Maybe it is time to re-write some of the assumptions (examples of scapegoating are here and here and here) about which kinds of borrowers were culpable for the scores of foreclosures that have undermined our housing markets in the last few years.
It is worth a moment to check out some of the highlights from a new paper. In “Complex Mortgages,” a paper presented at the 2012 American Finance Association meeting, a review of loan performance data revealed that most of the uptake of the kinds of complicated mortgages came from higher-income borrowers with advanced educations.
Their analysis did not go into comparing performance of “complex mortgages” with other sub-prime products. Rather, they focused on who was getting those loans.
The research is the work of economists at the Federal Reserve Bank of Chicago and professors at three major business schools. They managed to link demographic data to the “liar-loans,” “no-doc loans,” and “Alt-A” products which were fairly instrumental in defaults.
Looking back, two problems stood out about these products. On the front end, underwriting was largely a non-entity. If you could fog a mirror, someone would give you a mortgage. On the back-end, once those loans were made, many were not fully-amortizing. The shift to products that didn’t amortize took place in 2005. Prior to that, most of those loans still required people to pay down principal. The “Four Ways to Pay” suite of loans from Wachovia destroyed that bank.
I think most people already knew that Alt-A loans served an upscale demographic. They were targeted at people with lumpy incomes, at small business owners, and to those with more assets than income. Liar-loans/No-doc loans never had that profile.
Nonetheless, the new research attests to the up-market nature of the demand for those complex mortgage products. As a whole, they had higher-than-average credit scores. Those products were contrasted with the rest of the universe of sub-prime loans – which they concluded were much more likely to be made to low-income people.