Posts Tagged ‘banks’
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Tags: banks, crisis, high-income, housing, irrational exuberance, mortgages, poor
One of the persistent narratives about the 2008 financial crash is that low-income people (with help from the government) took out mortgages to buy homes they couldn’t afford. And when they inevitably defaulted on their mortgage payments (and government-sponsored lending agencies were declared bankrupt), the entire financial system came tumbling down. In other words, poor people caused the crash.
New research by Manuel Adelino, Antoinette Schoar, and Felipe Severino serves to bury that myth. According to the authors,
The large majority of mortgage dollars originated between 2002 and 2006 are obtained by middle income and high income borrowers (not the poor). While there was a rapid expansion in overall mortgage origination during this time period, the fraction of new mortgage dollars going to each income group was stable. In other words, the poor did not represent a higher fraction of the mortgage loans originated over the period. In addition, borrowers in the middle and top of the distribution are the ones that contributed most significantly to the increase in mortgages in default after 2007.
In other words, the mortgage crisis that provoked the crash was not caused by poor people “living beyond their means.”
So, let’s stop blaming poor people for a crisis that originated elsewhere—among lenders and borrowers at the other end of the distribution of income whose “irrational exuberance” led them to get caught up in a spiral of increasing levels of mortgage debt premised on an unsustainable increase in housing prices that served as the basis of an intricate web of financial derivatives.
A bubble, which had nothing to do with poor people, that inevitably burst.
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