Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis
We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those wrong beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Fed Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis
Fed Fact 2: No mortgage was “designed to fail”
Fed Fact 3: There was little innovation in mortgage markets in the 2000s
Fed Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005
Fed Fact 5: The originate-to-distribute model was not new
Fed Fact 6: MBSs, CDOs and other “complex financial products” had been widely used for decades
Fed Fact 7: Mortgage investors had lots of information
Fed Fact 8: Investors understood the risks
Fed Fact 9: Investors were optimistic about house prices
Fed Fact 10: Mortgage market insiders were the biggest losers
Fed Fact 11: Mortgage market outsiders were the biggest winners
Fed Fact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.” Top-rated bonds in collateralized debt obligations (CDOs) did.
You can read all about the Fed Facts below…