Community Replacement Act

Community Replacement Act

Subsidies to homeownership have disfavored renters through regressive regulations, lavishly subsidized bigger homes, and played no small role in the most crippling financial crisis and economic downturn since the Great Depression. If all that is not enough to turn you against these middle-class subsidies, you may be interested to learn that federal housing policy is also accelerating gentrification.

Diego Zuluaga’s work on the Community Reinvestment Act explores this unintended consequence. In the ’70s, Congress wanted to redress the legacy of rampant redlining, which left many black communities deprived of credit, homeownership, and middle-class stability. In their attempt to address the issue, they created the CRA, based on a simple plan:

Federal regulators… look at how much banks are lending to low-income borrowers (those who earn less than 80 percent of median income in their metropolitan area) and to those in low-income census tracts (below 80 percent of the area’s median income). The regulators assign a rating to each bank and take this rating into consideration when deciding on banks’ applications to expand or merge. Bad CRA performance can cost a bank billions of dollars in forgone business opportunities.

Notice that performance points are assigned based on either income or census tract. That second criterion is causing the problems.

Zuluaga finds that banks are accruing most of their CRA points through loans to people who only meet the location but not income qualification. He writes, “Of the more than $1.3 billion of CRA-eligible mortgage loans made in Washington in 2017, 65.5 percent went to borrowers whose incomes exceed 80 percent of the local median. Yet these mortgages earn banks CRA points because the borrowers reside in one of D.C.’s 88 eligible census tracts.” In simpler words, the majority of subsidized loans benefits richer people in poorer neighborhoods. Or, in even simpler words, the money is going to gentrifiers.

Now, reasonable people can disagree on how big a problem gentrification is. A recent study makes a compelling case that the modest displacement effects are offset by social benefits, like increased college enrollment, declining crime, and other quality of life indicators. On the other hand, even Lance Freeman (the founding father of gentrification sympathetic research) admits that inflated housing costs tend to eat up 61% of old stock residents’ income. Regardless of this broader debate, government programs probably should not subsidize gentrification, and government programs meant to compensate victims of discrimination certainly should not primarily benefit yuppies.

Past discrimination used housing wealth to drive racial inequality, but present policy should not assume housing wealth is the best way to redress that inequality. Policymakers in this space should investigate other compensations that do not rely on the inefficient delivery of an undiversified, bubble-prone asset.

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By |2019-07-30T12:02:43-07:00July 30th, 2019|Blog, Financial Regulation|