Was It the Chicken, or the Egg?

“. . . the housing boom of 2002-2005 was . . . a banker-created excrescence.”—By Sanford Rose

Dolors & Sense

By Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—6/23/2014—Did the housing boom of 2002-2005 cause the upsurge in toxic lending of the same period?

Or did the lending explosion cause the housing boom?

The inquiry is not academic.

If it was the frothy nature of the market that stimulated the lending, then the bankers and their regulators are less culpable than we thought. But if it was principally their action that boosted prices, they are of course blameworthy.

New research sheds light on this question.

Atif Mian and Amir Sufi, of Princeton and the University of Chicago respectively, have divided the country into low-credit-score and high-credit-score zip codes and into cities where the supply of housing could easily expand to accommodate demand surges and those that, because of geographic and regulatory constraints on land use, could not readily respond to those demands.

In cities where supply could easily adjust to demand, house prices rose during the 2002-2005 period, but not by very much. Mortgage credit increased substantially, however, principally in the low-credit-score zip codes.

Lenders and brokers had decided to target these areas because those with no net worth and low credit scores represented a previously untapped market (with good reason).

Since prices were not rising very much, it wasn’t a frothy market that stimulated this lending; the lending took place because the bankers had excess lending capacity and were persuaded that house prices could not fall.

In cities without the geographic ability to readily accommodate demand surges, house prices exploded. But they rose by twice as much in the low-credit-score zip codes, where bankers were doing most of their huckstering, as in the high-credit-score areas.

Ergo, the housing boom of 2002-2005 was, to a large extent, a banker-created excrescence.

If the bankers were responsible, where were their regulators, who were well aware of the problem?

If the lenders were responsible, why didn’t the government treat borrowers more kindly?

The regulators, led by the Federal Reserve, which had statutory authority to stop the predatory lending, turned a blind eye.

The rest of the government, which could have insisted on forgiveness of part of the mortgage principal (thereby limiting the number of foreclosures and thus reducing the duration and severity of the recession), gave the borrower and, of course, the country the back of its hand.

There have been few more dishonorable episodes in the nation’s history.