December 3, 2008 / 3:36 PM / 9 years ago

UPDATE 2-Lending to poor didn't spur crisis -Fed's Kroszner

(Adds background, detail on mortgage market debate)

WASHINGTON, Dec 3 (Reuters) - A federal program designed to increase lending to poor communities did not contribute to the recent subprime mortgage crisis, a senior Federal Reserve official said on Wednesday.

An extensive study of the Community Reinvestment Act shows the program, which is meant to increase borrowing opportunities for the poor, did not exacerbate current housing finance woes in any meaningful way, said Fed Governor Randall Kroszner.

"The long-term evidence shows that the CRA has not pushed banks into extending loans that perform out of line with their traditional business," Kroszner told a conference on extending credit to the poor in Washington.

In the last two years, millions of homeowners have faced the threat of losing their homes as defaults have climbed and property values have sunk.

The Fed conducted its study in the light of some critics who laid much of the blame for the current mortgage crisis at the feet of lawmakers and policy-makers who supported CRA.

PROGRAM'S QUID PRO QUO

Under the CRA, banks win informal credit from their regulators when they offer financing to underserved communities. A bank that provides relatively wide credit offerings to the poor could be in a stronger position if it applies to merge with or acquire a competitor.

Kroszner said the system creates an "unusual set of incentives to promote interaction between lenders and community organizations."

Still, he said those interactions have proven to be mutually beneficial, with banks finding new and worthy customers and communities getting easier access to credit. Fed researchers found no indication that CRA diluted underwriting standards during the years of the recent housing boom -- particularly since most risky, subprime loans went to more affluent borrowers.

Roughly 6 percent of high-priced mortgage loans originated during the housing boom were extended to poor borrowers by finance companies mindful of the CRA.

"The very small share of all higher-priced (home) loans originated that can reasonably be attributed to CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis," Kroszner said.

Late last month, Fed Chairman Ben Bernanke echoed Kroszner's words and the appraisal of Fed researchers.

"Our own experience with CRA over more than 30 years and recent analysis available data ... runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties," Bernanke wrote in a letter to Sen. Robert Menendez, Democrat of New Jersey. (Reporting by Patrick Rucker; Editing by Leslie Adler)

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