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.
“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