Study: Housing Bubble And Collapse Was Caused By The Government


There is a narrative – a fairy tale if you will – which has been promoted about the housing market bubble which was the first domino in the economic collapse that pushed America into the economic malaise we’ve been in for the last five years. That narrative holds that the housing bubble was caused by unfettered capitalism.

The American public has been inundated by self-assured demagoguery from politicians and smirking celebrities that it was “deregulation” which allowed greedy capitalist wolves loose in the American public, and that the solution to ensure that such a collapse never happens again is to put Wall Street on a short government leash.

To be sure, greed among Wall Street types was absolutely a factor, but the rest of the story just doesn’t pass the smell test. Bankers, even greedy bankers, make profits by lending money to people who pay them back. The subprime mortgage crisis was created when banks started lending to people who couldn’t pay their loans back.

So why did banks start making subprime loans? Maybe because the government, by and through policies such as the Community Reinvestment Act, incentivized such loans and even strong-armed more reticent banks into making them.

Which is exactly what a new study from National Bureau for Economic Research concludes. “Did the Community Reinvestment Act lead to risky loans?” the study asks:

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

Investor’s Business Daily puts the impact of the CRA into graphical form (above) and adds this anecdote illustrating the pressure for subprime lending the federal government was putting on banks:

“We want your CRA loans because they help us meet our housing goals,” Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant’s affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. “We will buy them from your portfolios or package them into securities.”

She described “CRA-friendly products” as mortgages with less than “3% down” and “flexible underwriting.”

From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.

What’s interesting is that the study’s authors actually admit that they may be underestimating the impact of the CRA and federal pressure for subprime lending. “If adjustment costs in lending behavior are large and banks can’t easily tilt their loan portfolio toward greater CRA compliance, the full impact of the CRA is potentially much greater than that estimated by the change in lending behavior around CRA exams,” write the researchers in their conclusion.

Put more simply, they believe banks finding it difficult to hit federal goals for CRA compliance may have moved toward more risky loans overall to please politicians and regulators who were looking for a specific lending philosophy which was more loans for subprime borrowers.

Free markets operate on mutually beneficial transactions. Banks profit only when their customers can repay their loans on time. Lending markets are inherently self-regulating. It was federal policies aimed at promoting home ownership (because, with typical political logic, politicians felt owning homes would make for better citizens) that distorted the market and created a disastrous bubble the fallout of which we’re still living with today.

And then, when everything fell apart, the politicians pointed sanctimonious fingers at Wall Street and decried “deregulation” and “predatory lending” as if the whole thing wasn’t their idea in the first place.

Rob Port is the editor of In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters.

Related posts

  • igx

    Democrat Jamie Gorelick is a Political Class Parasite that doesn’t know jack about finance and became wealthy off of this disaster while causing it at the same time. It beats working.

  • igx

    ACORN was present at the Bush White House when they signed the stupid Ownership Society law or whatever it was.

    The promotion of housing and too much easy money from the Fed makes it so you can’t survive in this country without speculating on housing or other things. Dumb policy begets dumb policy until the system collapses on it’s self.

  • WOOF

    Only one of the top 25 subprime lenders in 2006 was directly
    subject to the housing laws overseen by either Fannie Mae, Freddie Mac
    or the Community Reinvestment Act — Source: McClatchy

    • Deficit Hawk

      You’re wrong, I worked 10 years in the industry. You can sew your fairy tale but people like me need to call you out when your just flat making something up from something you read on the internet.

    • Deficit Hawk

      First of all Fannie and Freddie don’t oversee laws make laws or anything like that. They are private corporations with special government financing. Second if you are a fed member you are subject to CRA. Most on your list there are. There parent companies are banks which make them subject to.

      • WOOF

        Fed member ? The Federal Reserve ?

        “mortgage originations. The CRA only applies to
        deposit-taking institutions. Many of the most prolific subprime lenders,
        like Ameriquest and New Century, were independent mortgage companies,
        which obtain capital from secondary markets and are, therefore, not
        subject to the law in any way. The share of home mortgage debt held by
        CRA-regulated institutions has fallen steadily, from 73.9% in 1977, when
        the law was created, to 32.7% in 1995, when it was amended, to 26.4% in
        2008, the latest year for which data is available.

        Further, CRA-regulated institutions are primarily evaluated only in
        their assessment areas, roughly the counties in which they have a
        bricks-and-mortar office.”

        • Deficit Hawk

          Their parent companies are deposit taking institutions and CRA compliance is a function of lending not deposit taking. I worked for Wells as a lender and as a bank auditor, both internal and external. The fed is the regulator. I will take you to school on this all day. Please explain to me more about Fannie and Freddie’s laws and regulations

          • WOOF

            Your telling me you made or pushed people into sub-prime loans ?

            “The Federal Reserve Board recently issued an $85 million civil fine to Wells Fargo for allegedly steering borrowers inappropriately into subprime loans and falsifying income information on loan applications. This is the largest civil consumer enforcement fine ever
            imposed by the Fed.”

          • willieB

            As usual, your “track record” of stupidity remains impeccable.

          • Bat One

            The “subprime loans” in question were orginated by a unit of the old First Union, which was purchased by Wells at the direction of the Fed and the Treasury. Paying the fine was merely part of the cost of the transaction. The fine itself is deductible to Wells.

          • two_amber_lamps

            Lol…. no worried DH, I’m sure BARF will be happy to be a tackling dummy for you…

        • Bat One

          The CRA was the legislation that community agitators, like Barack Obama’s ACORN used to force banks to make more and more credit risky loans. As I’ve noted above, in response to the pressure and to secure Democrat hegemony, Clinton HUD Secretaries required the GSEs to lower their credit standards to accommodate the unqualified borrowers. The biggest originator of sub-prime mortgage loans in the Chicago areas was ACORN and its affiliates.

          • WOOF

            Outside agitators ? Can’t let that one go.

          • Bat One

            If you are going to quote me, at least have balls to do so correctly, huh?

          • WOOF

            “” I use those for quotes.
            “community agitators” is a sublimation.

          • Mike Adamson

            The part I don’t get is why the CRA loans didn’t default at a higher than average rate if the risk was so pronounced and burdensome. I also don’t get why ithe bulk of mortgage defaults had no relation to the CRA nor how the CRA could cause problems in countries outside of America. The problem with the CRA explanation is that it sounds plausible when you accept the scenario as provided by conservatives but when you actually look at the evidence, it’s a ridiculous claim.

          • Bat One

            The lowering of credit standards by the GSEs wasn’t something down overnight. It was done over a number of years as they found themselves unable to meet the participation goals set by First Cisneros and then Cuomo. In addition, Fannie execs Johnson, Gorelick and Rains had ordered the purchase of more and more sub-prime mortgage-backed securities on the open market and counting those as part of their compliance – and, not coincidentally, the basis for their own multi-million dollar bonuses. In 2000 Fannie purchased $1.2 billion such. In 2001 the figure was $9.2 billion and in 2003 the total was $15 billion. Between 2004 and 2006 the two GSEs purchased some $435 billion in securities backed by sub-prime loans to meet their “affordable housing goals. That’s in addtion to the loand they purchased directly from banks, brokers, and mortgage companies. By purchasing the securities of others institutions who were securitizing sub-prime loans, the GSEs were hugely increasing the market for such loans.

            As for overseas, because of their unique, implicit federal guarantee, the GSEs and others were able to sell vast amounts of MBSs to overseas entities as well as here in the US. And because the underlying mortgages were so comingled it was all but impossible to segregate out those that were still viable and those which weren’t when the housing bubble burst and the mortgage credit crisis hit. One single such security might have hundreds of mortgages backing it, only some which may have been in default. But neither the issuer nor the buyer of the security was going to be able to segregate them apart.

            Don’t forget, the purpose for which Fannie and Freddie were brought into existence was to provide liquidity to the mortgage market by buying up mortgage loans and securitizing them. The same is true of FHA, although with GNMA securities, the federal guarantee of the underlying mortgages is more explicit.

            The simple fact is that had the GSEs not been directed to lower their credit standards and buy mortgage loans which traditionally had been the purview of so-called sub-prime or portfolio lenders, none of this would have happened.

            Its also worth noting that there definitely were warnings of what could happen if the reduced credit standards and resulting sub-prime lending got out of hand. Franklin Rains said, “”We have not been a major presence in the subprime market,” he said, “but you can bet that under these goals, we will be.” And NYT Financial reporter Steve Holmes wrote “In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose anydifficulties during flush economic times. But,the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industryin the 1980s.”

            Others voiced similar concerns.

          • Mike Adamson

            Thank you for your generous response. Although I understand the original intent behind their creation, I’ve always had difficulty grasping the nature of the GSE’s and the existence of such weird beasts helps explain conservatives’ dubiousness around State enterprises in the economy. The NBER paper identifies 6% of high risk mortgages as CRA qualifying arrangements and I guess my fundamental skepticism rests on the relatively tiny number of loans created through a program that dates back 25+ years and how such an insignificant sliver of the mortgage market caused such widespread calamity. I could accept the view that lending standards became too lax and that the CRA represents an early example in a process that slipped down the slippery slope. I can accept that the GSE’s appetite for product and the government’s interest in increased home ownership were significant factors leading to the explosion in higher risk mortgage creation in the 200’s.That said, how can so many advance the point that the CRA directly caused the financial crisis? I accept that the government has to accept its share of responsibility for creating the mess but why give a private sector that seriously mispriced risk a pass?

            It simply doesn’t make sense and it can only make sense if one lets the CRA stand in for government policy and action in general…government made mistakes so the CRA is to blame. See what I mean? Nice chatting with you again.

    • Deficit Hawk

      Lastly why do you comment on every post when you don’t understand half of what you are saying.

    • Bat One

      Sorry, WOOF, but your table has no relation to your comment. It demonstrates nothing. Neither Fannie Mae nor Freddie Mac were tasked with regulatory oversight as you’ve wrongly suggested. The GSEs set the underwriting standards for mortgage loans that they would purchase from banks, brokers, and mortgage companies, such as the ones listed in your table. Those purchased loans were then dundled, securitized and sold off as market conditions allowed. And at the direction of Clinton HUD Secretaries Cisneros and then Cuomo, the GSEs were required to buy first 42% of their purchased mortgages and then 50% with borrowers from “minority and other underserved communities.” To accomplish these objectives, objectives intended to bind these communities to the Democrat party, both Fannie and Freddie lowered the credit standards for borrowers whose mortgages they would purchase. A mortgage loan that once required a minimum average credit score of 780 to be GSE eligible dropped all the way down to 620… and then even lower. And when even the lower underwriting standards were not sufficient to meet the HUD guidelines, Fannie execs Gorelick, Rains, and Jim Johnson purchased huge volumes of third-party sub-prime MBSs to fill their quotas and earn for themselves fraudulent, multi-million dollar bonuses

      • WOOF

        Bankers as victims is a hard sell.

        • Bat One

          The truth is often a “hard sell”, Particularly when the audience consists mostly of the comfortably ignorant… like you.

          • mickey_moussaoui


        • Bat One

          Perhaps if you actually understood how the mortgage business works and what the function of the GSEs really was? Then you’d begin to comprehend just how right the critics and reformers were, and how disastrously wrong-headed the Democrats, from the corrupt Barney Frank on down, were in fighting against GSE reform.

        • Wayne

          I know, it was those damned evil bankers. They are just like those evil greedy capitalist businessmen. Bastards. It couldn’t be those nice, well intentioned Democrat politicians. You are a typical liberal idiot. We are in a world of hurt because of idiots like you.

  • mickey_moussaoui

    I’ve been telling you this for a couple years now. Geeeese

    • Wayne

      Me too.

  • awfulorv

    I’ve noticed that Canada had no mortgage crisis, as did the upper tier of states in the Midwest, excepting Minnesota. What makes those other states, which were greatly affected, different than the rest? I think you all know the answer, it was this, all consuming crusade, primarily by liberal politicians, to make those of color feel good, to have them share in home ownership, and have someone else, other than themselves, bear the cost of their happiness. Sad to say it did not work, they’re as dissatisfied, unproductive, and hapless, as ever. Whats next? Well, their health care has been taken care of, and now it’s obvious some want to give them, redistribution it’s called, whatever the most successful in this country have managed to acquire, over the years. They’ll be after your IRAs, and 401s, soon, don’t doubt it. Is the average Americans racial guilt really so great that they’ll saddle their grandchildren, and their unborn children, with the bills for this ongoing folly?

    • Proof

      And now the average wealth of Canadians exceeds the average wealth of US citizens for the first time.

      • Mike Adamson

        and the beer is better too.

        • Proof

          Meet me at the airport. I’ll be right there!

  • RCND

    The mortgage crisis was caused by people who have no business owning a house (at least at this point in their life) taking out a loan for one. CRA and the subsequent easy credit helped speed it along, but no one put a gun to these peoples heads and made them take out a mortgage. “The bank said I could afford it” is not an excuse.

    • mickey_moussaoui

      well, not quite. Yes the mortgage loaners were guilty of
      selling ARM’s to stupid people…BUT…government leaned on the banks to make
      those loans in the first place. Nothing good comes from Democrat social medaling

      • RCND

        I know that happened. But ultimate responsibility still lies with those who took out the loans to begin with

        • Wayne

          Why did the Democrats think it was a good idea to make it easier for those who couldn’t afford it to get a mortgage? People were always applying for loans they can’t afford even before the collapse. The banks would turn them down. The Democrats threatened banks for it so they lightened up.

          • Guest

            Why did banks think it was a good idea to loan a million dollars to someone making minimum wage? Even if the loan was incentivized, no reasonable person would’ve expected that money to be paid back. Nobody was threatened to make the loan as you claim and your contention otherwise is patently untrue. Thanks for resorting to outright lies and demonstrating the baselessness of your argument though!

          • realitybasedbob

            If only history wasn’t on youtube, huh Waynester?

            Home Ownership and President Bush


          • RCND

            That may be but ultimate responsibility lies with those who asked for and accepted the money to begin with.

      • Bat One

        For every one of those sub–prime ARMs that went belly up, I guarantee that in the loan files there are very explicit disclosure forms, signed by the borrower(s) acknowledging that the terms of the loan have been explained to them and that they understand and agree to those terms. And when the closing package is transferred back from the title company or closing attorney to the lender, and when the lender then reviews the package before shipping it to the GSE or other investor, and when the investor repackages, bundles, and securitizes the loan, those disclosure forms are checked and rechecked, and rechecked again.

        • RCND

          Correctomundo. No one forced the loans on them. They willingly entered into the contract

          • WOOF

            You forgive straight up knowingly done fraud if done under the color of business. “We’ll just change a few numbers , we all do that, don’t worry I understand the business. Trust me, I’ve made it so you can easily afford the house. You’ll be thanking me later.”

          • RCND

            You forgive knowingly wishful mathematics on the part of the borrower as it pertains to their budgets (if they actually make them).

  • Factsarefacts

    People are dumb and liberals are even dumber for thinking they could afford what they really couldn’t.

  • AConservative

    Fannie Mae Eases Credit To Aid Mortgage Lending

    Published: September 30, 1999

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    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 and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

    ”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. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

    ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

    Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. 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.

    Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

    Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

    In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

    Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

    In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

    The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

  • WOOF

    Fraud is the herd of elephants in the room.
    Some will say it’s just how you do business.
    See they signed here and here, paragraph

    K-7 part 3b acknowledges that the undersigned

    naif understands. There is no fraud no matter

    what the loan officer said or wrote on the application.

    • Bat One

      The REAL “herd of elephants in the room” is the disparity in credit scores between whites and non-whites. The Boston Fed study was flawed in that it ignored this key underwriting metric, as did the AJC “Black and White” lending series that wrongly won a Pulitzer prize. The software used by the three credit reporting agencies to assesses one’s reported credit history and assign a “score” is race/ethnic neutral. Besides, everything on the 1003 has to be documented for a “conventional” GSE loan. Or at least it did until Barney Frank’s live in boyfriend started making up new programs at Fannie.

  • Guest

    wait… I thought it was Bush’s fault… (sarc)

  • Antima Sharma

    “I am very happy to read your articles it’s very useful for me,
    and I am completely satisfied with your website.
    All comments and articles are very useful and very good.
    Your blog is very attention-grabbing. I am loving all of the in.
    turn you are sharing with each one!….
    Baby Diapers