I happened to be looking at this Mian & Sufi paper from 2014, which is a stark reminder of the blindness of the economics academy coming out of the Great Recession.
I am thoroughly persuaded by your work on the issue of the mortgage crackdown, but I don't remember reading if you have identified any specific "smoking guns" that explain the shift. Do you know of any new explicit policy(ies) that have explanatory value or has the crackdown been more of a downstream effect of the generalized moral panic that took hold? Put differently, do you see the mortgage crackdown as a straightforward regulatory story or a messier, sociological one (if such a distinction can even be made)?
There is the reduced form approach vs. the structural model approach. I tend to rely on reduced form (a sharp change in the mortgage lending to lower credit scores in 2008 was associated with large, peculiar, otherwise unexplainable new trends in home prices) because the data is so clear there. Taking a structural model approach, the Guidance on Nontraditional Mortgages from the Fed that was updated in 2006 probably was an important factor ending the subprime boom, but I think the consequences of that are small relative to the crackdown on local banks and the federal agencies after 2007. There were updates to the Truth in Lending Act from 2008 through 2010, ending up being included in the 2010 Dodd-Frank regulations. Those regulations maintained the move to tight standards permanently. I used to think Dodd-Frank was a timely trigger, because there are price trend changes at the time it was passed that suggest it was important, but there was also a generous first time homebuyer credit that expired right when Dodd-Frank passed, so it is hard to disentangle the causes of those price trends.
The change in credit scores on new mortgages happened immediately and sharply mainly over the course of 2008, so I don't think we can say that later regulatory changes did anything more than keep the new standards in place. And, it may be that the early changes in late 2007 and 2008 were somewhat informal. A form of self-protection as the agencies tried to maintain the favor of Hank Paulson and other aggressive regulators. It is clear, when you read the memoirs of the major players like Paulson that those pressures were severe. They are proud of having applied them. But, that makes it difficult to pin down exactly what the triggers were that led to tighter standards. I'm not sure that there is a written record of a new requirement issued in August of 2007 that we could point to as an obvious cause of the 40 point increase in the average credit score on new loans.
So, I tend to lean on the reduced form evidence, though I admit that can be less than satisfying.
Taking the other side of the issue, for a decade after 2008, there were homes that were renting for $1,200 all over the interior of the country that could be purchased with a $400 mortgage payment. Those who claim there was just a change in buyer or lender preferences have had the advantage of being given the benefit of the doubt, but I think that evidence makes those explanations especially ridiculous, requiring some elaborate explanation. Nobody has been required to make those elaborate explanations.
So, I can't do much about the double standard, and I can't necessarily create a hard-and-shut structural case for the change in standards. The pieces are there, but the timing isn't always perfect. But, I think the reduced form evidence is so strong that I think they should at least lead reasonable observers to stop using the double standard and to be more doubtful of the conventional explanations. And, then, that slowly seeps into one's thinking about all sorts of facts and conclusions about the various forms of evidence, and I think I need to depend on the reader to do that work themselves.
Thanks for the terrific, thorough reply! I phrased my question clumsily, but you walked exactly through the terrain I was wondering about.
I actually find the "reduced form" story quite satisfying. Probably partly because so many bad arguments about housing and the GFC are/were predicated on simplistic "structural models."
I lived for a time in St Louis, which is one reason I really respond to your analysis of housing markets like it that were functioning more or less normally before '08. There are SO many places like that and examining them as a sort of "control" provides such a corrective check on the warped thinking that has become widespread as the housing shortage has become more widespread and severe.
I am thoroughly persuaded by your work on the issue of the mortgage crackdown, but I don't remember reading if you have identified any specific "smoking guns" that explain the shift. Do you know of any new explicit policy(ies) that have explanatory value or has the crackdown been more of a downstream effect of the generalized moral panic that took hold? Put differently, do you see the mortgage crackdown as a straightforward regulatory story or a messier, sociological one (if such a distinction can even be made)?
Good question.
There is the reduced form approach vs. the structural model approach. I tend to rely on reduced form (a sharp change in the mortgage lending to lower credit scores in 2008 was associated with large, peculiar, otherwise unexplainable new trends in home prices) because the data is so clear there. Taking a structural model approach, the Guidance on Nontraditional Mortgages from the Fed that was updated in 2006 probably was an important factor ending the subprime boom, but I think the consequences of that are small relative to the crackdown on local banks and the federal agencies after 2007. There were updates to the Truth in Lending Act from 2008 through 2010, ending up being included in the 2010 Dodd-Frank regulations. Those regulations maintained the move to tight standards permanently. I used to think Dodd-Frank was a timely trigger, because there are price trend changes at the time it was passed that suggest it was important, but there was also a generous first time homebuyer credit that expired right when Dodd-Frank passed, so it is hard to disentangle the causes of those price trends.
The change in credit scores on new mortgages happened immediately and sharply mainly over the course of 2008, so I don't think we can say that later regulatory changes did anything more than keep the new standards in place. And, it may be that the early changes in late 2007 and 2008 were somewhat informal. A form of self-protection as the agencies tried to maintain the favor of Hank Paulson and other aggressive regulators. It is clear, when you read the memoirs of the major players like Paulson that those pressures were severe. They are proud of having applied them. But, that makes it difficult to pin down exactly what the triggers were that led to tighter standards. I'm not sure that there is a written record of a new requirement issued in August of 2007 that we could point to as an obvious cause of the 40 point increase in the average credit score on new loans.
So, I tend to lean on the reduced form evidence, though I admit that can be less than satisfying.
Taking the other side of the issue, for a decade after 2008, there were homes that were renting for $1,200 all over the interior of the country that could be purchased with a $400 mortgage payment. Those who claim there was just a change in buyer or lender preferences have had the advantage of being given the benefit of the doubt, but I think that evidence makes those explanations especially ridiculous, requiring some elaborate explanation. Nobody has been required to make those elaborate explanations.
So, I can't do much about the double standard, and I can't necessarily create a hard-and-shut structural case for the change in standards. The pieces are there, but the timing isn't always perfect. But, I think the reduced form evidence is so strong that I think they should at least lead reasonable observers to stop using the double standard and to be more doubtful of the conventional explanations. And, then, that slowly seeps into one's thinking about all sorts of facts and conclusions about the various forms of evidence, and I think I need to depend on the reader to do that work themselves.
Thanks for the terrific, thorough reply! I phrased my question clumsily, but you walked exactly through the terrain I was wondering about.
I actually find the "reduced form" story quite satisfying. Probably partly because so many bad arguments about housing and the GFC are/were predicated on simplistic "structural models."
I lived for a time in St Louis, which is one reason I really respond to your analysis of housing markets like it that were functioning more or less normally before '08. There are SO many places like that and examining them as a sort of "control" provides such a corrective check on the warped thinking that has become widespread as the housing shortage has become more widespread and severe.
Keep up the great work!