Since the subprime mortgage disaster hit the fan in 2007, conventional wisdom has been operating under the assumption that greedy, misleading lenders have preyed on gullible and often risky buyers to lure them into subprime mortgages that would eventually lead to massive foreclosure rates and a devastated real estate and mortgage market. But a new study led by UC Irvine’s Paul Merage School of Business Center for Real Estate suggests that subprime loan products themselves may not be the primary factor behind the huge rise and fall of U.S. home prices in the past decade. Instead, the researchers, headed by UCI finance professor Kerry Vandell, found that it was Fannie Mae's and Freddie Mac's massive pullback from the credit market in 2003—a result of accounting controversies and consequent political pressure—and their replacement by aggressive mortgage securities issuers in the private sector, that caused the damage. These two factors, mixed with a large number of eager but risky would-be homeowners, led to a skyrocketing in mortgage volume that, according to Vandell, pushed prices into "bubble" territory. The team analyzed the markets in 20 U.S. metropolitan areas, using 1998-2008 housing and mortgage data from sources like First American LoanPerformance, the S&P/Case-Shiller Home Price Indices, and the Federal Housing Finance Board. They summarize their findings as follows:
[W]e find evidence that the changing credit regime that took place in late 2003, as the GSE’s pulled back from the market for political, regulatory, and market-based reasons, is suggested to be a primary factor reducing the dominance of market fundamentals in affecting house price returns and creating the price-momentum conditions characteristic of a “bubble”.
In other words:
Rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the “tail”) of the economic, political, and regulatory environment characteristic of the early- to mid-2000’s (the “dog”).
Still, let's not roll out the apologies to subprime lenders just yet: As the L.A. Times's real estate blog notes, partial funding for the study came from none other than the Mortgage Bankers Assn., the National Assn. of Realtors' Subprime Crisis Research Consortium, "and -- drumroll please -- Freddie Mac." Though CNN/Money writer Chris Isidore may be smiling right now.
