The Subprime Crisis: Is Government Housing Policy to Blame

"A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality..."

FTC Testifies on Efforts to Protect Consumers in Subprime Mortgage Market
"The Federal Trade Commission testified before the U.S. Senate Committee on Commerce, Science, and Transportation’s Subcommittee on Interstate Commerce, Trade, and Tourism, about the Commission’s continuing efforts to protect subprime mortgage borrowers.

The testimony described the agency’s priorities, including deceptive mortgage advertising, deceptive or unfair servicing practices, discrimination in lending, and foreclosure rescue scams, and it emphasized the following points:

* The Commission has been at the forefront of the fight against deceptive subprime lending and servicing practices since 1998, when it filed its case against Capital City Mortgage. The case alleged that the defendant took advantage of African-American consumers in Washington, D.C.

* In the past decade, the FTC has brought 22 actions in the mortgage lending industry, with particular attention to entities in the subprime markets. Through these cases, many of which have challenged deceptive advertising and marketing practices, the FTC has returned more than $320 million to consumers."

Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures
"This paper provides the first rigorous assessment of the homeownership experiences of subprime borrowers. We consider homeowners who used subprime mortgages to buy their homes, and estimate how often these borrowers end up in foreclosure. In order to evaluate these issues, we analyze homeownership experiences in Massachusetts over the 1989–2007 period using a competing risks, proportional hazard framework. We present two main findings. First, homeownerships that begin with a subprime purchase mortgage end up in foreclosure almost 20 percent of the time, or more than 6 times as often as experiences that begin with prime purchase mortgages. Second, house price appreciation plays a dominant role in generating foreclosures. In fact, we attribute most of the dramatic rise in Massachusetts foreclosures during 2006 and 2007 to the decline in house prices that began in the summer of 2005."

Dynamic Maps of Nonprime Mortgage Conditions in the United States
"The Federal Reserve System on Tuesday announced the availability of a set of dynamic maps and data that illustrate subprime and alt-A mortgage loan conditions across the United States.

The maps, which are maintained by the Federal Reserve Bank of New York, will display regional variation in the condition of securitized, owner-occupied subprime, and alt-A mortgage loans. The maps and data can be used to assist in the identification of existing and potential foreclosure hotspots. This may assist community groups, which can mobilize resources to bring financial counseling and other resources to at-risk homeowners. Policymakers can also use the maps and data to develop plans to lessen the direct and spillover impacts that delinquencies and foreclosures may have on local economies. Local governments may use the data and maps to prioritize the expenditure of their resources for these efforts."

Averting Financial Crisis
"There is no precise definition of “financial crisis,” but a common view is that
disruptions in financial markets rise to the level of a crisis when the flow of credit to households and businesses is constrained and the real economy of goods and services is adversely affected. Since mid-2007, central bankers — including the Federal Reserve — have labored to keep the downturn in U.S. subprime housing from
developing into such a crisis.

While subprime problems were widely anticipated, the subsequent spread of
turmoil into many seemingly unrelated parts of the global financial system was not.
Many losses occurring in diverse firms and markets — often quite severe — have
features in common: the use of complex, hard-to-value financial instruments; large
speculative positions underwritten by borrowed funds, or leverage; and the use of
off-the-books entities to remove risky trading activities from the balance sheets of
major financial institutions."

Government Interventions in Financial Markets:Economic and Historic Analysis of Subprime Mortgage Options
"This report summarizes and analyzes four previous government market
interventions (Home Owners Loan Corporation in 1933, Continental Illinois in 1984,
the savings and loan insurance fund shortfall in 1989, and the Latin American debt
crisis in 1989), in light of current mortgage market conditions. Current proposals to
help delinquent homeowners share many features in common with all of these
actions."