Thursday, March 29, 2012

"No, the affordable housing push didn’t cause the subprime crisis"

Once more - Suzy Khimm at Wonkblog:
It’s one of the biggest misconceptions about the housing crisis: the belief that the government’s policies to promote affordable housing — particularly through Fannie Mae and Freddie Mac — fanned the flames of the subprime mortgage market, ultimately bringing down the entire economy.

In fact, a growing body of independent research confirms that it wasn’t the affordable housing mandate that led to the proliferation of risky mortgages. And the most recent evidence comes from the St. Louis Federal Reserve Bank.

Over the past few decades, the federal government has tried to promote affordable housing in two major ways. First, the Community Reinvestment Act encouraged banks to lend to low-income communities. Second, Congress mandated that Fannie and Freddie hit certain targets for lending to low-income and minority communities.

Researchers from the St. Louis Fed analyzed whether such policies “influenced origination or affected prices of subprime mortgages.” While they confirmed that Fannie and Freddie did make widespread purchases of risky, mortgage-backed securities, they conclude that such moves were not, in fact, the result of these affordable housing mandate.