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Darby Ram

Mortgage default during the Great Recession came from real estate investors, not subprime credit holders

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Well, well, well...

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The Global Crisis narrative has suggested that an expansion of subprime credit was the reason for rising mortgage defaults, leading to the large-scale recession in 2007-09. Taking a closer look at the characteristics of subprime credit holders over the period, this column argues that the growth in mortgage defaults did not occur predominantly amongst subprime credit holders. Instead, it was real estate investors that played a critical role in the rise in mortgage debt, specifically among the middle and the top of the credit score distribution.

http://voxeu.org/article/credit-growth-and-global-crisis-new-narrative

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3 hours ago, Darby Ram said:

On reflection, could dirt-poor subprime borrowers ever have accumulated sufficient credit to imperil the global banking system? They really belong to the (Minsky) class of speculative borrowers, capable of repaying their loans but only via refinancing. It wasn't until the re-fi deals began drying up in 2006 that they began to default en masse. In contrast, middle-class flippers were able to accumulate stratospheric debts by virtue of their presumed lower default risk. Surely, these were Minsky's ponzi borrowers, incapable of repaying interest or principal without continuous asset price inflation.

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15 minutes ago, zugzwang said:

On reflection, could dirt-poor subprime borrowers ever have accumulated sufficient credit to imperil the global banking system? They really belong to the (Minsky) class of speculative borrowers, capable of repaying their loans but only via refinancing. It wasn't until the re-fi deals began drying up in 2006 that they began to default en masse. In contrast, middle-class flippers were able to accumulate stratospheric debts by virtue of their presumed lower default risk. Surely, these were Minsky's ponzi borrowers, incapable of repaying interest or principal without continuous asset price inflation.

Yes, I think that's true. The other side of it is that BLTers may well have good credit ratings but, as has been said repeatedly on this site, the mortgages they take out are a leveraged play on the wages of their tenants. The performance of speculative, high credit-score mortgages are therefore likely to be highly correlated to the performance of owner-occupier low credit-score mortgages because the income flows that sustain them are similar.

This set off the Minsky klaxon for me too, and maybe explains why the BoE has finally started talking about the systemic risk posed by BTL.   

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  • 293 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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