Loose loans: subsidized home ownership.

• Author: Tuccille, J.D.
• Position: Citings

DID GOVERNMENT policies designed to encourage home ownership in lower-income neighborhoods contribute to the spectacular housing meltdown? A new study from the National Bureau of Economic Research says yes.

Economists Sumit Agarwal of the National University Singapore, Effi Benmelech of Harvard, Nittai Bergman of the Massachusetts Institute of Technology, and Amit Seru of the University of Chicago looked at the impact if the Community Reinvestment Act (CRA), a 1997 law that was designed in part to encourage lending to low-income individuals. "We find that adherence to the act led to riskier lending by banks", they write.

The study compared the action of the banks facing CRA compliances audit by the action of banks not facing such security. During the six quarter surrounding the CRA audits, banks under examination made loans at a rate 5 percent higher than usual. Loans in those quarters defaulted about 15 percent more often than other loans. Enhanced lending and defaults were most apparent at large banks and in census tracts that were singled out for application of the CRA.

Lenders faced enormous government pressure. In a 2012 editorial, Investor's...