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Subprime Myths Debunked – Part 2

In my previous post, we looked at the first five "myths" the Cleveland Federal Reserve Bank explains and refutes in the article by Yuliya Demyanyk, an economist with the Fed.  Let's look at the last five of the ten myths now:

Myth # 6:  Subprime mortgages failed because of mortgage rate resets - There is data that seems to support this, but it used older fixed rate mortgages in the mix, skewing results and making the newer ARMs look worse.  If you take only fixed rate mortgages originated in the same years as newer ARMs, default rates are very similar.

Myth # 7:  Subprime borrowers with hybrid mortgages were offered (low) “teaser rates” - Though borrowers with lower credit scores were offered lower rates for ARMs, the discounts were much lower than those offered stronger borrowers.  Those with better credit scores, and qualifying for more normal mortgages, were offered more deeply discounted teaser rates.

Myth # 8:  The subprime mortgage crisis in the United States was totally unexpected - Though the regulatory agencies seemed in the dark, those selling packages of securitized mortgages seemed to have been gradually increasing rates over the years to adjust for higher perceived risk.

Myth # 9:  The subprime mortgage crisis in the United States is unique in its origin - This boom to bust scenario has played out in multiple countries around the world in the last 20+ years.  There have also been smaller, less devastating, examples in the U.S., such as the farm loans crisis in the 1980's.

Myth # 10:  The subprime mortgage market was too small to cause big problems - At only 16% of the total mortgage market, this is a conclusion some have drawn.  However, the derivative instruments and second and third level securities that packaged and resold these mortgages greatly worsened the situation.

Now, this is from one of the regulatory agencies, so you can interpret their information in other ways.  However, we can learn and hopefully adapt for a better lending market future if we know the facts of what happened.

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