
Credit Growth and the Financial Crisis: A New Narrative [pdf] - pulisse
http://papers.nber.org/tmp/80614-w23740.pdf
======
Digory
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).

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pmorici
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.

~~~
wpietri
I have repeatedly had people on the US right explain to me that the 2008
mortgage crisis was due to government-mandated loans to poor people.

As an example, here's some 2008 discussion of this thesis:
[http://www.slate.com/articles/business/moneybox/2008/10/subp...](http://www.slate.com/articles/business/moneybox/2008/10/subprime_suspects.html)

Here's a 2016 discussion of similar themes: [http://ritholtz.com/2016/06/no-
cra-not-cause-financial-crisi...](http://ritholtz.com/2016/06/no-cra-not-
cause-financial-crisis/)

That never matched my understanding, but it was practically an article of
faith for them.

~~~
concede_pluto
There's a strange theory that banks and brokers had to be forced to
reluctantly write bad loans, when in fact they were desperate to write more
once they had a way to dump the risk on clueless speculators.

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

------
osrec
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.

~~~
rusk
+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.

------
pulisse
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_

~~~
lifeisstillgood
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.

------
c3534l
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.

------
bmh_ca
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.

------
lifeisstillgood
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
Yea, I think the petrodollar was invented not long after we got off the gold
standard.

------
droopyEyelids
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.

~~~
tasty_freeze
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/subp...](http://www.slate.com/articles/business/moneybox/2008/10/subprime_suspects.html)

Edit: from 2013 [http://www.businessinsider.com/republican-explanation-
of-200...](http://www.businessinsider.com/republican-explanation-
of-2008-crash-is-false-2013-2)

~~~
Spooky23
The two things aren't mutually exclusive. The government absolutely did
strongly encourage writing loans to less conventional borrowers, with the
implied threat of civil rights investigations.

At first, the encouragement was tied to home ownership programs that pre-
screened applicants and provided training for owning a home. My dad ran one of
these for a few years, and they were remarkably successful at transitioning
section 8 recipients to homeowners and often homeowner/landlords.

Later, they decided that wasn't fast enough and they skipped the education and
screening and just wrote loans.

