Sunday, July 26, 2009

Cleveland Fed: Ten myths about subprime mortgages

From the Cleveland Fed:

Myth 1: Subprime mortgages went only to borrowers with impaired credit
Myth 2: Subprime mortgages promoted homeownership
Myth 3: Declines in home values caused the subprime crisis in the United States
Myth 4: Declines in mortgage underwriting standards triggered the
subprime crisis
Myth 5: Subprime mortgages failed because people used homes as ATMs
Myth 6: Subprime mortgages failed because of mortgage rate resets
Myth 7: Subprime borrowers with hybrid mortgages were offered (low) “teaser rates”
Myth 8: The subprime mortgage crisis in the United States was totally unexpected
Myth 9: The subprime mortgage crisis in the United States is unique in its origins
Myth 10: The subprime mortgage market was too small to cause big problems

1 comment:

Anonymous said...

Great read and thanks for the link.

That said, how many if not all of these qualify as "myths" I'm finding hard to understand. Perhaps, it's the somewhat odd definition of "cause" the authors use in the summary as opposed to the full article. Does a cause have to be necessary? Sufficient? Is something not a cause because it only contributed along with all the others to the problem?
Treating a cause as a factor whose presence makes the end result more likely to occur than if it were absent, #3 "declines in mortgage underwriting standards" was definitely a cause.

The full article suggests quite strongly that underwriting standards started low and just went lower and lower until the tide of home prices receded and everyone got to see who was swimming naked.

On an unrelated note, the section dealing with the CRA is pretty worthless. Not that any of their conclusions are necessarily wrong, but the proof offered is more than lacking. Looking at where CRA loans might have been originated instead of where they actually were reveals nothing. Obviously low to moderate income neighborhoods where CRA loans might have been made would have higher default rates along with the declining mortgage underwriting standards that led to more and more loans in such areas (and other areas to a lesser extent).

But if the mortgages were not issued by a GSE or CRA-regged institution, what does that say about the CRA? And the idea that looking at the spread between the income level of the loans and of the greater statistical metropolitan area will isolate loans originated to help CRA compliance just assumes what the section intends to prove.

Reasons exist, but it makes no sense to attribute this difference to the CRA while the entire rest of the article documents widespread declines in originating standards in all areas and income levels. The paper clearly shows originators/securitizeres looking for ways to deliver more loans and at higher yields to investors at the same time as the number of un-mortgaged potential customers and their demand for loans grew smaller and smaller. So they went harder after low income borrowers that should have never gotten loans in the first place. Does it follow that the CRA caused them to do this? Hardly.