February 6, 2024

Federal Reserve: New Paper Reexamines the Role of the CRA in Mortgage Supply and the U.S. Housing Boom


Concerns have lingered since the 2007 subprime crisis that government housing policies promote risky mortgage lending. The first peer-reviewed evidence of a causal effect was published by the Review of Financial Studies in a paper (Saadi, 2020) linking the crisis to changes in the Community Reinvestment Act (CRA) in 1995. A review of that paper, however, shows that it misrepresents the policy changes as having taken effect in mid-1998, 2.5 years after they were implemented. When the correct timing is used, a similar analysis yields no evidence of a relationship between CRA and riskier mortgage lending. Instead, the results are shown to reflect an unrelated confounding event, the first collapse of the U.S. subprime mortgage market following Russia’s debt default in August 1998.

Author: Kenneth P. Brevoort

Keywords: Community Reinvestment Act (CRA), house prices, mortgage lending, subprime crisis

DOI: https://doi.org/10.17016/FEDS.2024.009

PDF: Full Paper

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This post was originally published here.