Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

This paper, by Ruben Hernandez-Murillo, Andra C Ghent and Michael T Owyang, explores whether affordable housing policies in the United States – the Community Reinvestment Act, and the eligibility cutoffs set by Government Sponsored Enterprises Fannie Mae and Freddie Mac – influenced origination or affected prices of subprime mortgages.  The authors use a regression discontinuity approach to analyse merged loan-level data on non-prime securitised mortgages, with individual and neighbourhood level data for California and Florida.  The paper concludes that there is no causal link between the emphasis on affordable housing either in the CRA or in the mandates of Fannie Mae and Freddie Mac, and the subprime crisis.  The paper offers an excellent summary of affordable housing legislation in the US, and offers a compelling methodology and conclusion for understanding the subprime crisis.  Critically, the paper establishes that affordable housing lending is NOT the same as subprime lending.

Download PDF