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:
