Heroes of the subprime market

Arnold Kling writes about the subprime market:

They measure latent demand for mortgages as the percentage of mortgage applications turned down in that particular zip code in 1996. What they are saying is that in zip codes where lots of folks were turned down in 1996, you see lenders approving many more loans, and at lower risk spreads in 2001 through 2005, fueling the home price bubble. The lower risk spreads tells me that this was not predatory lending, but the opposite.

Keep this in mind when people say that better regulation could have prevented this problem. It sounds like what they are talking is that lenders charged exorbitant interest rates to hapless borrowers. In fact, lenders were guilty of charging borrowers too little for loans, as well as approving too many unqualified borrowers. If you think that alert regulators would have cracked down on lenders for providing too many home ownership opportunities to Americans, especially minorities, then you believe in a different political environment than what I remember.

The subprime borrower is, at this point, a largely mythological figure. I frequently hear and read people stating with total confidence that they're mostly investors, or poor credit risks who knowingly and with malice aforethought lied about their income and assets in order to borrow money they were well aware they couldn't repay. I hear other people stating, with equal confidence, that the main problem in these markets was fraud by mortgage brokers and "predatory lending" by banks who hypnotically suckered people into signing disadvantageous loans.

I have no idea how these people know these things. As far as I know, there is no reliable data on how many people lied on their mortgage applications, how many people were victims of fraud by mortgage brokers, and what percentage of property owners in distressed markets are flippers. What statistics we do have are often misleading. One often hears, for example, that half of subprime borrowers could have qualified for at least an Alt-A loan, but it's not yet been made clear to me whether this means that their FICO score was good enough to put them in Alt-A category, or whether their loan characteristics--things like loan size, CLTV ratio, documentation, borrower asset base, and borrower income volatility--actually qualified these loans for better rates. I have pretty good credit, but if I took out a no-doc 100% CLTV jumbo loan I'd have to pay a very high interest rate on it.

I'm not sure if we'll ever know the ratio between borrower fraud/lender fraud/joint and several stupidity. The data collection needed to measure that accurately seems, to say the least, extraordinarily daunting. But whether or not we get it, I have no doubt that ten years from now you will still be hearing multiple totally confident, thoroughly incompatible, assessments.