Archived: Study Blames ‘Aggressive, Private Funding’ for Housing Collapse


Bush signs $300 billion bill for foreclosure assistance.

EGP News Service

A UC Irvine study released Wednesday shifts blame for the housing collapse from sub-prime lending to the use of aggressive, private mortgage securities that followed the reduced role of traditional mortgage backers Fannie Mae and Freddie Mac.

The study was released on the same day that President Bush signed into law legislation that creates a $300 billion government initiative to help 400,000 homeowners facing foreclosure and bolsters Fannie Mae and Freddie Mac, the two biggest U.S. providers of mortgage money.

The study by the UCI Paul Merage School of Business Center for Real Estate ties the start of what became a massive real estate bubble burst to the 2003 pullback of the government-sponsored financial service corporations from the credit market and the change in the prevalent source of mortgage capital.

“We were quite surprised to find the intensity of sub-prime lending was insignificant after controlling for all the other factors influencing the market, but we were really blown away when Fannie’s and Freddie’s continuing presence in the market was shown to be so important,” said Kerry Vandell, a UCI finance professor and director of the Center for Real Estate.

The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth.

Those factors fueled housing demand and, in turn, increased U.S. home prices, while during that time, Fannie Mae and Freddie Mac actively issued and purchased conventional conforming mortgage-backed securities, the researchers said.

But in 2003, certain factors caused the two entities to significantly slow their lending volume, including accounting irregularities that led to the resignation of senior officers and the capping of their retained loan portfolios.

Private funding stepped in, in the form of asset-backed securities and residential mortgage-backed securities, while a new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products that included adjustable-rate mortgages with low initial “tease” rates, Vandell said.

The loans did not require income verification and many were non-owner- occupied investor products, the researchers said.

The climate gave formerly marginal borrowers greater access to credit, leading to a record increase in total mortgage volume and pushing up home prices with momentum that is characteristic of a bubble, the UCI team said.

The researchers also found that interest rates did not significantly affect housing prices, also a divergence from conventional wisdom.

“These finding help us understand that the government can have a major role in affecting the mortgage and housing markets,” Vandell said. “It’s important policymakers consider this influence when they attempt to shape the markets in the future.”

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