Two papers from the research department at the Boston Fed.
Borrowers did get adjustable-rate mortgages but the resets of those mortgages did not cause the wave of defaults that started the crisis in 2007. Indeed, to a first approximation, “exploding” mortgages played no role in the crisis at all. Arguments that deceit by investment bankers sparked the crisis are also hard to support. Compared to most investments, mortgage-backed securities were highly transparent and their issuers willingly provided a great deal of information to potential purchasers. These purchasers could and did use this information to measure the amount of risk in mortgage investments and their analysis was accurate, even ex post. Mortgage intermediaries retained lots of skin in the game. In fact, it was the losses of these intermediaries—not mortgage outsiders—that nearly brought down the financial system in late 2008. The biggest winners of the crisis, including hedge fund managers John Paulson and Michael Burry, had little or no previous experience with mortgage investments until some strikingly good bets on the future of the U.S. housing market earned them billions of dollars.
Why then did borrowers and investors make so many bad decisions? We argue that any story consistent with the 12 facts must have overly optimistic beliefs about house prices at its center.
languish in persistent delinquency, in which they neither cure their defaults nor lose their homes to foreclosure. In short, judicial intervention succeeds in temporarily reducing foreclosure by increasing the incidence of persistent delinquency. We show that persistently delinquent borrowers are unlikely to cure and that most eventually experience foreclosure. Over time, the foreclosure gap between judicial and power-of-sale states shrinks whereas the cure gap, or lack thereof, stays exactly the same. In other words, in the long run, a given number of defaults is expected to yield the same number of foreclosures regardless of the laws. These borrower-protection laws do not prevent foreclosure, they merely delay it.
My take on this is that attempts to prevent foreclosure merely set borrowers up to fail again. This raises the cost to lenders.
The problem with both of these papers is that they contradict the oppressed-oppressor narrative. The first paper says that borrowers and investors did not have bad mortgages foisted upon them by evil banks. Instead, everyone involved made assumptions about home prices that proved to be erroneous. The second paper says that treating delinquent borrowers as oppressed and trying to relieve the oppression with leniency is counterproductive.