Working Paper

Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom


Abstract: An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002–2006 U.S. house price boom. By contrast, this paper documents a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that higher house price appreciation lowered the transition rate into first-time homeownership for subprime individuals. Finally, the paper documents that subprime borrowers did not play a significant role in the increased speculative activity and underwriting fraud that the literature has linked directly to the housing boom. Taken together, these results are more consistent with subprime borrowers being priced out of housing boom markets rather than inflating prices in those markets.

Keywords: credit scores; subprime; housing boom; mortgages; house prices;

JEL Classification: G38; D14; D18; D53; G21;

https://doi.org/10.24149/wp2013

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Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2020-05-19

Number: 2013

Pages: 72