Contrary to one of the dominant myths of the credit crisis, a study from the Federal Reserve Bank of St. Louis demonstrates that lending standards did not deteriorate during the heights of the mortgage boom. This has important implications for the debate about the impact of the Community Reinvestment Act on the housing bubble.
The study from the Fed examines underwriting standards on the subprime mortgage originations from 1998 to 2007.
“Contrary to popular belief, we find no evidence of a dramatic weakening of lending standards within the subprime market. We show that while underwriting may have weakened along some dimensions, it certainly strengthened along others,” the authors write.
How does this square with the widespread belief that weakened lending standards contributed to the mortgage bubble? The most likely explanation is that credit standards had already weakened by the late 1990s.
One of the persistent claims of the folks who say the CRA had nothing to do with the bubble is that the mortgage bubble inflated long after the CRA was enacted. The CRA was modified in the 1990s to make if far more effective at changing lending patterns, however, and the Fed’s new study suggests that it was then that lending standards weakened–not in the years when the bubble was actually inflating.