What the commission fails to understand is that the government created the market for low down payment mortgages, legitimizing them. Then once the fuse was lit, the market bought more and more of these and similar low quality mortgages in search of high yield and low probability of refinance(unlike most mortgages these had very little negative convexity or risk of prepayment). If it were not for... [more]
What the commission fails to understand is that the government created the market for low down payment mortgages, legitimizing them.
Then once the fuse was lit, the market bought more and more of these and similar low quality mortgages in search of high yield and low probability of refinance(unlike most mortgages these had very little negative convexity or risk of prepayment). If it were not for CRA the sub prime market may never have developed. Low down payments(high LTV) is the single largest determinant for forecasting future defaults.
Same thing occurred with respect to commercial mortgages. The RTC essentially pioneered package of CMBS credits.
http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf
In conducting our inquiry, we took a careful look at HUD’s affordable housing
goals, as noted above, and the Community Reinvestment Act (CRA). The CRA was
enacted in to combat “redlining” by banks—the practice of denying credit to individuals
and businesses in certain neighborhoods without regard to their creditworthiness.
The CRA requires banks and savings and loans to lend, invest, and provide
services to the communities from which they take deposits, consistent with bank
safety and soundness.
The Commission concludes the CRA was not a significant factor in subprime lending
or the crisis. Many subprime lenders were not subject to the CRA. Research indicates
only of high-cost loans—a proxy for subprime loans—had any connection to
the law. Loans made by CRA-regulated lenders in the neighborhoods in which they
were required to lend were half as likely to default as similar loans made in the same
neighborhoods by independent mortgage originators not subject to the law.
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