Boston Fed: Mortgages Not to Blame for Housing Crisis

It wasn’t irresponsible mortgage brokers or unscrupulous securities professionals who caused the housing crisis: it was price overestimation, argue policy advisors of the Boston Federal Reserve Bank in a report published last week.

“The dominant explanation claims that well-informed mortgage insiders used the securitization process to take advantage of uninformed outsiders,” the report states. “The typical narrative follows a loan from a mortgage broker through a series of Wall Street intermediaries to an ultimate investor. According to this story, …deceit starts with a mortgage broker, who convinces a borrower to take out a mortgage that initally appears affordable. Unbeknownst to the borrower, the interest rate on the mortgagewill reset to a higher level after a few years, and the higher monthly payment will force theborrower into default.”

However, the theory presents 12 facts that debunk the common belief. Rather than the mortgage market being to blame, over-inflated idea of house price increases were the real culprit, the authors, Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen write.

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“If both groups believe that house prices would continue to rise rapidly for the foreseeable future, then it is not surprising to find borrowers stretching to buy the biggest houses they could and investors lining up to give them the money….The bubble theory therefore explains the foreclosure crisis as a consequence of distorted beliefs rather than distorted incentives.”

View the Fed report.

Written by Elizabeth Ecker

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  • So unreasonable expectations are to blame.  It sounds like the fed is trying to find fault outside of government oversight.  Who can blame them?

  • This conclusion is pure fantasy. Read Michael Lewis’ book “The Big Short”. Sit in on some of the mortgage fraud trials, review the files on Realtors being sanctioned for misconduct. You will come to the conclusion that everybody down the line was incentivized to milk the thing for all it was worth. I agree that many people believed that the bubble would never burst. But to make the numbers work on over-inflated prices, uninformed and unqualified borrowers were encouraged to lie on mortgage applications and appraiser were pressured to “hit the number”. I watched loan officers tell borrowers taking high interest sub-prime loan loans that APR wasn’t their actual rate it meant “average person’s rate” and theirs was much lower. Borrowers who felt they couldn’t afford the payment were told “That’s OK. in a couple months the home will be worth a lot more and we can refinance you at a much lower rate. I know a Realtor who encouraged credit challenged borrowers to take out a “stated income loans”, i.e., liar’s loans,  and on the application put in the number that they hoped to be making in the future because “that’s what lenders look at”..

    My person observations are that there was so much fraud, misrepresentation and bad advice that there aren’t enough prisons to lock everybody up so only the worst offenders…multi-million dollar scams were prosecuted.  

    • Mozilo got what he desired?  (LOL) — RIGHT!!!!  — (;-)  (;-)

      The housing bubble was the propaganda cover for mortgage corruption.  A take off of a Hitler axiom goes — Tell a big lie enough to enough people and soon it will become the truth.  Without the corruption in the mortgage market (including appraisers) there would have been nothing like the so called “housing bubble” we had.  

      The secondary market intentionally closed their eyes so that they would have no responsibility when the whole thing collapsed and collapse it did.  Making AIG the primary insurer was a brilliant way to cover up the real risk.  

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