The Center for Real Estate at UCIrvine completed a study revealing that defaulting borrowers did not cause the subprime dip as we’ve been told relentlessly.
You’ll be interested to know that the researchers we’re shocked to discover the cause directly points to Fannie and Freddie.
“We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors influencing the market, but we were really blown away when Fannie’s and Freddie’s continuing presence in the market was shown to be so important,” said Kerry Vandell, UCI finance professor and Center for Real Estate director.
The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.
“But in 2003, political, regulatory and economic factors – including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios – forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital.
“The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products. Such products included adjustable-rate mortgages with low initial “teaser” rates, Alt-A loans that did not require income verification and nonowner-occupied investor products. This borrowing climate provided previously marginal borrowers with additional access to credit. The credit market shift led to a record increase in total mortgage volume and pushed up home prices with momentum characteristic of a bubble.” [story]
It’s a kick isn’t it? …political, regulatory and economic factors…
Mother Nature Knows Best
Here’s the warning from UC’s School of Business to the free market jingoists in Washington and Manhattan telling us that nature knows best and we should just leave the economy alone:
“It’s important policymakers consider [looser underwriting standards and increased tolerance for riskier, high-yield loan products] when they attempt to shape the markets in the future.”
Policymakers shaping markets? Shaping our ‘free’ markets? And also shaping the bogus and underhanded manipulation of an electorate commonly known as the United States of America.