Credit Growth and the Financial Crisis: A New Narrative

Abstract

This paper studies the evolution of mortgage debt and defaults between 2001 and 2013 using a large, nationally representative panel of credit reports. Our analysis suggests that the 2007-2009 spike in mortgage defaults was concentrated among borrowers with mid to high credit scores. Among those borrowers, we find that real estate investors played a critical role in the rise of delinquencies and foreclosures. We also examine the determinants of geographical variation in the evolution of mortgage debt and defaults. We find that areas with a concentration of low credit score borrowers tend to be urban and displayed strong real estate investment activity by high credit score borrowers, though demographic factors such as age distribution and educational attainment may account for their greater exposure to the 2007-2009 recession. Our findings suggest that, borrower characteristics, such as the credit score, may be less important than behavior, such as investment activity, in driving mortgage defaults, thus providing an alternative narrative that challenges the large role of subprime credit for the crisis.

Keywords: Real estate investors; Financial crisis; foreclosure crisis; subprime mortgages

JEL Classification: G51; E32