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The CRA and subprime lending
The Community Reinvestment Act (CRA) has been under much scrutiny amid the subprime lending bust. Critics of the CRA contend that the law pushed banking institutions to undertake high-risk mortgage lending. A Federal Reserve Board staff analysis finds that the CRA was neither a source nor driver of the housing market's collapse. In this issue, we examine the CRA and its role in the mortgage market and distinguish it from causes of the subprime failure.
AUTHORS: Office, Community Affairs
The role of the securitization process in the expansion of subprime credit
We analyze the structure and attributes of subprime mortgage-backed securitization deals originated between 1997 and 2007. Our data set allows us to link loan-level data for over 6.7 million subprime loans to the securitization deals into which the loans were sold. We show that the securitization process, including the assignment of credit ratings, provided incentives for securitizing banks to purchase loans of poor credit quality in areas with high rates of house price appreciation. Increased demand from the secondary mortgage market for these types of loans appears to have facilitated easier credit in the primary mortgage market. To test this hypothesis, we identify an event which represents an external shock to the relative demand for subprime mortgages in the secondary market. We show that following the SEC's adoption of rules reducing capital requirements on certain broker dealers in 2004, five large deal underwriters disproportionately increased their purchasing activity relative to competing underwriters in ZIP codes with the highest realized rates of house price appreciation but lower average credit quality. We show that these loans subsequently defaulted at marginally higher rates. Finally, using the event as an instrument, we demonstrate a causal link between the demand for mortgages in the secondary mortgage market and the supply of subprime credit in the primary mortgage market.
AUTHORS: Sherlund, Shane M.; Nadauld, Taylor D.
Subprime lending over time: the role of race
Analyzes the racial gap in subprime mortgages over time. The study estimates a portion of the gap that cannot be attributed to such characteristics as income, credit score, loan amount, degree of documentation, denial rate, residence in a minority tract, and debt-to-income ratio. It concludes that the unexplained portion suggests that bias in mortgage lending cannot be ruled out.
AUTHORS: Smith, Marvin M.; Hevener, Christy Chung
Importance of financial econometrics for financial innovation and financial stability: a speech for the Inaugural Conference of the Society for Financial Econometrics, New York University Stern School of Business, June 5, 2008
Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, for the Inaugural Conference of the Society for Financial Econometrics, New York University Stern School of Business, New York, NY, June 5, 2008
AUTHORS: Plosser, Charles I.
\\"Cream-skimming\\" in subprime mortgage securitizations : which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007?
Depository institutions may use information advantages along dimensions not observed or considered by outside parties to "cream-skim," meaning to transfer risk to naive, uninformed, or unconcerned investors through the sale or securitization process. This paper examines whether "cream-skimming" behavior was common practice in the subprime mortgage securitization market prior to its collapse in 2007. Using Home Mortgage Disclosure Act data merged with data on subprime loan delinquency by ZIP code, the authors examine the bank decision to sell (securitize) subprime mortgages originated in 2005 and 2006. They find that the likelihood of sale increases with risk along dimensions observable to banks but not likely observed or considered by investors. Thus, in the context of the subprime lending boom, the evidence supports the cream-skimming view.
AUTHORS: Henderson, Christopher; Calem, Paul S.; Liles, Jonathan