Subprime lending and the housing bubble: Tail wags dog?

That's the title of a provocative and seemingly counterintuitive study by UC Irvine's Paul Merage School of Business Center for Real Estate. It wasn't the selling of home loans to credit-risky borrowers that sparked the phenomenal run-up in prices per se, it was "the changing credit regime" beginning in 2003 that inflated the bubble -- and Fannie and Freddie seem to be have major, albeit unwitting roles.

When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.

And helping to fuel them on was an enthusiastic administration pushing the "dream of homeownership" without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices "with momentum characteristic of a bubble," the study says.

Rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the "tail") of the economic, political, and regulatory environment characteristic of the early- to mid-2000’s (the "dog").

"We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors including the market," says Kerry Vandell, the UCI finance professor and director of its real estate center who was the lead researcher on the study. "But we were really blown away when Fannie's and Freddie's continuing presence in the market was shown to be so important."

Co-authoring the study was doctoral student Major Coleman IV and Michael LaCour-Little, a Cal State Fullerton finance professor who theorized in a provocative 2006 research paper that prepay penalties saved borrowers money.

The latest study was partly funded by the Mortgage Bankers Assn., the National Assn. of Realtors' Subprime Crisis Research Consortium and -- drumroll please -- Freddie Mac.

--Annette Haddad, Times staff writer

Photo credit: Associated Press

Questions? Comments? Tips? E-mail annette.haddad@latimes.com

Comments

[sunsetbeachguy]

That reminds me of the joke:

A mathematician, an accountant and an economist apply for the same job. The interviewer calls in the mathematician and asks "What do two plus two equal?"

The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."

Then the interviewer calls in the accountant and asks the same question: "What do two plus two equal?" The accountant says, "On average, four -- give or take 10%, but on average, four."

Then the interviewer calls in the economist and poses the same question: "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer, and says,

"What do you want it to equal?"

[Patrick Duffy, HousingChronicles.com]

Mark Zandi's new book, "Financial Shock: A 360-degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis" touches on this same issue. An unintended vacuum was created by Fannie & Freddie, and into the breach strode subprime loans.

[Cal]

I :heart: revisionist history.

[E]

Yup...still painting it as a subprime problem.

No funny money (Neg-Am Liars Loans) Alt-A loans made in L.A. due to reset.

Not a one.

Good thing we won't have to bail any Alt-A loanowners out.

Right?

Or Prime?

[Tom Lindmark]

I dug through the whole article and I can honestly say that at the end of it, I still hadn't couldn't find a pony.

[Laland-Nostalgia]

OK, I'M DONE WITH THIS BLOG

I do not find this posting provocative. I don't have time to waste sifting through crap while these people slowly learn how to blog. Better to stick to the real, original blogs and forget about the LAT.

I can't imagine the conversations that led to this absurd move. It reminds me of the tape where Sam Zell says "3 guys in a garage create Youtube and I've got 700 people here who don't know their a$$ from a hole in the ground" or something like that. He has a long way to go if he wants to clear out the underbrush at the LAT apparently.