Fed: Excessive Optimism
A report released May 2 from the Federal Reserve Bank of Boston contends that the mortgage meltdown was more the result of “overly optimistic beliefs” than extensive negligence among mortgage originators and investors.
According to the report, part of what led to the housing market crash was widespread euphoria over rising home prices among banks, investors and homeowners — all who underestimated growing risks.
The report also noted that borrowers overextended themselves to buy the largest houses they could afford, believing that prices would continue to climb. “Rising house prices generate large capital gains for home purchasers,” the report noted. “They also raise the value of the collateral backing mortgages, and thus reduce or eliminate credit losses for lenders.”
The report further contended that adjustable-rate mortgages were not responsible for increased mortgage defaults, noting that ARMs originated in 2006 had a much higher delinquency rate than those originated in 2005 despite a less severe payment shock. Additionally, data showed that 84 percent of delinquent borrowers who ended up in foreclosure had missed payments that were equal to what they were paying at mortgage origination.
The report called the foreclosure crisis “a consequence of distorted beliefs rather than distorted incentives.” The report also noted “a collective mania about house prices, rather than individual malfeasance on the part of mortgage industry insiders, may be the best explanation for why the foreclosure crisis occurred.”
Read the complete Fed report.