Here's some more evidence against the declining lending standards theory of the crisis -- and support for the claim that it was the design itself, or existence, of subprime mortgages that played a seminal role in our housing woes.
In a new working paper, Dean Corbae and Erwan Quintin investigate the impact of the financial innovation that was the subprime mortgage. Maybe more importantly, they try to figure out any social benefit that may have been created by the ability to make lower down payments -- the key innovation that subprime made widely available.
Corbae and Quintin report that we'd have about 50% fewer foreclosures had subprime mortgages not been made available:
In our simulations, when mortgages with low initial payments do not become available before the price collapse, the increase in foreclosure rates are 50% lower on impact and 25% lower at the peak of the crisis than our experiment where LIP [low initial payment] mortgages are available.
The reason for this, as has been pointed out more than once, is that subprime loans were very sensitive to home prices.
Ironically (and maybe tragically), Corbae and Quintin also report that people most likely to benefit from the introduction of subprime were ones with higher incomes:
Somewhat surprisingly at first glance, agents born with low income prospects benefit the least from mortgage innovation. The reason for this is that in all likelihood they will remain renters their entire life. The gains are so small, in fact, that in a model where house prices respond to demand for housing, mortgage innovation is likely to have a negative impact on agents who are born poor. Mortgage innovation primarily benefits the agents who are at the margin between renting and owning or need some financial help to buy bigger houses.
This seems a little obvious to me (excepting the social utility findings, which while intuitive are welcome).
Anyone who didn't think that subprime mortgages were unrelated to our current woes is either a paid flack or stupid.
What is more interesting is the underlying structural changes that allowed banks and others to make loans where the recipients ability to pay was shall we say, less than a primary concern, which inexorably lead to subprime mortgages being issued.
Even more interesting is how to fix it as it will apparently involve acknowledging that not all financial innovation is good, no matter how much more profitable it may be.
This seems a little obvious to me (excepting the social utility findings, which while intuitive are welcome).
Anyone who didn't think that subprime mortgages were unrelated to our current woes is either a paid flack or stupid.
What is more interesting is the underlying structural changes that allowed banks and others to make loans where the recipients ability to pay was shall we say, less than a primary concern, which inexorably lead to subprime mortgages being issued.
Even more interesting is how to fix it as it will apparently involve acknowledging that not all financial innovation is good, no matter how much more profitable it may be.
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