Why Subprime Borrowers Didn’t Cause the Foreclosure Crisis
Wharton study details why the foreclosure crisis caused by the US housing market bust may have been “more of a prime, rather than a subprime, borrower issue.”
A New Look At The U.S. Foreclosure Crisis: Panel Data Evidence Of Prime And Subprime Borrowers From 1997 To 2012
Fernando Ferreira and Joseph Gyourko
The Wharton School
University of Pennsylvania and NBER
Utilizing new panel micro data on the ownership sequences of all types of borrowers from 1997-2012 leads to a reinterpretation of the U.S. foreclosure crisis as more of a prime, rather than a subprime, borrower issue. Moreover, traditional mortgage default factors associated with the economic cycle, such as negative equity, completely account for the foreclosure propensity of prime borrowers relative to all-cash owners, and for three-quarters of the analogous subprime gap. Housing traits, race, initial income, and speculators did not play a meaningful role, and initial leverage only accounts for a small variation in outcomes of prime and subprime borrowers.
Most economic analysis of the recent American housing market bust and the subsequent default and foreclosure crises focuses on the role of the subprime mortgage sector.1 Roughly three-quarters of the papers on the crisis reviewed in the next section use data only from the subprime sector and typically include outcomes from no later than 2008. For example, Mian & Sufi (2009) use mortgage defaults aggregated at the zip code level from 2005 to 2007 to conclude that a “salient feature of the mortgage default crisis is that it is concentrated in subprime ZIP codes throughout the country.” However, subprime loans comprise a relatively small share of the complete housing market–about 15% in our data and never more than 21% in a given year. In addition, we document that most foreclosures in the United States occurred after 2008. These two issues raise questions about the representativeness of results based on selected subprime samples.
In this paper we provide new stylized facts about the foreclosure crisis and also empirically investigate different proposed explanations for why owners lost their homes during the last housing bust. We use micro data that track outcomes well past the beginning of the crisis and cover all types of house purchase financing – prime mortgages, Federal Housing Administration (FHA)/Veterans Administration (VA)-insured loans, loans from small or infrequent lenders, and all-cash buyers — not just the subprime sector. The data (described below in Section III)) contain information on over 33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units in 96 metropolitan areas (MSAs) from 1997(1)-2012(3), resulting in almost 800 million quarterly observations. It also includes information on up to three loans taken out at the time of home purchase, and all subsequent refinancing activity. Thus, we are able to create owner-specific panels with financing information from purchase through sale or other transfer of the home.
These data show that the crisis was not solely, or even primarily, a subprime sector event. It started out that way, but quickly morphed into a much bigger and broader event dominated by prime borrowers losing their homes. Figure 1 reports the raw number of homes lost via foreclosure or short sale for the five different types of owners we track each year across all 96 metropolitan areas in our sample. There are only seven quarters, 2006(3)-2008(1) at the beginning of the housing market bust, in which there were more homes lost by subprime borrowers than by prime borrowers, although the gap is small as the figure illustrates. Over this time period, which is the focus of much of the previous literature in this area, 39,094 more subprime than prime borrowers lost their homes. This small difference was completely reversed by the beginning of 2009, as 40,630 more prime borrowers than subprime borrowers lost their homes just in the 2nd, 3rd, and 4th quarters of 2008. An additional 656,003 more prime than subprime borrowers lost their homes from 2009(1)-2012(3), so that twice as many prime borrowers lost their homes than did subprime borrowers over our full sample period.
One reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers (and the other borrower/owner categories we consider). Table 1 lists the absolute number and share of all our borrower/owner categories over time. The prime borrower share varies around 60% over time and did not decline during the housing boom. Subprime borrower share nearly doubled during the boom, but only up to 21%. Subprime’s increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.
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