Yeah, the Right-Wing Line Was Bullsh*t: Low-Income Loans Didn't Cause the Financial Crisis
You knew it and I knew it, but here's new research from Duke, MIT, etc...
http://www.cbsnews.com/news/loans-to-low-income-households-did-not-cause-the-financial-crisis
Low-income loans didn't cause the financial crisis
What caused the housing bubble and collapse of the financial system? Many fingers have pointed to a lack of regulation, financial innovation that didn't live up to its promises of risk-sharing and risk-reduction, and low interest rates from the Fed, which created an excess of liquidity.
Another cause that's often cited says the financial crisis was the result of government pressure to make subprime home loans to those at the lower end of the income scale. But recent work from the National Bureau of Economic Research provides no support for that claim.
The typical narrative is that government, through the Community Reinvestment Act (CRA) and Fannie Mae/Freddie Mac, caused lenders to reduce standards in order to make these loans. That in turn led to an abundance of loans to people who could not afford to repay them. These loans went into default in large numbers, and that fueled the financial crisis.
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However, the new evidence from Manuel Adelino of the Fuqua School of Business at Duke University, Antoinette Schoar of the Tuck School of Business at Dartmouth College and Felipe Severino of the Sloan School of Business at MIT undermines this story. In their paper, "Changes in Buyer Composition and theExpansion of Credit During the Boom," the researchers found:
"While there was a rapid expansion in overall mortgage origination during this time period, the fraction of new mortgage dollars going to each income group was stable. In other words, the poor did not represent a higher fraction of the mortgage loans originated over the period. In addition, borrowers in the middle and top of the distribution are the ones that contributed most significantly to the increase in mortgages in default after 2007. Taken together, the evidence in the paper suggests that there was no decoupling of mortgage growth from income growth where unsustainable credit was flowing disproportionally to poor people."
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