Date on Honors Thesis



Political Science




The housing market bubble was created by market forces and exacerbated by government regulations. The government policies implemented incentivized certain behaviors by investors that exacerbated the housing bubble beyond what would have occurred “naturally.” The policy under analysis for this research is the Community Reinvestment Act (CRA) of 1995. The CRA made affordable-housing initiatives more enforceable and results-driven. These revisions produced unintended consequences in the economy in the form of incentives to give out risky loans. Statistical analysis through difference of means tests show that there is a low level of confidence in statistical significance between the CRA and increased real mortgage debt per capita; a statistically significant relationship between the CRA and increased debt-to-income ratio; and no impact on risk premium. These findings suggest that incentives were keeping the risk premium low when it should rise under normal circumstances.