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Publication Date

March 2010

Author(s)

Jonathan Spader, Roberto G. Quercia

Client/Funder

Ford Foundation

This article uses a unique demonstration program to examine the interaction of CRA-related lending with subprime and FHA lending activity. Specifically, the empirical analysis identifies the extent to which the origination of a CRA mortgage substitutes for FHA and subprime originations during the period 1998-2006.

This article uses a unique affordable home loan demonstration program, the Community Advantage Program (CAP), to examine the interaction of Community Reinvestment Act (CRA)-related lending with subprime and Federal Housing Administration lending activity.

Specifically, the empirical analysis identifies the extent to which the origination of a CRA mortgage substitutes for FHA and subprime originations during the period 1998-2006.

The results suggest that in the years prior to the expansion of the subprime market (1998-2001), the origination of CAP loans carried a small substitution effect with respect to FHA originations, with little to no impact on subprime originations. Conversely, during the years of the subprime industry’s growth (2002-2006), CAP originations substituted at a much higher rate for high-cost originations.

These findings are suggestive about the dynamic role of community reinvestment lending within the changing context of the broader mortgage market.

To the extent that CRA originations carry lower foreclosures risk than many subprime products, they also carry implications for the extent of neighborhood externalities in the wake of the subprime foreclosure crisis.


Topics(s): Affordable Homeownership, Community Advantage Program, Mortgage Finance, Other