Foreclosure Crisis Not Just Subprime : Economic Cycles Most Important?

Interesting - the foreclosure crisis due primarily to economic cycles. It seems there is some different opinions on this problem by a substantial number of economists that believe the Federal Reserve had a lot to do with this and the connections to the politicians in Washington.

Who's right? What seems to be the logical answer?

The U.S. Foreclosure Crisis Was Not Just a Subprime Event
Source: Les Picker, "The U.S. Foreclosure Crisis Was Not Just a Subprime Event," National Bureau of Economic Research, August 2015.

September 1, 2015

Most studies of the housing crisis of the last decade and the subsequent rise in defaults and foreclosures focus on subprime mortgages and only cover the period leading up to 2008. However, subprime loans represent only a small fraction of the housing market, usually around 15%, and most foreclosures occurred after 2008.

A new study reveals that the crisis was not solely a subprime sector event. Although, it started that way, it rapidly expanded into an event dominated by prime borrowers' loss of their homes. The study employs data that covers the years 1997-2012 and tracks all kinds of house purchase financing: prime, subprime, Federal Housing Administration and Veterans Administration.

The study's main findings: Between 2009 and 2012, 656,000 more prime than subprime borrowers lost their homes. Over the whole sample period twice as many prime borrowers as subprime borrowers lost their homes. Subprime borrowers never accounted for more than 21% of the market and the prime borrower share, around 60%, remained steady during the housing boom.

The main empirical breakthrough is that negative equity conditions can explain the difference in foreclosure and short sale outcomes of prime borrowers compared to all-cash owners, and it also explains the majority of subprime borrower distress cases.

The authors found that other factors such as housing quality, race, gender, buyer income, and speculator status did not have any significant impact; additionally, initial loan-to-value (LTV) had some influence but much less than current LTV. They conclude that the economic cycle was the most important explanation for the foreclosure phenomenon.