Here's What Really Caused The Housing Crisis

Since Lawrence Kudlow and Stephen Moore are now advisors to Trump, Mark Thoma explains yet again Here's what really caused the housing crisis.

“A lot of the narrative of the financial crisis has been that this [loan] origination process was broken, and therefore a lot of marginal and unsustainable borrowers got access to funding. In our opinion, the facts don’t line up with this narrative. … Calling this crisis a subprime crisis is a misnomer. In fact, it was a prime crisis.”

There are other reasons to doubt that subprime borrowers were responsible for the financial crisis. For one, a large number of subprime mortgages originated in non-CRA banks, and “none of the 300+ mortgage originators that imploded were depository banks covered by the CRA.”

As noted in a study by McClatchy from 2008, “Federal Reserve Board data show that more than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions;” “private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year;” and “only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics.”

A second question to ask is why, if the CRA and subprime borrowing were the problem, did a very similar housing bubble and financial crisis occur in scores of other countries that didn’t have legislation like this?

A third argument, the one Kudlow and Moore cite, is that declining lending standards by Fannie and Freddie brought about by the requirements of the CRA helped fuel subprime loans. But once again, this argument doesn’t stand up to scrutiny.

As Barry Ritholtz pointed out in 2011, “The relative market share of Fannie Mae and Freddie Mac dropped from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent as the bubble was developing in 2005–06.”

The reason Fannie and Freddie were losing market share is that loan standards on mortgages issued by private lenders were falling. Fannie and Freddie eventually adjusted some of their conditions for obtaining a loan in an attempt to prevent a further loss in market share, but it’s very clear that they were followers, not leaders, in the erosion of lending standards.

Update: More here: Why these economists say the usual explanation for the financial crisis is wrong