Anatomy of a Train Wreck: Causes of the Mortgage Meltdown
HOUSING AMERICA: BUILDING OUT OF A CRISIS, Benjamin Powell, Randall Holcomb, eds., Transaction Publishers, 2009
37 Pages Posted: 8 Aug 2008 Last revised: 10 Sep 2008
Why did the mortgage market melt-down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be? It is the thesis of this paper that, in an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s. The decline in mortgage underwriting standards was universally praised as an 'innovation' in mortgage lending by regulators, academic specialists, GSEs, and housing activists. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The bubble increased the number of housing speculators with estimates indicating that one quarter of all home sales were speculative sales prior to the bubble bursting. The recent rise in foreclosures is not related to the subprime/prime distinction since both markets had similar size increases in foreclosures that occurred at exactly the same time. Instead, the adjustable-rate/fixed-rate distinction is the key to understanding the rise in foreclosures. This is consistent with speculators turning and running when housing prices stopped rising. It is not consistent with the nasty-subprime-lender hypothesis currently considered to be the cause of the mortgage meltdown.
Keywords: mortgages, meltdown. foreclosure, flexible lending, defaults, subprime
JEL Classification: E50, E60, E65, G20, G28, I3, J70, K20, L32, L50, E58, G24, R21
Suggested Citation: Suggested Citation