Mortgage Lending and the Housing Crisis.

• Author: Van Doren, Peter
• Position: Working Papers: A SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION'S READERS - Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom - Book review

Mortgage Lending and the Housing Crisis

"Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom," by James Conklin, W. Scott Frame, Kristopher Gerardi, and Haoyang Liu. August 2018. SSRN #3240413.

A standard explanation of last decade's financial crisis blames "loose" lending standards by mortgage originators, particularly for lower-income borrowers, combined with the repackaging of mortgages into securities sold to investors falsely informed by misguided AAA ratings. In previous columns (Spring 2011, Fall 2012) I discussed papers presenting evidence inconsistent with this argument. Those papers compared default rates in census tracts that barely qualified for low-income housing goals with default rates in those tracts that didn't qualify. The papers found no differences or worse outcomes among the tracts whose incomes were too high and did not qualify. In the Fall 2018 issue, I discussed a paper that found that the cumulative losses (through 2013) on all subprime residential mortgage-backed securities (MBS) issued between 1987 and 2008 were dramatically lower for subprime AAA-rated MBS (0.42%) than all AAA-rated MBS (2.3%).

This paper examines whether credit expansion to marginal borrowers was associated with housing price appreciation. The authors examine subprime mortgages (defined as mortgages to borrowers...