Arnold Kling  

Loose Mortgage Credit

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Credit Spreads and the Fed... Correction: Men, Women, Kids, ...

Atif R. Mian and Amir Sufi write,


We demonstrate that high 1996 latent demand zip codes experience a dramatic relative reduction in mortgage denial rates during this time period. Simultaneous with the reduction in denial rates, high 1996 latent demand zip codes experience much larger increases in the debt to income ratio of accepted mortgage applications. The source of this increase in credit availability is disintermediation: the fraction of mortgages sold by originators in the secondary market experiences a sharp relative increase for high latent demand zip codes from 2001 to 2005. Finally, the interest spread between mortgages to low credit quality borrowers and high quality borrowers narrows to historical lows during this period. Taken together, these facts demonstrate a sharp relative increase in the supply of mortgages to high 1996 latent demand zip codes from 2001 to 2005.

They measure latent demand for mortgages as the percentage of mortgage applications turned down in that particular zip code in 1996. What they are saying is that in zip codes where lots of folks were turned down in 1996, you see lenders approving many more loans, and at lower risk spreads in 2001 through 2005, fueling the home price bubble. The lower risk spreads tells me that this was not predatory lending, but the opposite.

Keep this in mind when people say that better regulation could have prevented this problem. It sounds like what they are saying is that lenders charged exorbitant interest rates to hapless borrowers. In fact, lenders were guilty of charging borrowers too little for loans, as well as approving too many unqualified borrowers. If you think that alert regulators would have cracked down on lenders for providing too many home ownership opportunities to Americans, especially minorities, then you believe in a different political environment than what I remember.


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COMMENTS (5 to date)
Gary Rogers writes:

Thank you for the translation. I read that paragraph three times and was still scratching my head. Maybe what the economics profession needs is more translators.

Mr. Econotarian writes:

Indeed, neighborhood lending requirements put on the political pressure to not turn down loans.

What might be a useful regulation now is that mortgage originators must hold on to part of a loan before packaging it into and selling a mortgage-backed security, but I suspect people purchasing these today may be seeking more info from the originators than they would have a few years ago.

Steve Sailer writes:

Arnold,

As you may recall, there was a much publicized study by the Boston Fed around 1993 claiming that lenders were discriminating against minorities who wanted mortgages, and all sorts of pressure were brought to bear on the market. How big a role did this play in the subsequent over-expansion of credit?

Anthony writes:

Keep this in mind when people say that better regulation could have prevented this problem. It sounds like what they are talking is that lenders charged exorbitant interest rates to hapless borrowers. In fact, lenders were guilty of charging borrowers too little for loans, as well as approving too many unqualified borrowers.

I dunno, I think there were a lot of loans made which I'd consider "predatory". Low teaser rates and/or negative amortization which reset to payment schedules the borrower is pretty much guaranteed not to be able to afford (and often with prepayment penalties which make refinancing impossible).

Would regulation have prevented this problem from happening? Probably not completely, but it probably could have cut it down. But I'm still not in favor of it, because for every one regulation of this sort the government passes which prevents a problem, they'll pass five others which prevent solutions. Besides, when I became an adult I gained the right to choose for myself what is a good deal and what is a bad deal.

David writes:

There are some interesting stats at Google Answers on the length of time mortgages are held, and how that's changing:

http://answers.google.com/answers/threadview?id=781768
Mortgages---Statistics on actual length of time held
Mortgage Statistics

Worth a look.

David

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