Did Prime Loans Cause the Mortgage Crisis?

Conventional wisdom holds that subprime loans were at the root of the mortgage crisis which dominated the first decade of this century and contributed to the worst financial calamity in more than 70 years.

But a new analysis of the mortgage crisis, which cost millions of families their homes and brought down storied financial institutions such as Lehman Brothers and Washington Mutual, suggests prime loans, not subprime, were the major driver and “the crisis was not solely, or even primarily, a subprime sector event.

subprime”That’s the conclusion of Fernando Ferreira and Joseph Gyourko of The Wharton School of the University of Pennsylvania in their paper “A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers From 1997 to 2012.” This paper was released in June by the National Bureau of Economic Research. Current LTVs, they said in their study, were the reason so many borrowers defaulted.

“There are only seven quarters at the beginning of the housing bust in which there were more homes lost by subprime borrowers than by prime borrowers,” Ferreira and Gyourko said.

According to their research, 39,094 more subprime borrowers than prime borrowers lost their homes from 3Q 2006 through 1Q 2008. The difference, the authors said, was completely reversed by the beginning of 2009 when 40,630 more prime than subprime borrowers lost their homes.

“Sharply higher subprime distress rates became evident early in the housing bust just as the previous literature showed,” the authors said. “However those high rates never affected anything close to a majority of the market. Moreover, loss rates among the much larger group of prime borrowers started to increase shortly thereafter – within a year.

Read more: The Gift of Hindsight: Did Prime Loans Cause the Mortgage Crisis? – DSNews

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