Yesterday, I had a post about “liar loans” and some surprising information that had come out of research into a fairly large bucket of such loans. The real point of the article was that we really have a lot of preconceived ideas about what caused the mortgage meltdown, but unfortunately little data to back up that conventional wisdom
This isn’t a small point since we are spending many billions of dollars trying to correct the situation based on what might well be bad data. Moreover, we are framing a lot of dicsussion around what the mortgage market should be allowed to do in the future on the basis of these biases. So, it’s really important to try and divine some truth about what really did happen and avoid the temptation to make the truth fit our preconceptions.
Today’s evidence of just how much we may be wrong about some things comes from Yuliya Demyanyk of the Cleveland Fed. The title of her paper is “Ten Myths About Subprime Mortgages.” I’ll list the myths below but you need to go and spend a little time reviewing her reasoning.
Myth 1: Subprime mortgages went only to borrowers with impaired credit
Myth 2: Subprime mortgages promoted homeownership
Myth 3: Declines in home values caused the subprime crisis in the United States
Myth 4: Declines in mortgage underwriting standards triggered the subprime crisis
Myth 5: Subprime mortgages failed because people used homes as ATMs
Myth 6: Subprime mortgages failed because of mortgage rate resets
Myth 7: Subprime borrowers with hybrid mortgages were offered (low) “teaser rates”
Myth 8: The subprime mortgage crisis in the United States was totally unexpected
Myth 9: The subprime mortgage crisis in the United States is unique in its origins
Myth 10: The subprime mortgage market was too small to cause big problems
Are you gritting your teeth yet? I know, it flies in the face of all of the commentary but this certainly isn’t the first time and it won’t be the last that we thought we knew why something happened only to find out that our reasoning was about ninety degrees off.
I’ll readily concede that Ms.Demyanyk’s analyses might contain some flaws. Certainly, they aren’t the definitive answer but it makes no sense to close our eyes to data that might put a different spin on events than the one with which we have become comfortable.
more: here (Link To The Paper)