A look back: what we now know about the causes of the US mortgage crisis

Abstract

This article reviews what we know about the causes of the US mortgage crisis, almost a decade after the crisis began. The paper summarizes the key forces that led to the crisis or, in some cases, to the development of a fundamentally fragile mortgage market, whose vulnerability helped enable the crisis. While some factors, such as federal policies pre-empting state consumer protection laws, were near-term spurs to higher levels of subprime lending, others – such as the migration of lending activity from savings and loans to less regulated mortgage companies – led to the development of a mortgage market that was more risk-loving, less regulated, and more prone to cataclysmic failure.

Keywords:

• mortgages
• foreclosure
• housing
• housing crisis

Notes

1. As of 20 December 2013, Worldcat, a leading bibliographic search engine of books in libraries around the world, listed over 700 books listing the keywords ‘subprime crisis’, ‘mortgage crisis’, or ‘foreclosure crisis’ and that were published between 2008 and 2013. When limiting the search to books appearing in at least five listed libraries, the number of books still exceeded 250. A Google scholar search of ‘foreclosure crisis’ between 2008 and 2013 yields over 3600 articles and books. A similar search on ‘mortgage crisis’ yielded over 14,000 articles and books, as did a search on ‘subprime crisis'.

2. The CRA places an obligation on commercial banks to serve the credit needs of their communities. The law provides for regulators defining ‘assessment areas’ for each institution but does not prescribe any specific amount of lending but banks are expected to offer their loans to all parts of their assessment area and not exclude lower income neighbourhoods or borrowers. The Federal Housing Enterprises Safety and Soundness Act of 1992, among other things, established a system of formal affordable housing goals for the GSEs that were proposed and implemented by the GSE's mission regulator, the U.S. Department of Housing and Urban Development.

3. In the USA, the dominant credit scoring system, the Fair Isaac Corporation or ‘FICO’ score, ranges from 300 to 850. Traditionally, individuals with credit scores above 720 are considered to have very strong credit, with scores between 620 and 680 considered somewhat marginal, and scores below 620 classified as ‘subprime’ in nature. Credit scores are based on payment history, amounts owed, length of credit history, the amount of recent credit activities, and types of credit.