6 ms·

Credit Growth and the Financial Crisis: A New Narrative [pdf]

69 points by pulisse 9y ago

pulisse 9y ago
tl;dr: the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and these borrowers accounted for a disproportionate share of defaults
- DaiPlusPlus 9y ago
  FTFA: "[according to] a new NBER working paper". Working papers haven't undergone peer-review yet, though I'll concede the NBER probably is in a good position to determine the causes of the crisis.
- lifeisstillgood 9y ago
  Edit: reread nber paper So the argument seems to be that high credit score individuals with more than one first mortgage (flippers) rose from 20% to 35% in 02-07, and that rise accounts entirely for the excess defaults in 07. It also accounts for the rise in "east" delinquency - people who aren't living in a home are more willing to walk away from it. It's kind of convincing, but I don't think it lets mortgage fraud from lenders off the hook (i.e. Lax enforcement of scoring and approval etc) Basic message is don't give commercial investments the same rights or protections as domestic mortgages - but if you are going to adjust mortgage rules the best ones to focus on are again, fraud by lenders. And of course, reductions in securitisation of opaque assets and the misalignment of incentives of lenders and ... oh we have done this to death. We have not learnt anything.
pmorici 9y ago
Do people really associate subprime loans with poor people? This article is the first time I've ever seen subprime described that way. I've always taken it to mean any loan where the borrow is stretching themselves too thin or where there is low or no down payment.
- hermanradtke 9y ago
  Subprime is typically associated with low credit scores. Low credit scores are associated with poor people.
  - deelowe 9y ago
    Subprime means high debt/credit OR low credit scores. There was a lot more of the former than the latter (flippers, speculators, developers, etc.) Prior to the crash.
- gumby 9y ago
  You're correct as far as it goes, but that boom was associated with an enormous number of so-called "ninja" loans (No Income, No Job: Approved). The NBER paper says the volume of non-subprime loans dwarfed the subprime ones. "non-subprime" loans aren't "prime" of course unless you're a big bank or megacorp.
  - nradov 9y ago
    I've also seen "ninja" defined as: No Income, No Job or Assets.
    - mgkimsal 9y ago
      i worked at a mortgage company during that period and internally we used the term "no doc loan" - no documentation (re: proof of income) was required. Felt very odd.
    - gamechangr 9y ago
      I think the word you are going for it "NINA". I was a Real estate investor for a decade.' NINA - stands for "No Income No Asset". My lender joked it was "the liars loan". People would just state their income. I had a person who wanted to partner with me and he said he brings in 400k a year. We pulled his taxes and he had only reported 80k! He tried to tell us "I'm good for the 150k buy-in" but we weren't having it. I recall my buddy joking "We aren't lenders. You have to actually have the money you say you do."
droopyEyelids 9y ago
Wait wait wait. No one thought poor borrowers that caused a nationwide housing market crash. Furthermore, I don't think house flippers created an industry that needed an ever-increasing supply of loans for securitization and corrupted lending institutions with that demand either.
- maxxxxx 9y ago
  I have heard the line several times that the housing crisis was mainly caused by the government forcing banks to give loans to poor people who defaulted then.
  - prostoalex 9y ago
    Those loans are still extended today, and there are lenders like LendingClub or Prosper catering to those needs in personal loans market. However, with their typical junk rating they're a small portion of the market, interesting only to investors with an appetite for risk. The systemic trouble started when instead of junk those loans were rated AAA, which then opened the door to pension funds and institutional bond funds.
    - zeamaize 9y ago
      I wouldn't describe lending club and prosper as junk loans. I have money invested there because I feel it's a better social use than gambling on the stock market. I see good solid 5% returns. Most of the loans are repaid quickly.
- tasty_freeze 9y ago
  You would be wrong. It is a widely held belief that the government forced lenders to give mortgages to unqualified poor people, and that is what caused the crash. Here is pushback against that thinking from 2008! It still has a lot of traction, probably as much as it did in 2008. With a bit of effort I could probably find a similar article from every year between then and now. http://www.slate.com/articles/business/moneybox/2008/10/subprime_suspects.html http://www.slate.com/articles/business/moneybox/2008/10/subp... Edit: from 2013 http://www.businessinsider.com/republican-explanation-of-2008-crash-is-false-2013-2 http://www.businessinsider.com/republican-explanation-of-200...
osrec 9y ago
It was similar in the UK. House flippers fuelled the bubble. Eventually, it got so big, that even the common man on a reasonable salary was struggling to afford a home. Mortgages still got approved, and sure, people with lower incomes would be the first to default, but they were clearly not the cause.
- mmerlin 9y ago
  That sounds like Sydney and Melbourne nowadays
- rusk 9y ago
  +1 Irish experience as well. It was people with 2nd and 3rd houses that all defaulted. People with homes will usually do whatever it takes to pay them off.
lifeisstillgood 9y ago
Blaming house flippers is like blaming a pastry chef for my extra pounds on the waistline - it's a side show, to the real cause. oil prices reached record levels before 2007 financial crash. Then western economies were being forced into recession by the rising cost of energy and responded by hiking interest rates - that then triggered mortgage defaults and over-leveraged borrowers throughout economy collapsed. We are and always have been reliant on oil - it's not determinisim but it is dependency. When oil prices go mad, so do we, and if we are over stretched it breaks us. We are still over stretched (personal credit at all time highs etc) And oil has very few places to go but up over long term.
- yuhong 9y ago
  Yea, I think the petrodollar was invented not long after we got off the gold standard.
c3534l 9y ago
It's silly to think there is a single thing that caused the recession. It's a nice narrative to have a singular reason and lets you tell a story. But there's a million reasons it happened.
Digory 9y ago
This is an odd way of framing it (the NBER article isn't quite so slanted). If you were leveraged in 2008 you were more likely have (on paper) a high credit score (with assets far in excess of liabilities). But you were also going to get hammered, and be more likely to hit a cashflow wall. If you had a job, one house, and one loan, you probably weathered the storm. It's a little odd to frame that as "poor" vs. "investors," though. The anecdote that always struck me from Lewis's Big Short was that toward the end, lenders were pushing recent immigrants to start no-money-down rental empires, because recent immigrants haven't been here long enough to have credit hiccups -- so they start with high credit scores, even at modest incomes. And for every high credit score loan, the CDOs could launder multiple C-grade loans into a AAA security. The systemic problem was bad securitization math, which led to unsustainable returns in housing investments. A significant element of that was enticing average Joes to over-leverage themselves like "investors." (The idea that Community Reinvestment Act lending was anything as systemic as the rating errors is totally bogus, as far as I can tell).
deleted 9y ago
[deleted]
dang 9y ago
We changed the url from https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ https://qz.com/1064061/house-flippers-triggered-the-us-housi... to the original source. Hopefully this will make for a more substantive, less sensationalized discussion.
bmh_ca 9y ago
Rapid expansion of credit strongly correlates with insolvency. There's an excellent paper by Gudrun Johnson back when she worked at the IMF that captures it in the sovereign insolvency context.

69 points by pulisse 9y ago

tl;dr: the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and these borrowers accounted for a disproportionate share of defaults

DaiPlusPlus 9y ago
FTFA: "[according to] a new NBER working paper". Working papers haven't undergone peer-review yet, though I'll concede the NBER probably is in a good position to determine the causes of the crisis.
lifeisstillgood 9y ago
Edit: reread nber paper So the argument seems to be that high credit score individuals with more than one first mortgage (flippers) rose from 20% to 35% in 02-07, and that rise accounts entirely for the excess defaults in 07. It also accounts for the rise in "east" delinquency - people who aren't living in a home are more willing to walk away from it. It's kind of convincing, but I don't think it lets mortgage fraud from lenders off the hook (i.e. Lax enforcement of scoring and approval etc) Basic message is don't give commercial investments the same rights or protections as domestic mortgages - but if you are going to adjust mortgage rules the best ones to focus on are again, fraud by lenders. And of course, reductions in securitisation of opaque assets and the misalignment of incentives of lenders and ... oh we have done this to death. We have not learnt anything.

pmorici 9y ago

Do people really associate subprime loans with poor people? This article is the first time I've ever seen subprime described that way. I've always taken it to mean any loan where the borrow is stretching themselves too thin or where there is low or no down payment.

hermanradtke 9y ago
Subprime is typically associated with low credit scores. Low credit scores are associated with poor people.
- deelowe 9y ago
  Subprime means high debt/credit OR low credit scores. There was a lot more of the former than the latter (flippers, speculators, developers, etc.) Prior to the crash.
gumby 9y ago
You're correct as far as it goes, but that boom was associated with an enormous number of so-called "ninja" loans (No Income, No Job: Approved). The NBER paper says the volume of non-subprime loans dwarfed the subprime ones. "non-subprime" loans aren't "prime" of course unless you're a big bank or megacorp.
- nradov 9y ago
  I've also seen "ninja" defined as: No Income, No Job or Assets.
  - mgkimsal 9y ago
    i worked at a mortgage company during that period and internally we used the term "no doc loan" - no documentation (re: proof of income) was required. Felt very odd.
  - gamechangr 9y ago
    I think the word you are going for it "NINA". I was a Real estate investor for a decade.' NINA - stands for "No Income No Asset". My lender joked it was "the liars loan". People would just state their income. I had a person who wanted to partner with me and he said he brings in 400k a year. We pulled his taxes and he had only reported 80k! He tried to tell us "I'm good for the 150k buy-in" but we weren't having it. I recall my buddy joking "We aren't lenders. You have to actually have the money you say you do."

droopyEyelids 9y ago

Wait wait wait. No one thought poor borrowers that caused a nationwide housing market crash. Furthermore, I don't think house flippers created an industry that needed an ever-increasing supply of loans for securitization and corrupted lending institutions with that demand either.

maxxxxx 9y ago
I have heard the line several times that the housing crisis was mainly caused by the government forcing banks to give loans to poor people who defaulted then.
- prostoalex 9y ago
  Those loans are still extended today, and there are lenders like LendingClub or Prosper catering to those needs in personal loans market. However, with their typical junk rating they're a small portion of the market, interesting only to investors with an appetite for risk. The systemic trouble started when instead of junk those loans were rated AAA, which then opened the door to pension funds and institutional bond funds.
  - zeamaize 9y ago
    I wouldn't describe lending club and prosper as junk loans. I have money invested there because I feel it's a better social use than gambling on the stock market. I see good solid 5% returns. Most of the loans are repaid quickly.
tasty_freeze 9y ago
You would be wrong. It is a widely held belief that the government forced lenders to give mortgages to unqualified poor people, and that is what caused the crash. Here is pushback against that thinking from 2008! It still has a lot of traction, probably as much as it did in 2008. With a bit of effort I could probably find a similar article from every year between then and now. http://www.slate.com/articles/business/moneybox/2008/10/subprime_suspects.html http://www.slate.com/articles/business/moneybox/2008/10/subp... Edit: from 2013 http://www.businessinsider.com/republican-explanation-of-2008-crash-is-false-2013-2 http://www.businessinsider.com/republican-explanation-of-200...

osrec 9y ago

It was similar in the UK. House flippers fuelled the bubble. Eventually, it got so big, that even the common man on a reasonable salary was struggling to afford a home. Mortgages still got approved, and sure, people with lower incomes would be the first to default, but they were clearly not the cause.

mmerlin 9y ago
That sounds like Sydney and Melbourne nowadays
rusk 9y ago
+1 Irish experience as well. It was people with 2nd and 3rd houses that all defaulted. People with homes will usually do whatever it takes to pay them off.

lifeisstillgood 9y ago

Blaming house flippers is like blaming a pastry chef for my extra pounds on the waistline - it's a side show, to the real cause. oil prices reached record levels before 2007 financial crash. Then western economies were being forced into recession by the rising cost of energy and responded by hiking interest rates - that then triggered mortgage defaults and over-leveraged borrowers throughout economy collapsed. We are and always have been reliant on oil - it's not determinisim but it is dependency. When oil prices go mad, so do we, and if we are over stretched it breaks us. We are still over stretched (personal credit at all time highs etc) And oil has very few places to go but up over long term.

yuhong 9y ago
Yea, I think the petrodollar was invented not long after we got off the gold standard.

c3534l 9y ago

It's silly to think there is a single thing that caused the recession. It's a nice narrative to have a singular reason and lets you tell a story. But there's a million reasons it happened.

Digory 9y ago

This is an odd way of framing it (the NBER article isn't quite so slanted). If you were leveraged in 2008 you were more likely have (on paper) a high credit score (with assets far in excess of liabilities). But you were also going to get hammered, and be more likely to hit a cashflow wall. If you had a job, one house, and one loan, you probably weathered the storm. It's a little odd to frame that as "poor" vs. "investors," though. The anecdote that always struck me from Lewis's Big Short was that toward the end, lenders were pushing recent immigrants to start no-money-down rental empires, because recent immigrants haven't been here long enough to have credit hiccups -- so they start with high credit scores, even at modest incomes. And for every high credit score loan, the CDOs could launder multiple C-grade loans into a AAA security. The systemic problem was bad securitization math, which led to unsustainable returns in housing investments. A significant element of that was enticing average Joes to over-leverage themselves like "investors." (The idea that Community Reinvestment Act lending was anything as systemic as the rating errors is totally bogus, as far as I can tell).

deleted 9y ago

[deleted]

dang 9y ago

We changed the url from https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/ https://qz.com/1064061/house-flippers-triggered-the-us-housi... to the original source. Hopefully this will make for a more substantive, less sensationalized discussion.

bmh_ca 9y ago

Rapid expansion of credit strongly correlates with insolvency. There's an excellent paper by Gudrun Johnson back when she worked at the IMF that captures it in the sovereign insolvency context.