas, not around people's skin colors.

Think about that for a minute. So, banks using redlining would not necessarily be turning down black corporate execs would they?

The claim is that redlining is a proxy for racism, but it may just be socioeconomic, i.e. a kind of geographic credit rating that happens to fall heavier on certain races rather than being racist.

The CRA was merely one component in a long process of changing the ecosystem of mortgage lending from one favoring gimlet-eyed pessimists to one favoring imprudent optimists.

For example, Kerry Killinger, CEO of the late, not so great Washington Mutual, won government approval under the CRA for 29 acquisitions of other lenders, sometimes by offering to make more billions in lower income and minority loans than other bidders. Winning all those government approvals to expand WaMu made Killinger a superstar role model in the industry.

Killinger didn't promise $375 billion in CRA loans when buying Dime Savings because the government was holding a gun to his head and forcing him to make imprudent loans. Nobody wastes $375 b-b-b-billion. No, he was a Kool-Aid drinker. He thought the strategy the government was encouraging was a great strategy that would make him rich (indeed, he took home $88 million in compensation in the last decade).

But, think of the Selection Effect. Financiers with more realistic views of the ability of lower income and minorities borrowers to pay back their mortgages were disadvantaged by the CRA in implementing mergers and acquisitions. They stayed small or got out of the business. The fools like Killinger got rich and famous, and their success encouraged other lenders to emulate them.

Last paragraph is correct. That's a bubble. CRA or no CRA the aggressive lenders would have outshone the cautious, and the same bubble would have formed. Minorities would have been involved regardless of any government pushing. The pushing certainly didn't help, but the housing bubble can't be blamed on just those miserable darkies.

Not surprising.

But since these default rates were (or should have been) well-known, this risk should have been factored into the prices of MBS and CDOs and such.

The CRA forced banks to take risks. If financial institutions failed to recognize the existence of those risks, I'd say the problems are with the financial system, whose job it is to accurately estimate risk.

Well yes.

There is that.

"But since these default rates were (or should have been) well-known, this risk should have been factored into the prices of MBS and CDOs and such."

But, could you factor these racial differences in default rates into your models without opening yourself up to discrimination lawsuits and the like? For example, if you sent an internal email saying, "Hey, I just noticed that one of the mortgages in this MBS we are considering buying is for $340,000 on a 500 sq. ft. one-bedroom house in Compton, CA. Now my impression of Compton, which mostly comes from NWA's "Straight Outta Compton" album, is that Compton isn't a really desirable neighborhood and Comptonites aren't all that trustworthy. Are we sure we want to do this?"

You wouldn't want that coming up discovery when you get sued for aiding redlining, would you?

Factors we're not allowed to write about tend to get forgotten.

you think credit quality isn't a close enough of a proxy for this?

"you think credit quality isn’t a close enough of a proxy for this?"


Down payments are a better proxy, but in 2002-2003 the Bush Administration went to war against down payment requirements for blocking racial equality in homeownership.

I agree. I didn't see your post when I posted my reply. However, down-payments fix a lot of the problems by effectively having the buyer pay for the put option up front.

Oy. You just posited the existence of underwriters assessing credit worthiness based on, 'my impression of Compton, which mostly comes from NWA’s “Straight Outta Compton” album.'

Did it escape your notice that "credit quality" is not a proxy for anything? It *is* the thing that underwriters ought to use, and not, say, impressions of a neighborhood based on a rap album.

Dear Rick Schaut:

Thanks, great reply!

By the way, if you are ever in town, I know a $340,000 one-bedroom 500 s.f. house in Compton that you'd just love to buy. Heck, I'll throw in the Terminal Island Bridge as part of the deal.

"Did it escape your notice that “credit quality” is not a proxy for anything? It *is* the thing that underwriters ought to use,"

No, underwriters should use the expected resale value and liquidity of the house as well, as they are not just selling a loan, they are also effectively bundling a put option on that loan.
This is effect is more important the smaller the downpayment percentage.

You make it sound as if the Bush administration began the efforts to lower downpayment requirements in 2002, but those efforts began in the 1990s. Here are some examples of people taking credit for it, beginning with a New York Times article from Sept., 1999:


“Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people.”

“''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ”

“By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.”

There was an article in USA Today on Aug. 4, 2000 by Christine Dugas titled “Fannie Mae, Freddie Mac face scrutiny Corporations' size, expansion, risk are issues” (in the Money section, p. 3B) which said that

“Many housing executives credit Fannie Mae and Freddie Mac with sparking industry innovation, leading to popular products such as low-down-payment loans.”

“In recent years, Fannie Mae and Freddie Mac have expanded their ability to buy loans taken out by less creditworthy borrowers”.

There was also an op ed written by Franklin Raines in USA Today on Jan. 8, 2004 (News Section, p. 12A) in which Raines boasted that “Fannie Mae also has helped make the low-down-payment mortgage the industry standard.”

Granted, this last quote is from 2004, but it fits with what Raines was saying earlier. What did the Bush administration do beginning in 2002, and how can you separate this out from the trend that began earlier? I'm genuinely curious, since I wasn't aware of this later "war".

At Anne S.
They didn't do that much, mostly fanny and freddy goosed and gave legitimacy to the subprime market at the same time that the fed was pumping liquidity.

"You make it sound as if the Bush administration began the efforts to lower downpayment requirements in 2002, but those efforts began in the 1990s."

Quite true.

But, one big difference was that the Clinton Administration felt it had to be cautious in its efforts due to the potential for criticism from Republicans. When the Bush Administration started pushing traditional Democratic pro-minority policies (which were of course pro-business in effect ... in the short run), the Republicans stopped criticizing out of partisan loyalty and the Democrats liked the policies because their client groups benefited (in the short run).

It isn't.
Interest rates are higher for high risk individuals, but the high interest rates themselves also increase the likelihood of default, because it becomes harder to pay the loan off.

This non-linearity is further compounded, because in the US, a housing mortgage comes with a built-in put-option. This means that the banker owns the tail risk.

Furthermore its made worse, because the home owner does not pay for the put option up front in zero-down loans (the lion's share of the defaults), but its included in the interest rate. Because its not paid for up front, effectively this put option itself has a put option... and so on, and so on ad infinitum.

Now, exercising this put option has a high price (default). But people who are high-risk effectively have a lower cost to it.

No one is going to sue you for refusing to pay the asking price on a CDO backed by a bunch of CRA mortgages.

so well put

You can't fight the ______. Insert culprit, e.g. The Fed, the Feds, etc.

The economy is not so resilient that it can withstand everything we throw at it.

As in: Just don't buy the stocks/assets that are going up mr. Stock Broker/Banker because while your competition is looking good doing this his market share will be short-lived.

Some people actually did this, except the short-term winners were shielded from losses as well.

People actually knew what was in a CDO that was backed by CRA mortgages?

I thought it was all a mish mash and that was part of the problem when the sell off began.

I don't understand your point. If $340K is an excessive price for a 500 sq ft house in Compton then that ought to be enough to make someone not buy the loan. This would also be true if the house were more reasonably priced but the credit of the buyer was suspect.

So what are you talking about, exactly?

Short termism. Lots of individuals made some money off the deal now (real estate agent, mortgage broker, etc.) by handing the hot potato off to a Greater Fool. Even the buyer might have gotten a free place to live for the year or two it often takes to foreclose.

The best way to understand the financial crisis of 2007-2008 is as the popping of a bubble. A bubble in what exactly? Most people would say housing prices, but that's an oversimplification. As your comment gets to, the real reason house prices went up is because home loans, particularly risky home loans got so cheap. And the real reason they got so cheap was because they could be financed at super narrow credit spreads inside structured credit products like sub-prime CMOs and CDOs.

So the question is what made structured credit buyers over-price senior tranches on CDOs (the equity tranches ended up actually being profitable even with 2008). The answer is that correlation was priced at historic implied lows. 2007-2008 is best understood as a bubble in correlation as an asset class. 2002-2008 was an incredible bull market for correlation that was driven by a number of factors, including the Great Moderation (asset correlations were much lower from 1993-2007 then from 1965-1993), increasing leverage in investment banks combined with favorable treatment by Basel II, the hunt for yield and diversification by institutional investors, and systematic flaws in rating agency models.

How does this relate back to government policy related to the housing market. My view is that the insanity in the housing market was a byproduct of the financial bubble in correlation, that it was a ready supply for the demand for correlation. Pools of home mortgages are easy proxies for implied correlation bets, especially for institutional and Basel-bound investors. As an analogy imagine if the government had announced a massive program to wire up rural areas with Internet broadband in the late 90s, I'm sure a lot of the Internet bubble money would have wound up in this boondoggle often closely tied in with corruption.

But if it wasn't the housing market, I think we would have seen the correlation bubble express in other asset classes, like non-mortgage ABS, corporate credit, corporate loans, or possibly even equities or commodities. To a certain extent it did in all of these things, but housing was where the vast majority of correlation bubble blew. One might argue though that even though it was a bubble that not all bubbles leave the same legacy, that had the correlation chasers invested in corporate credit instead of consumer home equity loans the economy would be in better shape today.

Consider an analogy between the Great Financial Crisis and American involvement in WWII. The question: "Why did the U.S. get involved in WWII?" has two very different answers:

1. Because of Pearl Harbor

2. Because of global stresses and strains in the system of international relations (e.g., Germany invading Poland, etc.) made American involvement inevitable, with or without Pearl Harbor.

Both answers are pretty reasonable. But, Answer #2 was not treated as an excuse for not investigating Pearl Harbor. America devoted a lot of resources to studying how Pearl Harbor happened and building defenses to prevent future Pearl Harbor-like sneak attacks, which worked pretty well for 60 years.

Unfortunately, the notion that Wall Street or the Euro or whatever would have led to a financial crisis eventually has provided a handy excuse for not investigating thoroughly our own domestic Pearl Harbor.

If we're going to make this analogy, Pearl Harbor was more like the Lehman Brothers Bankruptcy. The dispute is whether CRA represents appeasement or whether other factors such as repeal of Glass-Steagall are more appropriate in that regard.

"The dispute is whether CRA represents appeasement or whether other factors such as repeal of Glass-Steagall are more appropriate in that regard."

The debate, such as it is, has been kind of like: "Pearl Harbor: Was it the fault of the Japanese or the Germans? Pick one and only one!"

In reality, the Japanese and the Germans were working together.

Similarly, Henry Cisneros and Angelo Mozilo were working together.

There's no bright line delimiting government from business in this history. Robert Rubin was in the government and then in private enterprise. Jim Johnson was in a hybrid. Dick Syron was in a couple of hybrids. George W. Bush was in the government. Roland Arnall was in private enterprise, but then he was appointed Ambassador to the Netherlands.

We need to understand the system.

What part of Glass Steagall that was repealed contributed to this crisis?

This is where we hear either dead silence or a litany of things that either weren't related to Glass Steagall or were not a major contributor to the crisis.

What part of Glass Steagall that was repealed contributed to this crisis?

The eventual use of TARP to inject liquidity into the banks was in large measure to support BofA and CitiGroup. One would have to assume that the commercial and retail banking divisions of those banks were fairly solid - they were brought to the brink of ruin by their investment banking divisions.

One would have to assume that the commercial and retail banking divisions of those banks were fairly solid – they were brought to the brink of ruin by their investment banking divisions.

I'm purposefully trying to avoid the wider arguments on this page. But BoA's problems came from its mortgage group, particularly its purchase of Countrywide at the government's request without any sort of government protection. (Just what kind of protection is should have asked for is a question for BoA's board and shareholders.)

What? Over? Did you say "over"? Nothing is over until we decide it is! Was [the bubble] over when the Germans bombed Pearl Harbor? Hell no!

On a less snarky note, I'm surprised it took this long in the thread for someone to try to use Glass-Steagall as a firewall to CRA. If only we had prohibited
interest bearing checking accounts, the housing bubble never would have happened.

The securitization of mortgages was designed by the gse wizards in response to the savings and loans crisis of earlier times. The run-up of credit in the 00's was to every one in these government agencies a good thing.

Noah Smith writes:

"But since these default rates were (or should have been) well-known,"

Are these default rates well known? Please tell us the default rates on home purchase mortgages in California originated in 2004 to 2006 by:





After all, this is 2012, so we ought to know this kind of thing by now.

If they're not well-known, that must mean we can't have needed to know them.


By the way, I know what the numbers are.

Wouldn't a better - as in, more useful for evaluating the impact of the CRA - statistic be the default rates on CRA mortgages versus other mortgages?

The government requires every mortgage to be classified by the race of the borrower. You can look up, for example, how many dollars Countrywide loaned to each race in the Inland Empire in each year of the 2000s:


So, it's hardly irrelevant to ask what the default rates were by race.

For example, the government's statistics on home purchase mortgage dollars in California's Inland Empire (giant Riverside and San Bernardino counties), which was a major locus of the boom and bust, are quite eye-opening:

New mortgage dollars flowing to Hispanics in this sprawling California region increased 782% from $1.5 billion in 1999 to $13.5 billion in 2006. This huge increase in demand clearly had a big impact on home prices.

In contrast, the non-Hispanic white borrowing over 1999-2006 was up 134% (more than doubling). To be fair, white borrowing from 1999 to the white peak in 2005 was up 199% (a tripling), but white borrowing in the Inland Empire fell 22% from 2005 to 2006 as more prudent people ran for the hills.

In the Inland Empire in 1999, Hispanics received only 34% as much mortgage money as non-Hispanic whites did. By 2006, Hispanics received 127% as much as whites.

Clearly, there was a mortgage bubble among non-Hispanic whites, too, but white borrowing peaked earlier, in 2004-2005, when home prices weren't quite as ridiculous, and has declined in a somewhat less frantic fashion. In contrast, the Latino bubble peaked in 2005-2006 when home prices peaked, and then started to collapse in 2007. In 2007, Hispanic home purchase borrowing crashed back down to $5.0 billion as financial institutions finally started to worry about loan quality. The dollars flowing to Hispanics fell 63% from 2006 to 2007, versus 38% among whites. In the more realistic atmosphere of 2007, Hispanic borrowing was back down to 75% of white borrowing.

By the way, black borrowing from 1999-2006 was up 464% and Asian/Pacific Islander borrowing was up 987% to $3.4 billion.

These increases in borrowing dollars may sound like some craziness restricted to one section of California, but last year Tino found similar patterns at the national level: mortgage lending for home purchases to Hispanics was up 691% nationally from 1999 to 2006. For blacks, the increase was 397%. For Asians 218%, and for whites about 100%.

You can see graphs at:


You can't price differential risks, if you can't make inquiries about the attributes which would indicate it's existence (credit, collateral, capacity) because doing so would produce lending patterns that met with government disapproval and a risk of litigation by NGO's.

CRA induced loans were 15% more likely to default according to the paper. In general, subprime loans have been about 500% more likely to default than prime loans. Is there an actual protective effect with CRA loans?


There is. They required full document and qualifying, something investment banks didn't think worth bothering over since they were secured and property values only go up.

Not all CRA loans were subprime. You are comparing apples and pears

What a ridiculous assertion! Paul Krugman long ago exonerated the CRA of any contribution to the housing bubble by pointing out other contributing factors. Iron-clad Krugman logic.

This study is not intended to "prove" that the CRA significantly affected the mortgage market. They don't get into market weighting, for example. If anything, their methodology only makes sense if their is NOT a strong influence by CRA testing tracts on non-CRA testing tracts. The Krugman argument relates to aggregate measures of mortgage origination.

I feel dumber having read these comments.

There are any number of books documenting the insatiable hunger that investment banks had for mortgages. Credit quality didn't matter: the top tranche of a pile of crap mortgages garnered AAA ratings from the ratings agencies. And so, as pointed out, default risks were misunderstood and inaccurately factored into CDOs that were being peddled; CDSes compounded the problem.

And Fannie Mae was as bankrupt as Lehman, except they had the implicit government backing turned into explicit.

There is lots of blame to go around. One doesn't have a failure of such magnitude without multiple points of failure. The CRA was one point of failure.

All the more reason for the mortgage industry to agree with the CRA and to encourage them that sub-prime was okay, nay, encouraged by the regulators....you know those wise regulators who know what prudence is since they are not greedy or fallible. This is like a cop saying "you know, if you have to speed a bit to get to work on time, its cool."

Do you think people will speed less then, even if it is safer?

I was a low-level researcher at the Minneapolis Fed when the Clinto-era rewrite of the agency rules were being drafted. Many within the Fed bureaucracy, especially at the Board of Governors, never liked CRA and waged an internal drag-your-heels war against it.

Yes, having a negative CRA rating on your record gave regulators a reason to nix a bank's application for a merger or acquisition. But it was pretty easy to get a satisfactory CRA rating without making subprime loans. Out of some 8,000 banks subject to CRA, well over 7,000 of them got satisfactory CRA ratings without ever making a subprime loan.

Yes, many of these were small rural banks that could get CRA brownine points with their traditional farm and main-street small business lending. But there were many midsize and large banks that mert CRA requirements without making any high-risk loans.

The composition of subprime lending was not constant over the whole cycle. In the early stages, the large bulk of subprime loans were to higher risk housholds. But as the boom mentality went on, larger and larger fractions went to real estate speculators who were buying properties in the hope of flipping them within months or to middle-class buyers who were playing the "get leveraged up as much as possible" game on a personal basis. These tended to be higher-principal loans and so make up a disproportionately large and growing fraction of all sub-primes in the last three years before the bubble burst. Nothing in CRA forced anyone to make these loans.

I was in the mortgage business for over thirty years. I worked for CRA covered and non-covered institutions (including Countrywide). There were plenty of ways to meet your CRA requirements that had nothing to do with CRA loans.

Income is the leading indicator for mortgage defaults, not down payment. Down payment will determine how fast after the loss of income the property will go into default.

Stated Income loans were the primary cause of the bubble and the collapse. Early payment defaults on stated income loans alerted quality control underwriters at investment banks that borrowers were fraudulently overstating their income in order to qualify for loans they were not qualified to receive.

Refinances were a large percentage of the mortgages made during the bubble. A large percentage of these were "cash-out" refinances. Borrowers overstated their income, received a large amount of cash, and defaulted on their loan within the first six to twelve months. And no borrower went to jail.

It was the contractual repurchase requirement of these early payment default loans that caused the first lending institution failures (e.g.,New Century, Ameriquest). Which intern lead to tighter restriction on stated income loans, and their eventual extinction.

You will notice that areas where stated income loans were most predominate, that housing prices have fallen to the level (and below in some over built areas) they were prior to the take off of stated income loans. Income drives price and without artificially inflated income, prices will fall to their natural (actual income) level.

Actual CRA loans were a miniscule portion of the loans made during this bubble period. CRA loans, in and of themselves, did not cause the bubble, or the collapse.


The top two priorities of the Bush Push to increase minority homeownership by 5 million families were to reduce downpayment requirements and to reduce documentation (i.e., allow more "stated income" loans).

Here's Angelo Mozilo's February 2003 Harvard address:

"Whether you represent government agencies or GSEs, non-profits, faith-based groups or industry associations, communities or even Countrywide competitors, we together have secured the future for many families in this great Country. For the people in this room, the American Dream of Homeownership is not cliché. It’s our cause. It’s our mission. The past few years have been remarkable ones for our industry. Lower interest rates, the push for greater diversity in homeownership, and massive immigration into the U.S. have created both challenges and opportunities. However, despite the fact that approximately $2.5 trillion in mortgage loans were made in 2002, the gap between low income and minority homeownership, and what is classified as white homeownership, remains intolerably too wide. Therefore, expanding the American Dream of Homeownership must continue to be our mission, not solely for the purpose of benefiting corporate America, but more importantly, to make our Country a better place.

"... The overall U.S. homeownership rate, which was at 44 percent in 1940, hit 68 percent by the end of the third quarter of 2002. Historically low interest rates along with new, creative and flexible underwriting techniques are continuing to fuel a record period of growth for our industry. ... And, increasingly, the sub-prime market is boosting that number and the industry as a whole. During the first nine months of 2002, sub-prime originations rose an estimated 26 percent over the same period in 2001 – outpacing the overall market. ...

"As President Bush said last October: “Two thirds of all Americans own their homes, yet we have a problem here in America because fewer than half of the Hispanics and half of the African Americans own their home. That’s a homeownership gap. It’s a gap that we’ve got to work together to close for the good of our Country, for the sake of a more hopeful future. We’ve got to work to knock down the barriers...”

"While the number of minority homeowners has advanced recently, climbing from 9.5 million in 1994 to 13.3 million in 2001 – an increase of 40 percent – the fact remains that it is still not at a level equal to that of white homeownership. And as President Bush pointed out, the homeownership rate for African Americans is 47 percent and for Hispanic Americans it is 48 percent, a stark contrast to the homeownership rate of 75 percent for white American households. That means there is currently a homeownership gap of over 25 points when comparing white households with African Americans and Hispanics. My friends, that gap is obviously far too wide. It has been far too wide for far too long. And when adding new factors into the equation – like an influx of new immigrants or continued reduction in the supply of affordable housing – it has the potential to become far worse.

"So tonight, I want to discuss why that gap persists and how Countrywide is trying to address it. ... If we don’t get a better handle on these issues, as I will discuss, I would argue that the homeownership gap will not only remain, but there is a good chance it will widen and the homeownership rates among low income and minority borrowers will continue to be depressed. ...

"One of the more obvious resolutions to the Money Gap is the elimination of down payment requirements for low-income and minority borrowers. Current down payment requirements of 10 percent or less add absolutely no value to the quality of the loan. It is the willingness and the ability of a borrower to make monthly payments that are the determinants of loan quality. Over the past 50 years, I have personally interviewed thousands of potential homebuyers and in the vast majority of cases, the barrier standing in between them and the house of their dreams was the down payment. That barrier must be eliminated by offering customized programs to those borrowers who cannot meet the current down payment requirements.

"Equally important, we must reduce the documentation required to make any and all loans; we should be able to approve loans in minutes, rather than days, and close loans in days, rather than weeks."


The "push" was for market share and profits. The most profitable loans were stated income, option-ARM (negative amortizing) loans. The leader in this product was World Savings. Countrywide was late to the game with this product, but tried hard to catch up. There were many more lenders with more competitive products and service (e.g., Greenpoint, FirstFed).

Conforming loan amount, full documentation - FNMA/FHLMC - loans were priced as commodities, and acquisition costs were high. Deferred interest loans carried a much higher coupon, annual rate adjustments and higher than average credit scores - they were designed for portfolio lenders, not the secondary market. But, Wall St saw dollar signs and went blind (the same is true of sub-prime loans - what we use to call "hard money" until they became an investment vehicle. There were still hard money loans, but they were now purely an equity play - income and credit were secondary, if considered at all).

Angelo Mozilo made a lot of politically correct speeches and headline producing, yet unfulfilled, commitments, all to keep ACORN and their ilk off his back.


"The “push” was for market share and profits."

Of course. The Help Us Fight Racist Redlining rhetoric from Mozilo and Bush was intended to disarm regulators, to keep them from taking the punch bowl away as the party got more interesting, by putting the lenders on the side of the angels.

One major reason we have financial regulation is lenders can make a lot of money in the short run by lending like crazy and then handing the bag to the public when it blows up.

But, increasingly over the years 1968 to 2005, regulators got a second, contradictory assignment: don't just prevent imprudent lending, but increase lending to the right kind of people. Mozilo and Cisneros exploited this contradiction to get out from under traditional regulation.

"Angelo Mozilo made a lot of politically correct speeches and headline producing, yet unfulfilled, commitments, all to keep ACORN and their ilk off his back."

No, that's not quite right. Mozilo's goal was to keep regulators off his back by doing what ACORN and the like had long advised. The problem for the public turned out not be that his commitment of a trillion dollars in CRA-style loans to minorities and lower income borrowers by 2010 went unfulfilled, but that Mozilo and his ilk came pretty darn close to fulfilling their commitments before they blew up the economy. Notice that in his January 2005 press release, Mozilo boasted of already being $342 billion toward his goal of a trillion dollars in CRA-style loans.

$342 billion here, $342 billion there, pretty soon you are talking about real money.

Mozilo was probably over halfway to his trillion dollar promise when the economy went kablooey.

Per the initial question posed by Tyler, the answer is surely yes: the CRA lead to risky lending. All lending is risky. Risk must be managed appropriately, and this was the problem.

When all was said and done, the CRA had very little impact on the implosion of the financial markets. IBs were clamoring for mortgages of ANY sort in order to package them together and then slice and dice them apart. There was willful deceit on the parts of these IBs and the ratings agencies were financially motivated to proffer AAA ratings on what were undoubtedly tranches of junk. Thus, risk was not managed appropriately. The CRA was not a necessary impetus of mortgage origination because mortgage brokers were submitting liar loan/no-doc applications with or without it - all in an effort to slake Wall Street's insatiable thirst for mortgages it could pass on and profit from.

These CDOs were bad (risky) enough, but these unknown risks were compounded by CDSes.

This was certainly not a story where a single entity or process is to blame, but I really believe that CRA had very little to do with it. Perhaps it was the fuse that started the chain reaction, or perhaps it was propellant that helped keep feeding it, but the IBs were going to get their mortgages with or without the CRA.

The CRA was just one part of a broad, long-lasting government strategy to increase mortgage lending to blacks and Hispanics. This trend was capped by George W. Bush's 10/15/2002 White House Conference on Increasing Minority Homeownership, where the President told his regulators he expected 5.5 million more minority homeowners by 2010, and explained that the way to get there was to stop being so picky about down payments and documentation.

This strategy may well have been a good thing on the whole for the first few decades after it was launched in 1968, but diminishing returns and increasing costs are not unusual in life. The real, unexpected problem turned out to be the interaction of this policy with massive unskilled immigration: hence, the giant bubble/bust in the Sand States.

I have a question. I was told by someone once in the business that when they filled in income applications they could count as income even such crazy things as Section 8 housing.

Is that true, crazy talk, or a fraud method?

Think about the impact of the CRA just from the standpoint of economic theory. Say you own a bank the lends to homebuyers.

Now, the government tells you to lend more to certain types of borrowers. Do you?

Well, sure. I mean, the government has guns and ICBMs.

But, how much?

In the long run, you have a lot of options.

- If you are pessimistic, you can sell your bank to somebody who is more optimistic.

- Or you can shift into other types of business.

- You can drag your heels and do the minimum possible, accepting that this won't make you popular with government regulators, but most of their power comes when you want to make an acquisition. So, maybe you make fewer acquisitions.If you are a pessimist about the new borrowers coming into the market, maybe you don't want to expand.

You can make a big show of drinking the government's Kool-Aid: make a splashy donation to ACORN, become a sponsor of the Greenlining Institute, put Henry Cisneros on your board, sponsor a concert series at Jim Johnson's Kennedy Center, that kind of thing. Buying goodwill can be pretty cheap.

Or, you can decide the government and the conventional wisdom is right: As Dan Quayle said, "Diversity is our strength." The Hispanics are our future. Of course they'll be able to pay back all those inflated mortgages in the Sand States. Only a racist would not believe.

After all, how much trouble can you get in doing, saying, thinking what everybody else is doing, saying, thinking?

The latter appears to be what happened with Angelo Mozilo. And guess what? Things turned out pretty good for Angelo. He took home about $350 million in compensation in the last decade, the SEC fine was only a modest fraction of that, and the Obama Administration decided not to prosecute. All in all, not bad ...

Do the math. If the CRA increased risk of default by 15%, and if 5% of loans were affected by the CRA, a number which is way too high but lets go with it, then over all defaults go up by less that 1%. No where close to what we actually saw.


Everything I've read indicate that Doug is entirely correct. At most the CRA was a tiny component of the problem.

From what I have read, by far the biggest component of the crash was an almost universal belief that a 30% fall in housing prices was impossible. At every level of every organisation an objection was raised, and the universal response was, "For you to be right prices would have to fall nationwide, and that's impossible." As near as made no difference, everyone excepted that rational.

Everything I’ve read...

You've been reading b.s.

To make such a statement means that you've disregard any facts that conflict with your convinced notions.


For a libertarian on the front lines understanding of the crash, you might want to take a look.

"To make such a statement means that you've disregarded any facts that conflict with your pre-convinced notions."

I mean :-)

So, if house prices could not crash 30% then you'd have to be a real jerk to deny people some marginally riskier loans, right?

Repeat of prior comment… Still needed…

It’s important to note that the CRA was only one of a zillion government efforts to promote minority lending. Most folks on the “minority lending contributed to the financial crisis” side of the argument, use the CRA as a short hand to refer to all of these efforts. Its actually sort of refreshing to see the CRA itself implicated.

I had to sell the new homes I built from 2003-2007 to illegal aliens,or face discrimination lawsuits . most had no ss# yet they were able to get 100% no money down loans.when the market fell less than 5% in 2007 they walked away.I sold these houses for 245,000.00,when the bank took them back they dumped them for 80,000.00.it cost me 145,000.00 to build.six years later one is for sale now that I built ,the asking price is 69,000.00.as a home builder of 54 it looks like I will be unemployed for the rest of my life.and guess what the one % did not cause this,as my conservative father would say,it was the do gooders.

I had to sell the new homes I built from 2003-2007 to illegal aliens,or face discrimination lawsuits

That doesn't pass the smell test. If the banks had approved them, what rational person would refuse to sell to them?

As I stated above - 30 yrs in the mortgage business. I know of no lender who would make a loan to a borrower without a social security number. It was very difficult for foreign nationals to get a loan, let alone an illegal without a SS# or even a phony SS#.


I had to sell the new homes I built from 2003-2007

As a builder, why were you in fear of lawsuits? It would not be rational for you to refuse buyers with approved mortgages.

jmo maybe you and two buck chuck could get together to rub butts,or join the 99% and protest Wallstreet ,go ahead share a tent with him,not that there is anything wrong with that.

you obviously suck as a broker,you never herd of loan fraud,I think a little took place from 2000-2008.that is what this blog is about,ass wipe.


Under Bush, the Federal government issued ITINs so illegals could buy homes. Type 'ITIN mortgage loans illegal' into Google and you find many articles on the subject.

jmo some of us care about this country more than just making money,also its a proven fact home prices drop when many families move into the same house,in the same neighborhood . many cars, more crime,ect.and I still own more lots on that street,so I have a vested interest,but you are short sighted,and obviously one of those do gooders.

Joe the Builder... :D

Your conservative father is an idiot. Enjoy the unemployment line.

suck my balls!dick smoker.

The government's responsibility for the crisis is simple. It did not do its job. It did not prevent the bubble. It had the power to regulate, but failed to do so.

CRA-like notions were part of the reason for government's failure. They were a politician's dream, a way to curry favor with groups of voters without the pain of raising revenue. I'm sure no one much cared about whether discrimination was rational. Politicians grabbed the white hat that was offered to them. That's what they do. They are not elected based on their ability to wisely consider second and third order effects. The offered certain voters free benefits, or the opportunity to feel righteous without actually doing anything righteous. No one was buying Calvin Coolidge, and no one was selling it either.

Government, in all its many forms, made the determination that down payments, income verification and honest appraisals --well established industry norms --were not in the national interest, and certainly not as important as democratizing home credit further and pleasing voters. To be fair, the voters, and the banks, did not object.


The funny thing is that Bush actually apologized in his 2010 memoirs for his attack on downpayments and other traditional credit standards. His Ownership Society seemed like a good idea at the time, but it didn't work out well.

But how often do Democrats blame Bush for this, even though he has already admitted some degree of culpability? Almost never, because that would imply we ought to learn from the past, which we'd better not.

Who needs data? Any program with the word "Community" in its name is going to cause trouble.

Anything with the word 'affordable' in its name is going to cause trouble.

Awful study. First, they only examine the years 1999-2009, second they use as a proxy the behavior of banks right before and during a CRA review as opposed to the behavior when they weren't facing a CRA review. I don't see how that's any kind of reasonable proxy for judging CRA vs. non-CRA banks and their lending behaviors. They're measuring something but not what they think they are.

Propaganda fail.

"Awful study. First, they only examine the years 1999-2009,"

Those were rather interesting years, mortgage-wise.

Cherry picking. The CRA has been around since 1977. If the CRA had some noticeable effects, they would have been observable much earlier and separately from an economy wide bubble. Also, the only valid type of analysis would be to compare CRA covered institutions with similar non-CRA institutions.

But this is pointless, there's never been any actual evidence that the CRA contributed to the housing crisis despite the endless efforts of those who try to blame minorities for everything - which is where you seem to show up with alarming regularity.

"there’s never been any actual evidence that the CRA contributed to the housing crisis"

Except the current paper under discussion, right?

Your assertion that CRA would have caused the problem before is saying that there will be a single smoking gun found. I consider it obviously The Fed, but they needed a lot of accomplices.

As an aside, since I consider it unquestionably The Fed to be the smoking gun, what happens when we have NGDP targeting and there is another fundamental change in secular growth rates?

Read my first comment. I can't see any reason why their assumption of measuring CRA institutional behavior in two different time periods has anything to do with measuring the overall effect of the CRA. If you have anything more than a SWAG why this should work, I'm all ears. But it looks to me like it's unsupported assumptions all the way down.

"Cherry picking. The CRA has been around since 1977."

It was largely symbolic from 1977 until about 1994, when it was much strengthened.

1999 is the first year you can look up the race of every new mortgage borrower in the country on the FFIEC online database, which I encourage you to check out. It's fun to look at, say, how much Countrywide's lending to Hispanics in the Inland Empire increased in the bubble years.

If you're looking for a contest as to who can most blatantly misuse race and ethnicity statistics, don't worry, you win.

Repeat of prior comment... Still needed...

It’s important to note that the CRA was only one of a zillion government efforts to promote minority lending. Most folks on the “minority lending contributed to the financial crisis” side of the argument, use the CRA as a short hand to refer to all of these efforts. Its actually sort of refreshing to see the CRA itself implicated.

Exactly what I was thinking. I couldn't download the full paper because their link wasn't working in my browser, but the abstract indicates that the paper only shows that bank lending was marginally riskier in the short period before CRA reviews. It doesn't prove anything about what the banks' baseline lending behavior was. The banks could very well have done no minority lending when they weren't facing review.

Yes. Its the black peoples fault that CDO builders from elite universities, working at elite banks took subprime loans, leveraged them up 40-1, mixed them together and then bribed the rating agencies to give them AAA ratings so that these piles of garbage be sold to various idiotic European pension funds and banks. And whatever couldnt be sold to idiotic Germans was stuffed back onto the bank's own balance sheet or an 'off balance sheet vehicle' because you know...math! . People who wouldnt hire a GMU student for their banks' back office positions, much less as analysts or economists, set up the structures that not only badly miss priced risk but also amplified it. Then, when the inevitable came through it all collapsed. But once again, its all the blacks fault. And the liberals of course.

It was more the fault of elites like Angelo Mozilo, George W. Bush, Henry Cisneros, Roland Arnall, Jim Johnson, Richard Syron, Karl Rove and others who did very well for themselves for awhile by encouraging massive imprudent lending to minority and lower income buyers in the name of fighting racism.

I realize the concept of elites exploiting the vast symbolic value of minorities for their own selfish ends is not a common one in our discourse, but maybe it ought to be. Maybe we should become a little more cynical about the powerful extolling the sacredness of Diversity.

The rate of homeownership dropped from 69% (2004 t0 2006) to 66.4% in March 2011.

Let's confront this lie: The lowest US homeownership rate on record was not 62.9 percent in 1965. That’s the year the Census Bureau began reporting the data. The lowest home ownership ratre on record was 47% in 1900. It rose to 48% in 1930; back to 44% in 1940; 55% in 1950; 62% in 1960.

Symptoms: Pre-Great Recession, the US experienced GDP growth without grwth in real household incomes. Residential property prices soared while household disposable income stagnated. Individual savings rates fell to approximately zero. Household debt levels tripled.

Your Ministry of Truth, and its unpaid collaborators in the lying, liberal (I repeat myself again) media, suppress the facts.

11/1/2011: "Smoking-Gun Document Ties Policy To Housing Crisis"
“Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rate, and launched what would prove the costliest social crusade in U.S. history.

“At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important (FNMA/FHLMC) secondary mortgage market and stiff fines, along with other penalties.

“Bubble? Regulators Blew It

“The threat was codified in a 20-page "Policy Statement on Discrimination in Lending" and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.”

“The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies. . . . Confronted with the combined force of 10 federal regulators, lenders naturally toed the line, and were soon aggressively marketing subprime mortgages in urban areas.”

Well, if the CRA didn't increase the number of risky loans, then what in the world was the point of it? The entire idea was to expand loans to people who couldn't obtain them--tends to correlate with race but isn't necessarily 1 to 1--and presumably the banks had reasons not to offer these loans before...because they were higher risk. Bankers weren't refusing these loans because of race, the only color they care about being green.

So the CRA was a typical government program. An activity that could not be justified in economic terms was deemed good in moral terms and mandated through law.

"Well, if the CRA didn’t increase the number of risky loans, then what in the world was the point of it?"

...is what I'm saying. The debate is like a strawman cluster-foible. I figure things like the CRA as symptom of the "we are all equally assholes" worldview. The only reason it didn't cause more damage is because politicians are so incompetent.

How 'bout this for a starter, no government subsidized credit expansion for positional goods?

I love the way we need "papers" to answer blindingly obvious questions.

Is loaning billions of dollars to hobos a bad idea?
Should the US Government stop borrowing and spending $4 billion PER DAY?
Are there any downsides to creating a power vacuum in Libya and then letting al-Qaeda run rampant?

Gosh, I dunno. These things need a lot of study.

LOL Righ on!

I'm waiting for the paper that concludes dumping Mubarrak (sp) for the Muslim Brotherhood was probably a bad idea.

Or maybe, Spring in the middle-east is not at all what it's cracked up to be due to Anthropogenic Global Warming.


The interests of the USA and those of the Muslim Brotherhood might be more congruent than it appears on the surface. The radical muslims of Egypt can no longer blame the USA for their local problems. They now have to blame moderate Islamists. Who cares about the ruling system of these countries If the oil flows freely in the region?

"The radical muslims of Egypt can no longer blame the USA for their local problems."

We can still blame Bush in 2012, so they have 4 years at least left to blame the USA.

p.s. Israel will be good for a century.

The one element of CRA loans that seems to be missing in this discussion is that CRA loans were NOT minority loans per se - they were low income ZIP Code loans. A CRA covered institution could make 100% of their loans to minorities, but if none of them was in a CRA Zip Code, the have not met their CRA requirements. CRA Loans also had maximum income restrictions, so if you lent in the proper ZIP Code, but the borrower's income exceeded the maximum allowable amount, you did not get credit towards your CRA requirements for that loan - regardless if the borrower was a minority or not.

CRA loans were not sub-prime loans - sub-prime loans required an industry standard credit history, verifiable income and assets. CRA loans were designed for low income borrowers, non-standard sources of income (cash payments), non-standard assets (cash under the mattress) and without industry standard credit histories (utility bills, non-credit bureau reporting consumer credit). There were no stated-income, stated-asset, no-doc, etc., CRA loans.

It was easier for CRA covered institutions to get CRA credit for community events, than it was for them to make CRA loans - especially in a real estate bubble. Housing prices in CRA Zip Codes were inflating along with the rest of the market, and maximum allowable income was based on prior years census income. So you ended up with a mismatch between income required to qualify for the loan exceeding the max income allowed.

Without the rise of stated-income loans to otherwise highly qualified borrowers and stated-income sub-prime loans, CRA loans would not have made any impact on the market - either in property appreciation or market collapse. The bubble was burst, as I said above, by early payment defaults on stated-income, sub-prime loans originated (packaged and sold to Wall St) by New Century and Ameriquest and their ilk. The subsequent shut down of stated-income loans is what collapsed the market - real income could not support the inflated housing market.

Replies with nothing but urban legends are not solicited.


One correction on sub-prime loans - they did NOT always require verifiable income - they did however required verifiable employment. And, equity was the borrower's primary asset.


One recurrent element of this discussion is that the nothing-to-see-here-folks-just-move-along side wants to focus as narrowly as possible on the CRA as opposed to the totality of government policy. The CRA was implemented in 1977 with a lot of "neighborhood" rhetoric about banks reinvesting in their local communities, but over time government policy evolved in the direction of monitoring disparate impact on individuals of protected races.

For example, go to the FFIEC's Home Mortgage Disclosure Act website and you can look up extremely precise numbers on mortgage dollars going to even the most obscure racial group, such as Countrywide's lending to couples that are part white and part nonwhite.


Of course, as a nonbank, Countrywide wasn't technically covered under the CRA, but all of its lending figures by race were published for the use by racial activist groups. Over time, of course, Angelo Mozilo came to believe that the government was pushing Countrywide in the right direction toward more multicultural lending and became a leading voice of getting rid of old regulations that had disparate impact on lending to, say, immigrants who only get paid in cash.

The history of the Housing Bubble was politicians and aggressive lenders pushing on each other's open doors, with "Diversity" as not just a lovely cover story, but as a largely unquestioned system of belief.

Doubt it. Relies too much upon Mozilo as idealist theory. He sold his shares, betrayed long time friendships with money managers, pumped up shares, and lol'ed his way to the bank. Dude ain't no idealist.

Countrywide was a bank - chartered in 1990.

Targeted low-income lending was such a miniscule part of overall loan production it had no effect on the bubble or the collapse.


In a boom cycle with super low interest rates, wouldn't even the addition of a few extra buyers boost the price of houses?

Isn't this the whole "on the margin" effect?

I think you are overly discounting this, though I would put the issue more on interest rates and greedy stupidity (which ran from individual home buyers, flippers, to banks, and MBS sellers) but this is at least some part of the problem. Its okay to say its a minor part, but to deny it having ANY part is a bit much.

"In a boom cycle with super low interest rates, wouldn’t even the addition of a few extra buyers boost the price of houses Isn’t this the whole “on the margin” effect?"

Right. That's why it's called Marginal Revolution.

But, it wasn't just a few extra buyers, it was the the long term effect of massive immigration that made the Sand State housing bubble plausible-sounding. Companies like Countrywide and Washington Mutual spent a huge amount of money gearing up, hiring Spanish-speakers, to get into the Hispanic market. (Blacks were largely window dressing.)

The thinking of Cisneros, Mozilo, Bush, and so forth -- as put forward in many speeches in 2002-2004 -- was that the huge influx of population from Latin America would be able to make enough money to pay off big mortgages and wouldn't have negative effects on property values.

And who would publicly tell them they were wrong, that Hispanics, on average, didn't have what it would take?

In the final analysis government should play no role whatsoever in the private housing market and that includes bailing out lenders. No good can ever come of it. Government is notorious for enabling people and companies to do things they shouldn't be doing. I guess some of us will never learn.

Simplicity is best. Party A wants to buy a house from Party B while Party C finances the deal. All involved assume their own portion of the risk. If anyone in the deal can't qualify or live up to the terms the deal breaks down and it is none of our business either way. The end.

Final question for those who feel the CRA had no effect.

Why have the CRA if it has no effect or only a tiny effect?

Has it been rescinded?

If no, then why not? It has no effect at all or such a tiny effect to be equivalent to be non-existent, so why not eliminate it?

Would anyone here who thinks it didn't have an effect advocate that?

"Has it been rescinded?"

No. The Obama Administration continues a quiet campaign of suing banks for not lending enough to minorities. Here's a tiny story out of small town newspaper three months ago, but it's the kind of thing that sends a message to the mortgage industry about what makes the government unhappy and what makes the government happy:

Fom the Santa Rosa Press-Democrat:

"Luther Burbank Savings settles lawsuit by Justice Department over loan practices


"Luther Burbank Savings will spend $2 million to settle a federal lawsuit accusing the Santa Rosa lender of discriminating against African-American and Latino borrowers with a jumbo loan program that targeted wealthy individuals.

"Under the settlement with the U.S. Justice Department, Luther Burbank created a new division to increase conventional lending in minority communities.

"The thrift, Sonoma County's largest financial institution with $3.6 billion in assets, did not admit wrongdoing. Luther Burbank is settling the lawsuit to avoid long and costly litigation, said John Biggs, the thrift's president and chief executive. ..."

Luther Burbank operates eight branches in California, all in posh areas like Beverly Hills. It specializes in apartment building loans, but ran a small side business that originated a little over 100 single family home mortgages per year. The Feds had no objection to this modest-sized bank's main business's lending practices.

But, apparently they don't have more important targets to focus their anti-discrimination wrath upon:

"Instead, prosecutors focused on a smaller line of business that issued jumbo loans through independent brokers to wealthy borrowers. Those loans account for about 15 percent of its portfolio.

"The bank chose to offer only “non-traditional” loans — including interest-only and stated-income loans — to high-income borrowers for amounts greater than $400,000. Such loans, when offered by other institutions to first-time home buyers, have been faulted for helping lead to the subprime loan crisis. Historic numbers of borrowers were unable to make their loan payments or keep their homes, resulting in huge financial losses at banks and a sharp downturn in the housing market.

"The Justice Department lawsuit alleged that because Luther Burbank would lend no less than $400,000, very few African-American and Latino borrowers were able to qualify for its loans.

"In the greater Los Angeles area, for example, only 5.8 percent of Luther Burbank's single-family residential mortgages from 2006 through 2010 were issued to African-American and Latino borrowers, compared to 31.8 percent by comparable prime lenders, the Justice Department said.

Look, interest-only and stated-income loans are what are often called "toxic" mortgages. So, the Obama Administration sued Luther Burbank Savings for not saddling minorities with enough toxic mortgages in 2006.

“It is critical that lenders have policies in place to ensure that they don't discriminate in their lending programs,” Thomas E. Perez, assistant attorney general for the Civil Rights Division, said in a statement.

"The settlement, filed Wednesday in U.S. District Court in Los Angeles, is the latest to emerge from an Obama administration task force searching for fair-lending violations during the housing boom. It has reached settlements in 18 cases for $370 million, including agreements in July with Wells Fargo and in December with Bank of America.

“The Department of Justice will not allow financial institutions to have in place residential lending practices that illegally impact minority communities,” André Birotte Jr., the U.S. Attorney in Los Angeles, said in a statement.

"Luther Burbank's attorney, Andrew L. Sandler, said the case represented the Justice Department's “most aggressive use of the disparate impact discrimination theory.” He was referring to the use of a statistical analysis to allege discrimination.

“It has accused a bank of discrimination because it offered only non-traditional portfolio loan products to high net-worth individuals, and is imposing as part of the settlement a requirement that it offer additional loan products in order to obtain more loans from minority borrowers,” Sandler said in a statement. ...

"The thrift lowered its minimum loan limit to $20,000 in June 2011.

"Luther Burbank will now spend $2 million on initiatives to increase lending in minority neighborhoods in California.

"Under the settlement, which is subject to court approval, the thrift will invest $1.1 million in a financing program to increase the amount of credit it extends to residential borrowers seeking loans of $400,000 or less.

"It also will spend: $450,000 in partnerships with community-based organizations; $300,000 for outreach to potential customers; and $150,000 on consumer education programs."

Something to keep in mind about the CRA is that it's a source of food on the table for more than a tiny number of activists.

Quite amazing. It's one thing to argue about who was reckless before 2007. But now that we should all know better, it is interesting that the government continues to push the same policies. The above is a good example.

Another is the continuation of reckless down payments below the traditional level of 20%. The average today is 9% with the FHA sill giving loans with 3.5% downpayment. The government can't stop reckless finance. That's the conclusion of this author:
PS, Steve, you make excellent points in all your comments above.

You're kiddin, right? The Atlas Society?


You know anything at all about the success of the FHA program through the decades? You know anything about their up front mortgage insurance payments?

Know anything at all about their foreclosure rates through the years? Anything about foreclosure rates on properties where buyers did not stupidly buy HE loans from investment banks that went to 125% of LTV?

Nah, you'll shrug that off.

The FHA is bankrupt. If it were a private company is would have been nationalized or bailouted by now. In 2007, when private label MBS became extinct, the FHA ramped up production to fill the void. The '07, '08, and '09 vintages are killing the FHA. As I said (and as the author said) the gov't can't stop its reckless lending. The gov't never learns.

Everyone prior to '07 underweighted falling housing price scenarios. What's the excuse after that point? Ah, the needs of the poor require continued reckless lending ... isn't that how it started in the first place?

Barry Ritholtz at The Big Picture blog has good commentary about this.

Back in the summer of 2009, Barry Ritholtz came to my blog to start a debate on this general topic. You can read the exchange (in reverse chronological order) here:


Just awful, ideological bs.

Now if you can give me an explanation how the CRA was even a minor part of the problem when the bubble did not occur in CRA areas, I would like to hear it.

Or if you could give me an explanation how the CRA was even a minor part of the problem when their loan amounts were so tiny, and had steadily declined from 1993 right through the bubble, I would like to hear it.


Or with all the talk of Countrywide and ethnic groups, how do you explain how insignificant that lending was in CRA areas that counted in CRA audits?


And after you fail to come up with anything that even remotely contains any actual facts, as in number of loans, number of foreclosures, etc.( cause I will not listen to goals, or speeches , etc), then try and figure out how the investment banks did exactly the same thing in the UK and Ireland that they did here without the CRA, or anything like it.

It won't matter, cause if you read this drek, you will just call me names, post a speech from someone, maybe even Barney Frank, and none of it will contain any real numbers whatsoever, unless of course you pull out the Wallison/Pinto comedy routine.

But then maybe one of you will figure out why no one is going after the government for forcing them to do loans? It's been done, y'know? But not now. Cause it never happened.

Then maybe one or two will notice all of the litigation flying around, and that all of that litigation has an investment bank as a defendant. And you will actually read the depositions, y'know, sworn documents from people like Mozilo in MBIA v. Countrywide:

“The loans were originated through our channels with serious disregard for process, compliance with guidelines…we delivered loans with deficient documentation, did not respond timely in correcting those deficiencies”.

And then maybe you will figure out that the Bush and Obama admins decided not to prosecute for the same reason, it would cause the end of the US European banking system, cause they were, and are, all guilty of fraud.

And then as the litigation winds down with real little effect (though if you have any BOA stock, I would suggest you dump it), though huge payments will be made, you guys will forget all of that and go on back to the good 'ol CRA.


What a waste of space

But nah, you guys will blame some insignificant program whose sole purpose was to prevent redlining.

You aren't really up to speed, are you? The discussion has moved far beyond your old talking points.

In your mind, perhaps not.

I have gone through this many times. I have never seen a single answer to one of my questions that was not based on total bs.

Reviewing the posts in here are old hat.

And I swear, if I hear an "atmosphere of lending was created by the government" or anything like that, that is the end.

These discussions are important. But not if actual facts and actual numbers are not included. And if I see the name Pinto or Wallison(let alone Ayn Rand) this is not a discussion, it is an ideological lecture.

Never mind.

My apologies.

I should have read your blog exchanges with Ritholz prior to coming in here.

Thanks. I appreciate that.

Here is the housing bubble.

"The charts reveal some astonishing facts. At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half—45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with “just” two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000."


The same exact thing happened at the same exact time in auto finance. Curiously enough, many of the same investment banks were involved in that also. All of the main sub prime auto banks took tremendous losses, as repos happened before they could even sell off the ABSs, or happened fast enough that the banks took the hit instead of the investors.

HSBS, AmeriCredit and Cap One were the big guys. HSBC went under(the auto part); AmeriCredit had to sell off just about everything to survive(and is now being bought out); and Cap One just squeezed through. There are another 5 or 10 that just disappeared.

Often misunderstood is that people think subprime financing is a bad thing. It is not. It gives people the chance(at a price) to rebuild their life from past mistakes. The problem is that when it is intentionally mispriced(not to mention intentionally misrated) huge losses will occur. It is just arithmetic.

And all of the banks knew it. But they also knew that they could artificially create incredible demand with their fake AAA paper. And they knew that AAA paper attracted huge investment dollars from sources whose portfolios had to be all AAA or a huge % of their portfolios had to be AAA(insurance companies, pension funds, etc.).

Add in the fact that AAA paper can be leveraged much higher than other paper, and you have the whole story of the financial crisis.

Oh, there is no CRA controlling auto finance.

Or, you can read this testimony regarding Citi before Congress.

"The delegated flow channel purchased approximately $50 billion of prime mortgages annually. These mortgages were not underwriten by us before they were purchased. My Quality Assurance area was responsible for underwriting a small sample of the files post-purchase to ensure credit quality was maintained.

These mortgages were sold to Fannie Mae, Freddie Mac and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.

In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets.

This situation represented a large potential risk to the shareholders of Citigroup.

Testimony of Richard M. Bowen, III page 2

I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.
We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production."


Understand that a violation of reps and warranties means buyback. Citi could have been taken under a day after this testimony.

And you guys carp about the CRA.

Repeat of prior comment… Still needed though…

It’s important to note that the CRA was only one of a zillion government efforts to promote minority lending. Most folks on the “minority lending contributed to the financial crisis” side of the argument, use the CRA as a short hand to refer to all of these efforts. Its actually sort of refreshing to see the CRA itself implicated.

You wrote a great article on the housing crisis and the community reinvestment act. That is only half of the blame.

But no one talks about the unnamed villain of the housing crisis that tipped the whole system intobankruptcy. This villain is the NAR.

The NAR stands for the National Association of Realtors, the lobbying group listed at #4 on opensecrets.org’s list of political heavy hitters: an organization about which the New York Times once flatly stated, “You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.”

Over the last decade, the NAR has stayed under the radar while doing a monstrous amount of damage. As the Bloodhound Realty blog says, “It was the NAR that lobbied for each law and rule change that resulted in the housing boomthat then led to the current housing crisis.” Yet chief economist for the NAR Lawrence Yun just stated that it was Wall Street. Yun, who has publicly state he never saw the housing crash coming said “Wall Street lenders went wild and Fannie Mae, along with it’s rival Freddie Mac, chased the market bubble profits.”

The question is who got these loosey goosey lending laws passed. The NAR pushed for each and everyone. They lobbied (spending hundreds of thousands of dollars) for sub-prime lending-catastrophe, the bundling of the bad loans so even more could be made, a large percentage of these bundled loans were sold to European Banks, which is a huge part of the Euro crisis. The unquestioning subsidization of the secondary mortgage market which led to the Fannie and Freddie bailout and then there is AIG. All of these practices have one common denominator the NAR lobbied for them-why because they sell more homes and yield real estate commissions. Who funds the NAR-real estate agents!! These practices that have led to their continued profits off of the exploitation of the American consumer. Every law that caused the current real estate collapse was heavily lobbied for by the NAR.

And make no mistake, they pushed hard. The NAR is the largest trade association in the United States. Of all political action groups, they are the third-largest contributors to political campaigns; since 1990, they have pumped over $30 million into the candidates that promise to fight for regulations that will hurt the public while keeping bad business afloat. Money is abundant as they spent $379,000 on a Rose Bowl float.

How do they have so much money and influence? Well, membership in the NAR is mandatory in most markets if agents want access to Multiple Listing Services. So one million people pay a yearly $155 to continue to play in the real estate pool.
Last month, the NAR decided to raise the dues another $40 per member: a move they openly acknowledge is to add another $40 million annually to their political-contribution war chest that is 100% earmarked for political contributions-“soft money.”

The NAR’s mission statement states, “Working for America's property owners, the National Association provides a facility for professional development, research and exchange of information among its members and to the public and government for the purpose of preserving the free enterprise system and the right to own real property.”

The NAR lobbied to make it illegal for banks to handle foreclosures in-house; now they have to use a real estate agent. The NAR has kept a stranglehold on the real estate industry; as housing prices quadrupled, so did broker’s commissions, even as the Internet made the business simpler than ever. The NAR dug homeowners into a state of crisis, and yet they continue to claim that they exist for the public and for the protection of homeownership.

We can no longer afford this protection!

Real estate agents, at this point, have no choice. Remember, they have to pay to play the game. Yet I wonder why, in right-to-work states like Texas, the NAR isn’t seen as a union breaking the rules.

The answer, as always, is money: money spent wining and dining our representatives.

Next year, the NAR needs to hire a couple of good economists with that Rose Bowl money. They state that they “never saw the housing crisis coming.” That’s either dishonesty or shameful ignorance, considering that most of the housing information in the media comes from this political group. Perhaps they should also hire an ethicist, as independent groups continue to find the NAR’s home sale statements inflated by up to 20%. They were called on the carpet by Core Logic and had to readjust their numbers.

The NAR ultimately exists for the broker’s commission, the direct way of taking enormous amounts from the public and putting it back in the huge purse of the real estate industry. With the Internet, the commission system is slowly breaking down. With this added $40 million it is frightening what new laws we might have passed.

Despite all of this spending the number of real estate agents is plummeting and only 22% of all homes are now sold with the full commission.

Real Estate agents are becoming a thing of the past at a very rapid.

According to statistics from the National Association of Realtors, they might be. The number of real estate agents has dropped over 26% in less than 5 years. And, the NAR has spent over $90 million in political contributions trying to save real estate commissions. Let’s just say they’re certainly invested in their own industry.

It’s common sense that the number of agents would have dropped. After all, a lot of professions have cut jobs since the recession. But across all sectors, you’d have to dig pretty deep to find a loss of 26%. In fact, only construction workers—a notorious casualty of the housing bust—can keep real estate agents company in terms of percentage of jobs lost.

Still, if I had to choose between being a construction worker and a real estate agent right now, I might choose to get out my hardhat. Once the economy turns around, people will begin building and buying homes again, if on a more modest scale. The age of the easily mortgaged McMansion is over, but construction workers will certainly be needed again, and their industry will recover. It has to—we haven’t yet found a way to outsource home building or build supercomputers that can do it for us. And thank goodness for that.

Real estate agents, on the other hand, are facing an entirely different dilemma. The business model that has employed them for so long is expiring.
I will be the first to admit that 10 years ago or even 5 years ago it would not have been in a homeowners best interest to sell their own home. There was only one web site that homes could be posted for sale and that was your local multiple listing services. To obtain a purchase contract, they were only available at the state association for realtors and only realtors had access to them. There were no templates to make flyers, and no sign companies that would make just one custom sign. Then there was distribution, how did you let people know your home was for sale. Those were the old days.

We now have web sites like Zillow, which is ranked #1 most searched web sites not the Multiple Listing Service. Purchase contracts are available at your local Office Max or online. There is a Kinkos/Fed Ex on every corner. And a custom sign is just a few clicks away. As a real estate agent, everyday my email is flooded wanting me to buy another program on how to use social media to sell my listings. A year ago a week would not go by that I do not get anemail from a “soccer mom” selling her own home and the flyer is better than what most real estate firms send out. With email and social media, anyone can advertise their home to the masses in a matter of seconds.

There’s a quiet revolution going on in real estate. Buyers and sellers are seeing that they can deal directly with each other, and most importantly, save money. Who would you rather go to Hawaii when you sell your house—you or your real estate agent? I don’t like to make assumptions, but I think I know the answer to that one.

The only surprise is that the real estate agent has lasted this long. At this point, the agent is the dinosaur in the deal. A few willsurvive, inevitably. But real estate agents can expect that their industry will have to change or die within the next decade, because it’s only getting easier to buy and sell a home yourself and save the commission. And commissions mean thousands, if not tens of thousands of dollars of cash in your pocket.

Innovation doesn’t care about the real estate commission. Innovation has never cared about its own consequences. And we embrace innovation every day.

The American public is embracing this huge opportunities to save money and take the real estate transaction into their own hands.

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