January 9, 2017
Fascinating read from MIT Sloan, challenging a central assumption of the housing crisis:
While all types of people participated in the crisis, borrowers defaulting on bigger mortgages were responsible for a greater dollar amount in defaults. The researchers found that the top quintile of borrowers by income were responsible for 13 percent of delinquent mortgage debt in 2003. That share increased to 23 percent by 2006. Meanwhile, the bottom quintile of borrowers saw their share of delinquent mortgaged debt drop from 22 percent in 2003 to 11 percent in 2006. The shift in the middle was less pronounced, but tells the same story. And the researchers found a similar shift in the share of delinquent mortgage dollars when segmenting borrowers by credit score.
“Given that it’s such a systemic event across income groups and especially in the middle class, it points to the fact that households as well as banks really believed in this house price appreciation and thought that it was sustainable,” Schoar said in an interview. “And they acted on this feeling that they were richer because their home was worth more. Once the economy slows down, then it becomes tougher for people to pay their mortgages, but also they have less incentive to pay them if the house is underwater. It points to the fact that this was a house price bubble that you could say most people in the economy seem to have bought into.”