Commenter Handle is skeptical of the revisionist view that investor loans rather than subprime lending fueled the housing bubble and bust.
how does debt to high risk borrowers stay constant while everyone knows that underwriting standards dropped a lot? Why wouldn’t a drop in standards have scooped up a lot of marginal borrowers and expanded the debt in that category?
1. The loosening in underwriting standards may not have been as deep and widespread as people have come to believe.
2. Perhaps looser standards did not draw in many borrowers, because people self-rationed. Most people fear taking on a lot of debt, even if lenders are offering it to them.
3. Perhaps the authors of the revisionist papers are deceiving themselves by the way that they look at trends in debt among homeowners. If debt was going up for some borrowers and down for others, then on average you might not see a debt increase. But the debt might have increased among borrowers less able to carry it. Note that the ability to carry debt depends on many factors, including factors that are not observable to economists researching the issue.
4. An increase in house purchases by affluent speculators and an increase in house purchases by sub-prime borrowers are not mutually exclusive explanations of the boom and bust. It could be that both phenomena together were important. The cycle would have been much less extreme if either of those phenomena had not taken place.
5. Perhaps the biggest shock was not the loosening of standards prior to 2008 but the tightening of standards subsequently. As the “subprime crisis” unfolded, politicians hit lenders with new rules and, more important, harsh rhetoric about “predatory lending” that discouraged lenders from offering a mortgage loan to anyone who actually needed one (lending to people with plenty of assets was still ok). Perhaps if underwriting standards had merely reverted to those of 2002, home prices would have stabilized at a higher level.
I lean toward (3) and (4). Maybe someone (Kevin Erdmann?) can talk me into (5).