Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class
Duke University; Duke Innovation & Entrepreneurship Initiative
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
Tuck School of Business at Dartmouth
Tuck School of Business Working Paper No. 2546427
Duke I&E Research Paper No. 15-8
This paper highlights the importance of middle-class and high-FICO borrowers for the mortgage crisis. Contrary to popular belief, which focuses on subprime and poor borrowers, we show that mortgage originations increased for borrowers across all income levels and FICO scores. The relation between mortgage growth and income growth at the individual level remained positive throughout the pre-2007 period. Finally, middle-income, high-income, and prime borrowers all sharply increased their share of delinquencies in the crisis. These results are consistent with a demand-side view, where homebuyers and lenders bought into increasing house values and borrowers defaulted after prices dropped.
Number of Pages in PDF File: 53
Keywords: Mortgage credit, mortgage origination, financial crisis, income
JEL Classification: E44, E51, G21, L85, O51, R21, R30, D30, G21
Date posted: January 9, 2015 ; Last revised: March 22, 2016
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