Friday, May 31, 2013

Why so much policy focus on home ownership?

Some have blamed the Community Reinvestment Act (CRA) for the too risky lending to US homeowners during the house price run-up. Actual evidence for this is hard to come by, though. In this previous post, I discuss that there was indeed more risk taken, but it is not clear whether that additional risk was priced in or not. And were we to blame CRA, it would show in banks giving loans to neighborhoods that should not have received them for economic reasons, only to satisfy CRA.

Patrick Bayer, Fernando Ferreira and Stephen Ross look at the history of mortgages that they can link to credit scores and demographic characteristics. They find that for the same credit score, blacks and Hispanics were much more likely to run into mortgage trouble. While the authors do not mention this, the CRA was clearly targeting neighborhoods with such populations, and banks had to lend more there to comply. This would indicate that there is at least some truth to the CRA blaming. The authors frame this result rather by writing that this is evidence that favoring homeownership is not a good way to reduce wealth disparities. I would agree, but also because owning a home is very poor diversification, especially when this is all the wealth you can have. And there is no evidence that homeownership is good anyway, to the contrary.

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