Developing the Erdmann Housing Tracker to more comprehensively quantify the causes of high housing costs has radicalized me a bit. When I wrote “Building from the Ground Up”, I still was operating with a model of the recession where the Fed originally caused a nominal slow-down that was deeper than it needed to be, and then, after their big error from September to December 2008, mortgage suppression added a second, deeper recession that mostly hit working class homeowners, which has been either ignored or written off as part of a larger, inevitable wealth shock.
Was tightening lending something imposed by regulators or just a market decision (lenders didn’t want to become the next WaMu)? If the first, what regulations or agencies were involved?
In 2006 and 2007 there was a mixture of changing sentiment and tightening regulations. By 2008, the federal agencies had taken over almost the entire market. And, then in August 2008, Fannie and Freddie were put under direct federal control. There is a complex dance between regulations, policies, and private market lending standards. But, even looking beyond that, by 2008, if private standards had become too tight, public policies could have been aimed at reversing it. And, instead they were aimed at reversing it. The public agencies became much tighter. And, eventually, this was solidified through the Qualified Mortgage patch, in which the regulatory liabilities on mortgages with default risk are much lighter if the mortgages are accepted by the public agencies, and the public agencies continue to have very tight underwriting.
Would you argue that lending was too loose to lower credit borrowers prior to this tightening? Weren't lenders giving away loans to anyone that could breathe and those loans were being sold in CMBS issuance?
There were definitely financial shenanigans before 2008, and loose underwriting.
There are 3 levels at which I would push back on that, though.
1) The most disruptive financial instruments (eg "The Big Short", etc.) were synthetic CDOs which didn't require new mortgages. They repeatedly referenced existing mortgages. This all gets mushed up, in the conventional telling, into a story of "excesses", which I think misses some very important distinctions. The financial securities that blew up were created during the housing bust, not the bubble, and the conventional wisdom is hopelessly confused about this. Basically the entire CDO mortgage boom, and especially the synthetic CDO boom, happened in the middle contractionary period in Figure 1 above.
2) The change in underwriting mostly appears to have favored unsophisticated investors, etc. This isn't a conclusion I had expected or look for, but that was the original discovery years ago that drew me into this research. There is surprisingly little evidence in the standard sets of national data of a decline in homeowner qualifications, incomes, etc. from the mid-1990s to 2007. I go into that quite a bit in "Shut Out". I know it's surprising, but I don't think we can pretend the data says something it doesn't to make it match our anecdotal experience.
3) That being said, I did attribute some price appreciation to mortgage access in my paper "Reassessing the Role of Supply.....", but it played a secondary role to supply constraints. The connection between loose lending and home prices has been GREATLY overestimated. And the poorer neighborhood in Atlanta in Figure 2 above is an example of how I would compare the scale of the effects of pre-2008 lending on home prices to the scale of the effects of the much more egregious tightening of lending standards that followed.
Was tightening lending something imposed by regulators or just a market decision (lenders didn’t want to become the next WaMu)? If the first, what regulations or agencies were involved?
In 2006 and 2007 there was a mixture of changing sentiment and tightening regulations. By 2008, the federal agencies had taken over almost the entire market. And, then in August 2008, Fannie and Freddie were put under direct federal control. There is a complex dance between regulations, policies, and private market lending standards. But, even looking beyond that, by 2008, if private standards had become too tight, public policies could have been aimed at reversing it. And, instead they were aimed at reversing it. The public agencies became much tighter. And, eventually, this was solidified through the Qualified Mortgage patch, in which the regulatory liabilities on mortgages with default risk are much lighter if the mortgages are accepted by the public agencies, and the public agencies continue to have very tight underwriting.
Would you argue that lending was too loose to lower credit borrowers prior to this tightening? Weren't lenders giving away loans to anyone that could breathe and those loans were being sold in CMBS issuance?
There were definitely financial shenanigans before 2008, and loose underwriting.
There are 3 levels at which I would push back on that, though.
1) The most disruptive financial instruments (eg "The Big Short", etc.) were synthetic CDOs which didn't require new mortgages. They repeatedly referenced existing mortgages. This all gets mushed up, in the conventional telling, into a story of "excesses", which I think misses some very important distinctions. The financial securities that blew up were created during the housing bust, not the bubble, and the conventional wisdom is hopelessly confused about this. Basically the entire CDO mortgage boom, and especially the synthetic CDO boom, happened in the middle contractionary period in Figure 1 above.
2) The change in underwriting mostly appears to have favored unsophisticated investors, etc. This isn't a conclusion I had expected or look for, but that was the original discovery years ago that drew me into this research. There is surprisingly little evidence in the standard sets of national data of a decline in homeowner qualifications, incomes, etc. from the mid-1990s to 2007. I go into that quite a bit in "Shut Out". I know it's surprising, but I don't think we can pretend the data says something it doesn't to make it match our anecdotal experience.
3) That being said, I did attribute some price appreciation to mortgage access in my paper "Reassessing the Role of Supply.....", but it played a secondary role to supply constraints. The connection between loose lending and home prices has been GREATLY overestimated. And the poorer neighborhood in Atlanta in Figure 2 above is an example of how I would compare the scale of the effects of pre-2008 lending on home prices to the scale of the effects of the much more egregious tightening of lending standards that followed.