According to Federal Reserve Bank of Cleveland senior research economist Yuliya Demyanyk, "On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms."
Then she follows that up with a list of Ten Myths about Subprime Mortgages, and I have to tell you: I am not impressed. Many of the "myths" she lists are actually not myths -- and her explanations prove that they aren't myths.
Take number three, for example: "Declines in home values caused the subprime crisis in the United States." Ms. Demyanyk refutes this by writing that "The decline in home values only revealed the problems with subprime mortgages; it did not cause the defaults. Research shows that the quality of newly originated mortgages was worsening every year between 2001 and 2007; the crisis was brewing for many years before house prices even started slowing down. But because the housing boom allowed homeowners to refinance even the worst mortgages, we did not see this negative trend in loan quality for years preceding the crisis."
Yes, exactly: Rising property values allowed people with loans they couldn't afford to refinance or sell to avoid default. When property values stopped rising, you got to see who was swimming naked and the default rates went through the roof. So yes, actually, declining home values are what caused lax subprime lending standards to morph into a crisis. When people could refinance, there was no crisis. So how is that a myth?
Then myth number four is even more bizarre: "Declines in mortgage underwriting standards triggered the subprime crisis." What? She writes: "Actually, the criteria that are associated with larger default rates, such as debt-to-income or loan-to-value ratios, were, on average, worsening a bit every year from 2001 to 2007, but the changes between the 2001–2005 and 2006–2007 periods were not sufficiently high to explain the near 100 percent increase in default rates for loans originated in these years."
That's because those were people who bought at the peak and couldn't refinance because of declining property values. See also: myth number three.
I could go on and on but the point is that these "myths" are not really myths. They're actually facts. The housing bubble was a Ponzi scheme that fell apart once home prices stopped climbing and the people with crap mortgages had nowhere else to turn. Most people actually understand it pretty well.
Ten subprime mortgage myths from the Fed (some of which aren't really myths)