It’s been 10 years since the beginning of the housing market crash. Over time, the standard narrative has placed blame squarely on banks who doled out subprime mortgages, and the borrowers who were unable to pay off the debt. But a new working paper from the National Bureau of Economic Research found a very different story: Buyers with average or above average credit scores were responsible for the majority of foreclosures, not subprime borrows.
Researchers used anonymized credit score data and determined that the default rate for borrowers in the lowest quartile actually fell by half, from 70% to 35% during the bust cycle. Meanwhile, wealthy investors were getting second or third mortgages to flip houses during the boom. These loans had much higher values, and buyers were more likely to default since they weren’t at risk of losing their primary residence. In fact, researchers determined that “the rise in mortgage delinquencies is virtually exclusively accounted for by real estate investors.”
To be sure, toxic subprime mortgages were devastating for low income and minority communities. While some protections are now in place to prevent future predatory lending, this new research should encourage the housing industry to think critically about how to make sure we don’t repeat other past mistakes.
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