We
are constantly learning new stuff about the housing bubble — and some
of the new stuff contradicts the old. This is obviously important,
because the bubble led to the 2008-2009 financial crisis and Great
Recession. What we don’t understand may one day come back to bite us.
There’s
a standard and widely shared explanation of what caused the bubble. The
villains were greed, dishonesty and (at times) criminality, the story
goes. Wall Street, through a maze of mortgage brokers and
securitizations, channeled too much money into home buying and building.
Credit standards fell. Loan applications often overstated incomes or
lacked proper documentation of creditworthiness (so-called no-doc
loans).
The poor were the main
victims of this campaign. Scholars who studied the geography of mortgage
lending found loans skewed toward low-income neighborhoods. Subprime
borrowers were plied with too much debt. All this fattened the revenue
of Wall Street firms or Fannie Mae and Freddie Mac, the
government-sponsored housing finance enterprises. When home prices
reached unsustainable levels, the bubble did what bubbles do. It burst.
Now
comes a study that rejects or qualifies much of this received wisdom.
Conducted by economists Manuel Adelino of Duke University, Antoinette
Schoar of the Massachusetts Institute of Technology and Felipe Severino
of Dartmouth College, the study — recently published by the National Bureau of Economic Research — reached three central conclusions.
First,
mortgage lending wasn’t aimed mainly at the poor. Earlier research
studied lending by Zip codes and found sharp growth in poorer
neighborhoods. Borrowers were assumed to reflect the average
characteristics of residents in these neighborhoods. But the new study
examined the actual borrowers and found this wasn’t true. They
were much richer than average residents. In 2002, home buyers in these
poor neighborhoods had average incomes of $63,000, double the
neighborhoods’ average of $31,000.
Second,
borrowers were not saddled with progressively larger mortgage debt
burdens. One way of measuring this is the debt-to-income ratio: Someone
with a $100,000 mortgage and $50,000 of income has a debt-to-income
ratio of 2. In 2002, the mortgage-debt-to-income ratio of the poorest
borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers
also remained stable during the housing boom. The essence of the boom
was not that typical debt burdens shot through the roof; it was that
more and more people were borrowing.
Third,
the bulk of mortgage lending and losses — measured by dollar volume —
occurred among middle-class and high-income borrowers. In 2006, the
wealthiest 40 percent of borrowers represented 55 percent of new loans
and nearly 60 percent of delinquencies (defined as payments at least 90
days overdue) in the next three years.
If
these findings hold up to scrutiny by other scholars, they alter our
picture of the housing bubble. Specifically, they question the notion
that the main engine of the bubble was the abusive peddling of mortgages
to the uninformed poor. In 2006, the poorest 30 percent of borrowers
accounted for only 17 percent of new mortgage debt. This seems too small
to explain the financial crisis that actually happened.
It
is not that shoddy, misleading and fraudulent merchandising didn’t
occur. It did. But it wasn’t confined to the poor and was caused, at
least in part, by a larger delusion that was the bubble’s root source.
During
the housing boom, there was a widespread belief that home prices could
go in only one direction: up. If this were so, the risks of borrowing
and lending against housing were negligible. Home buyers could enjoy
spacious new digs as their wealth grew. Lenders were protected. The
collateral would always be worth more tomorrow than today. Borrowers who
couldn’t make their payments could refinance on better terms or sell.
This
mind-set fanned the demand for ever bigger homes, creating a permissive
mortgage market that — for some — crossed the line into unethical or
illegal behavior. Countless mistakes followed. One example: The Washington Post recently reported
that, in the early 2000s, many middle-class black families took out
huge mortgages, sometimes of $1 million, to buy homes now worth much
less. These are upper-middle-class households, not the poor.
It’s
tempting to blame misfortune on someone else’s greed or dishonesty. If
Wall Street’s bad behavior was the only problem, the cure would be
stricter regulatory policing that would catch dangerous characters and
practices before they do too much damage. This seems to be the view of
the public and many “experts.”
But
the matter is harder if the deeper cause was bubble psychology. It
arose from years of economic expansion, beginning in the 1980s, that
lulled people into faith in a placid future. They imagined what they
wanted: perpetual prosperity. After the brutal Great Recession, this
won’t soon repeat itself. But are we forever insulated from bubble
psychology? Doubtful.
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