Cra and Financial Crisis
Table of Content Introduction 2 Real-life examples 2 Empirical cycle 2 Other concepts of Babbie, Gravetter and Forzano applied 2 Conclusion 2 References 2
Introduction
The burst of the United States housing market bubble initiated the worldwide financial crisis. Amongst all housing regulations, the community reinvestment act (CRA) may be the most significant. The act passed in 1977 to improve low-income households’ housing opportunities. As such, the act raised the incentives for banks to provide mortgages to low-income households (FFIEC, n.d.). Over time, several political administrations, like the George H.W. Bush-, Clinton- and George W. Bush-administration, changed the original act, adapting to new challenges in the housing market (Braunstein, 2008). However, as time passed, the act became less important for banks, as the products, mortgages, became more profitable. As a result, more and more financial institutions started offering mortgages to low-income classes. These so called subprime mortgages are often associated with high risks (Aalbers, 2009). This point of view can be concluded with the hypothesis that the CRA will be seen as a cause of the financial crisis.
Firstly, the different opinions and their respective arguments with regard to the hypothesis are illustrated. Secondly, an explanation is given on how these examples fit in the empirical cycle. Thirdly, three other concepts of Babbie, Gravetter and Forzano are applied to the examples. Finally, a conclusion is drawn with respect to the examples.
Real-life examples
As a result of the CRA, banks were rated, based on the number of loans given out to low-income households. A bad rating could have had severe consequences for a bank. The fact that the FED did not allow a Hartford, Connecticut bank to acquire a New Hampshire bank on CRA grounds demonstrates this. In order to keep their CRA ratings high, banks had to provide low-income classes with loans. In essence it can be
Introduction
The burst of the United States housing market bubble initiated the worldwide financial crisis. Amongst all housing regulations, the community reinvestment act (CRA) may be the most significant. The act passed in 1977 to improve low-income households’ housing opportunities. As such, the act raised the incentives for banks to provide mortgages to low-income households (FFIEC, n.d.). Over time, several political administrations, like the George H.W. Bush-, Clinton- and George W. Bush-administration, changed the original act, adapting to new challenges in the housing market (Braunstein, 2008). However, as time passed, the act became less important for banks, as the products, mortgages, became more profitable. As a result, more and more financial institutions started offering mortgages to low-income classes. These so called subprime mortgages are often associated with high risks (Aalbers, 2009). This point of view can be concluded with the hypothesis that the CRA will be seen as a cause of the financial crisis.
Firstly, the different opinions and their respective arguments with regard to the hypothesis are illustrated. Secondly, an explanation is given on how these examples fit in the empirical cycle. Thirdly, three other concepts of Babbie, Gravetter and Forzano are applied to the examples. Finally, a conclusion is drawn with respect to the examples.
Real-life examples
As a result of the CRA, banks were rated, based on the number of loans given out to low-income households. A bad rating could have had severe consequences for a bank. The fact that the FED did not allow a Hartford, Connecticut bank to acquire a New Hampshire bank on CRA grounds demonstrates this. In order to keep their CRA ratings high, banks had to provide low-income classes with loans. In essence it can be
References: Aalbers, M. (2009). Why the Community Reinvestment Act cannot be blamed for the subprime crisis. City & Community, 8 (3): 346-350. Babbie, E. (2005). The Basics of Social Research (3rd ed.). Belmont: Thomson Wads worth Braunstein, S. (2008). The Community Reinvestment Act, 13 February 2008. Retrieved 20 January 2010 from: http://www.federalreserve.gov/newsevents/testimony/braunstein20080213a.htm Carney, J. (2009a). Here’s how the Community Reinvestment Act led to the housing bubble’s lax lending, June 27, 2009. Retrieved 15 January, 2010 from http://www.businessinsider.com/the-cra-debate-a-users-guide-2009-6 Carney, J. (2009b). Sorry, folks, the CRA really did require crap lending standards, June 23, 2009. Retrieved 15 January, 2010 from http://www.businessinsider.com/sorry-folks-the-cra-really-did-require-crap-lending-standards-2009-6 Foote, C., Gerardi, K., Goette, L. & Willen, P., (2008). Journal of Housing Economics, 17: 291-305