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Posted by on May 4, 2012 in Mortgage News, Psycho-babble | 10 comments | Print Print

“Collective Euphoria”

From HW:

The meltdown of the U.S. housing finance system resulted from overly optimistic views on home prices as opposed to a type of gross negligence in the mortgage industry, a new Federal Reserve Bank of Boston report concluded.

The report attacks several common assumptions about the cause of the recent financial crisis, including the popular notion that mortgage finance firms, and insiders in the business, are primarily to blame for the housing fallout.

Instead, a collective euphoria over the rise in home prices and the false expectation of constant price increases led to the mortgage industry and borrowers miscalculating the risks.

“If both groups believed house prices would continue to rise rapidly for the foreseeable future, then it is not surprising to find borrowers stretching to buy the biggest houses they could and investors lining up to give them the money,” wrote the report’s authors Christopher Foote, Kristopher Gerardi and Paul Willen. “Rising house prices generate large capital gains for home purchasers. They also raise the value of the collateral backing mortgages, and thus reduce or eliminate credit losses for lenders.”

The group attacks the idea that payment shocks on adjustable-rate mortgages created an atmosphere of extreme default. The report analyzes ARMs originated in 2005 and 2006. The 2006 loans experienced a less severe payment shock than the 2005 group, but ended up with a much higher delinquency rate, killing the idea that payment hikes alone on ARMs caused the problem.

84% of foreclosed borrowers, for example, were overdue on payments equal to when the mortgage first originated.

The authors go on to claim there was little substantive change or innovation in the mortgage markets in the 2000s. Government policy toward mortgages did not change as much as theorized in reports about the market fallout. The report says investors knew the risks, but like many buyers, based their short-term and long-term calculations on overly optimistic home-price growth.



  1. Talk about blaming the victim.

    This is like if a cigarette company started adding crack to its products then said its customers fault for being addicted.

  2. Seems like they want to confuse everyone with the blame game.

  3. I do recall the meme house prices can never go down on a national basis being around at the time. From a behavioral economics point of view the argument for mass delusion makes sense. Of course some who had lived in Houston 1983-1988 knew that at least locally house prices could crash, as well as some others, but the herd effect and the persistent theme of buy now or the price will be higher, and its always a good time to buy in the air.
    As in many things Pogo was probably right we have met the enemy and he is us.

  4. It’s not the first and won’t be the last time we experience irrational exuberance. Of course those outside of the herd issuing warnings are always ignored because it’s different this time.

  5. Whatta crock. I don’t ever remember no down, no doc, let alone interest only mortgages in my life. But then I bought my first house 20 yrs, 20% down and that was the furthest leveraged I ever got.

    And this doesn’t even get to the fraudulent RBMS.

    Or the easy money for ever.

  6. I’m still on the record as this being a “false start”. The real test will be on January 1st when all the new taxes and laws come into being.

  7. Revisionist history at it’s best. Sheesh. Nothing like the Fed to try and cover it’s tracks.

    Had the financial crooks let historical lending standards stand then the bubble would’ve burst in 2003 at much safer levels.

  8. The next paper done by these “experts” will claim that another 10 trillion in goobermint deficit spending is a solid strategy and that the Holocaust didn’t happen either.

  9. The Fed reserve is evil to it’s core. The whole system is full of scams and fraud. Bubble after bubble, yet there’s always some new sucker out there who’s ready to jump in head first. People never learn.

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