Middle Class Origins of the Financial Crisis

Antoinette Schoar (Massachusetts Institute of Technology)
Thursday, June 11, 2015 - 2:00pm
Spandauer Straße 1, Room 23

We provide a novel interpretation of the debt dynamics leading up to the financial crisis of 2007. Earlier research suggests that distortions in the supply of mortgage credit, evidenced by a decoupling of credit flow from income growth, may have been responsible for the rise in house prices and the subsequent collapse of the housing market. This paper shows that the increase in mortgage originations was shared across the whole distribution of borrowers, and that middle and high income borrowers still made up the majority of originations at the peak of the boom. Compared to prior years, middle and high income borrowers (not the poor), as well as those with high fico scores, made up a much larger share of delinquencies in the crisis relative to the previous period. By focusing on individual transactions rather than zip codes, we show that the relationship between individual mortgage size and income growth during the housing boom never decoupled and was strongly positive, in line with previous periods (and independent of how income is measured). These results are most consistent with an expectations based view of the financial crisis where both home buyers and lenders were buying into an unfolding housing bubble.