Myths From Subprime Mortgage Crisis

Here is a noteworthy article by Yuliya Demyanyk of the Federal Reserve of Cleveland debunking popular explanations of the recent subprime mortgage crisis.

Ms. Demyanyk's intro: (bold highlights mine)

``On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms."

Most of the misconceptions had been aggravating circumstances read as causal effects, logical fallacies or outright cognitive biases at work.

The ten myths:

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

Read her insightful revelations here.

My favorite quote from Yuliya Demyanyk's striking comments (oddly from a quasi government agency): From myth 2.(bold highlights mine)

``The availability of subprime mortgages in the United States did not facilitate increased homeownership. Between 2000 and 2006, approximately one million borrowers took subprime mortgages to finance the purchase of their first home. These subprime loans did contribute to an increased level of homeownership in the country—at the time of mortgage origination. Unfortunately, many homebuyers with subprime loans defaulted within a couple of years of origination. The number of such defaults outweighs the number of first-time homebuyers with subprime mortgages.

``Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership."

In short, inflationary "boom bust" policies has not only failed to achieve its goals, it has led to the sharp deterioration of the society's standard of living!!!