November 3, 2010

"The political economy of the subprime mortgage credit expansion"

Here's a 2010 article by economists Atif Mian, Amir Sufi, and Francesco Trebbi on how Congresscritters voted in 2002-2007 on Housing Bubble-related bills:
The global financial crisis has its origins in the failings of the US housing market – and, some believe, those of the US government. ... Indeed, government intervention is often well intentioned and justified by economic theory. But once governments are involved in the financial sector, the incentives for individuals to try to manipulate government policy and politicians’ votes can be irresistible. The results can be disastrous. ...

The expansion of subprime lending coincided with key US government policies, often with cross-party backing, that reduced regulation of subprime lenders and increased mortgage support for low-income households.

Among the most prominent was the affordable housing mandate imposed by the Department of Housing and Urban Development. The mandate required that mortgage providers and guarantors Freddie Mac and Fannie Mae purchase a larger fraction of mortgages that serve low- and moderate-income borrowers....

Beginning in 2002, mortgage industry campaign contributions increasingly targeted US representatives from districts with a large fraction of subprime borrowers. To measure constituent interest we use zip code level data on consumer credit. Combining this with electoral data, we then compare this with campaign contributions, lobbying expenditure, and eventually congressional voting data.

During the expansion years, we find that both mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behaviour on housing-related legislation. In 1997 and 1998, the fraction of subprime borrowers in a representative’s district significantly predicts the representative’s votes on only 30% of roll calls. By 2003 the fraction increases to 70%.

As the solid line in Figure 2 shows, beginning with the 107th Congress in 2002, there is a sharp relative increase in mortgage campaign contributions to high subprime share districts, while there is no such pattern for non-mortgage contributions. Our results suggest that a one standard deviation increase in the subprime share as of 1998 – before the expansion – leads to a relative increase in the growth rate of mortgage industry campaign contributions of 81%.

Taken together, our results suggest that constituent interests, measured with the fraction of subprime borrowers in a given Congressional district before the subprime mortgage expansion, and special interests, measured with campaign contributions from the mortgage industry, both helped to shape government policies that encouraged the rapid growth of subprime mortgage credit.

In the final section of the study, we examine voting and co-sponsorship patterns on six bills for which competing interests are well defined, these are:
  • The American Dream Downpayment Act of 2003, which aimed to increase homeownership among low-income communities by providing downpayment and closing cost assistance;
  • the Ney-Kanjorski Responsible Lending Act of 2005, which would have preempted state regulations on predatory lending;
  • the Prohibit Predatory Lending Act of 2005, which would have placed more stringent controls on subprime lenders;
  • the Mortgage Reform and Predatory Lending Act of 2007, which was a revised version of the Prohibit Predatory Lending Act that eventually passed the House (but failed in the Senate);
  • and the Federal Housing Finance Reform Acts of 2005 and 2007, which sought to tighten regulation of Freddie Mac and Fannie Mae.
...  Focusing on the trade-off between ideology and economic incentives, we find that conservative politicians are less responsive to both constituent and special interests. This suggests that politicians, through ideology, might be able to commit against intervention even during severe crises.

This suggests that, say, Senator Rand Paul will be less likely to go along to get along on the next trillion dollar scam.

6 comments:

Bob said...

As much as you'd like to blame this all on the government, which does bear some blame, the worst excesses of the housing bubble occurred as a result of private mostly foreign investors stupidly buying repackaged American loans that were too low-quality for Fannie and Freddie to buy under their guidelines.

This graph shows that the Fannie/Freddie/Ginnie market share went from the 70-80% range before the housing bubble to 40-50% during the bubble.

http://cr4re.com/CRimages/Mortgagemarket.jpg

The worst lending, the 0-down loans, the $1 million loans to gardeners with no documented income, etc, the government had a 0% market share.

In 2006, for example, Fannie and Freddie would only buy mortgages of $417,000 or less. In 2005 it was $359,650. Obviously that severely limited their market share in California and other bubble areas.

They went bankrupt because they were so thinly capitalized, not because they were corrupt or reckless. The amount of money required to bail them out, given their size, was also pretty small.

Anonymous said...

Bobsaid

'The amount of money required to bail them out, given their size, was also pretty small.'

200 billion here 300 billion there. Pretty soon you're talking real money.

Spot on about the greedy, and ignorant euro banks, though. A teeny weeny bit of research would have saved them billions.

Rb London

Bob said...

RB,

When figuring out how much Fannie/Freddie cost to bail out, you have to remember that some of the money going to them now is to cover their losses on loans made well after the bubble popped and the government took ownership.

Rather than a bailout of dumb loans made during the bubble when they were nominally private, the recent money going into the GSEs is to cover losses they fully expect to occur as a backdoor stimulus.

Anonymous said...

Uh, Bob, time to call your logician...

"They went bankrupt because they were so thinly capitalized, not because they were corrupt or reckless. The amount of money required to bail them out, given their size, was also pretty small."

If they were thinly capitalized, and bought risky, low quality repackaged American real estate loans anyway, how does that not make them reckless?

If they expected to be, and were, bailed out, how does that not make them corrupt?

If the amount was so "small", why do you ignore the knock on effects that completely F_CKED UP the entire economy?

Bob, apologist for bankster corruption: logic fail.

kurt9 said...

Tim Wise, whom you designated as "Uncle Tim", went into a diatribe yesterday.

http://www.timwise.org/2010/11/an-open-letter-to-the-white-right-on-the-occasion-of-your-recent-successful-temper-tantrum/

An example of a liberal unhinged.

Jason Victor said...

This is a fascinating view of things. I've often felt politicians sometimes do more to hurt than help, not the least of which is ushering the public into a false sense of understanding that basically amounts to "Wall St = Bad".