Subprime lending and the housing bubble: Tail wags dog?
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
That’s the title of a provocative and seemingly counterintuitive study by UC Irvine’s Paul Merage School of Business Center for Real Estate. It wasn’t the selling of home loans to credit-risky borrowers that sparked the phenomenal run-up in prices per se, it was ‘the changing credit regime’ beginning in 2003 that inflated the bubble -- and Fannie and Freddie seem to be have major, albeit unwitting roles.
When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.
And helping to fuel them on was an enthusiastic administration pushing the ‘dream of homeownership’ without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices ‘with momentum characteristic of a bubble,’ the study says.
Rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the ‘tail’) of the economic, political, and regulatory environment characteristic of the early- to mid-2000’s (the ‘dog’).
‘We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors including the market,’ says Kerry Vandell, the UCI finance professor and director of its real estate center who was the lead researcher on the study. ‘But we were really blown away when Fannie’s and Freddie’s continuing presence in the market was shown to be so important.’
Co-authoring the study was doctoral student Major Coleman IV and Michael LaCour-Little, a Cal State Fullerton finance professor who theorized in a provocative 2006 research paper that prepay penalties saved borrowers money.
The latest study was partly funded by the Mortgage Bankers Assn., the National Assn. of Realtors’ Subprime Crisis Research Consortium and -- drumroll please -- Freddie Mac.
--Annette Haddad, Times staff writer
Questions? Comments? Tips? E-mail annette.haddad@latimes.com