Government intervention in mortgage credit markets: Increases in lending to minority and low-income communities, reductions in neighborhood crime from homeownership, and potential efficiency gains for banks from regulation

The Community Reinvestment Act (CRA) was enacted in 1977 to encourage banks to reinvest into the low-to-moderate income (LMI) areas from which they received their deposits. I exploit an enforcement increase in 1989 to determine whether: (1) the CRA succeeded in increasing mortgage credit to targeted areas, (2) increased homeownership improves neighborhoods through decreased crime, and (3) compliance with the CRA affected bank profitability.; In Chapter 1, using Home Mortgage Disclosure Act (HMDA) data, I create a new dataset of bank geographic lending in California from 1981 to 2000, to test whether enforcement was responsible for increases in lending to targeted neighborhoods. While targeted banks did increase their relative lending to LMI neighborhoods, greater increases were actually found in minority areas, with the largest increases in African-American neighborhoods. Since enforcement changes to the CRA and fair lending laws occurred at the same time, the findings suggest that while the CRA has had some success, fair lending may have played a larger role in increasing credit to historically neglected neighborhoods.; In Chapter 2, I combine HMDA data with an LAPD dataset on crimes in Los Angeles to investigate the relationship between mortgage credit and crime. Given their endogenous relationship, I use the 1989 enforcement change as an instrument to predict mortgage credit levels across census tracts. IV strategies suggest that increased mortgage credit significantly decreases violent crime, in particular homicides and robberies. However, while generally insignificant results are found for property crimes, increased credit is actually associated with a significant increase in larcenies.; In Chapter 3, I empirically examine on net the direction of bank profitability of targeted banks, and whether these banks changed portfolio compositions over time to strategically avoid compliance. Relative to non-targeted banks, targeted banks did not experience any significant decreases in profitability over the shorter or longer term. Further, these banks did not shift towards commercial loans or government bonds. However, large banks did decrease their share of charge-offs related to real estate lending. It appears that banks did not bear any inordinate costs of complying with the CRA, but may have responded by better assessing risk.