“Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class” by Antoinette Schoar
MIT and NBER
We provide new facts on the debt dynamics leading up to the financial crisis of 2007. Mortgage originations increased across the whole distribution of borrowers, not just poor or subprime borrowers. Middle- and high-income borrowers made up the majority of originations even at the peak of the boom. We also show that defaults by middle- and high-income borrowers, and those with medium and high credit scores (not subprime), constituted a much larger share of delinquencies in the crisis relative to earlier years. At the individual borrower level, the relation between mortgage size and income growth during the housing boom stayed strongly positive, and mortgage growth did not decouple from income growth at origination (independent of how income is measured). These results highlight the importance of middle class borrowers in understanding the mortgage crisis. They are most consistent with a view of the crisis in which both homebuyers and lenders bought into increasing house values and defaulted once prices dropped.