Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class
We provide new facts on the debt dynamics leading up to the financial crisis of 2007. Earlier research suggests that distortions in the supply of mortgage credit, evidenced by a decoupling of credit flow from income growth, may have caused the rise in house prices and the subsequent housing market collapse. This paper shows that the increase in mortgage originations was shared across the whole distribution of borrowers, and that middle- and high-income borrowers made up the majority of originations even at the peak of the boom. Compared to prior years, middle- and high-income borrowers (not the poor), as well as those with medium and high credit scores, made up a much larger share of delinquencies in the crisis relative to earlier years. We show that the relation between individual mortgage size and income growth during the housing boom was always strongly positive, also in line with previous periods (and independent of how income is measured). These results are most consistent with an expectations based view of the financial crisis in which both homebuyers and lenders were buying into increasing housing values and defaulted once prices dropped.
We thank Nittai Bergman, Markus Brunnermeier, Ing-Haw Cheng, Matthieu Gomez, Raj Iyer, Amir Kermani, Andrew Lo, Sendhil Mullainathan, Debarshi Nanda, Jonathan Parker, Adriano Rampini, David Robinson, Steve Ross, Amit Seru, Andrei Shleifer, Jeremy Stein, Jialan Wang and seminar participants at Berkeley, Cass, Brandeis, CFPB Research Forum, Dartmouth, Duke, Harvard Business School, Maryland, McGill, MIT, NBER Corporate Finance, Princeton, UNC and Imperial College London for thoughtful comments. This paper was previously circulated under the title “Changes in Buyer Composition and the Expansion of Credit during the Boom.” The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Manuel Adelino & Antoinette Schoar & Felipe Severino, 2016. "Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class," Review of Financial Studies, vol 29(7), pages 1635-1670.