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Was Subprime Lending Really to Blame for Great Recession?

New research is dispelling the myth that subprime lending was the major culprit in the housing boom during the early 2000s. Furthermore researchers from the Federal Reserve Bank of New York are also emphasizing that subprime loans were also not necessarily at higher risk for fraud. 

This “new narrative” is important for policymakers hoping to stave off a similar housing boom and bust as they may not need to be concentrating on subprime borrowers as much as previously thought. 

“Our findings run counter to the traditional narrative of the 2000s housing boom: namely, that the growth in subprime home purchases led to the growth in house prices too,” said James Conklin, W. Scott Frame, Kristopher Gerardi, and Haoyang Liu, in a post titled, “Did Subprime Borrowers Drive the Housing Boom?” on the Federal Reserve Bank of New York’s Liberty Street Economics blog. 

As evidence that subprime lending did not cause housing price boom, research shows that the increase in subprime lending and the elevation in home prices did not occur in the same places. 

Home prices grew most dramatically in the west, the northeast, and Florida. Subprime lending was most prevalent in the midwest and the Ohio River Valley. 

There is actually a “negative correlation between the growth in house prices and the increase in subprime share of home purchase mortgages at the county level over this period,” the researchers stated. 

One then, clearly could not have directly caused the other on a large scale. Instead, rising prices likely “priced out” many subprime borrowers in many markets. 

Another possible misperception cleared up by the New York Fed research is whether subprime loans were more likely to be fraudulent. The research shows that appraisal fraud was not typical of subprime loans. 

Incidences of inflated appraisals did not increase over time during the housing boom years. They also were not concentrated in areas with a high prevalence of subprime loans, and in areas that experienced high price growth, inflated appraisals were less prevalent among subprime borrowers than among prime borrowers. 

About Author: Krista F. Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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