Skip to main content

Was The Subprime Bubble Built On Borrower Speculation?

In the official version of the subprime mortgage mess, the villians “thousands of mortgage brokers who banked big bucks steering customers into subprime loans and the hundreds of mortgage traders and bankers at investment firms” who recklessly securitized the loans and sold them off to investors. Borrowers are typically portrayed as naïve victims of the mortgage bubble—save for a few actual fraudsters.
But what if the fraud was a lot more widespread than we've been lead to believe? According to a story in today’s Wall Street Journal—hidden from sight way back on page B 8—subprime speculation seems to have been fairly common.

Roughly 20% of mortgage fraud involved "occupancy fraud," or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in.
Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were investors during the boom, up from their earlier estimates of one in 10 buyers.

This of course does not bode well for the default rate. If default projectionss are built on faulty assumptions about owner occupancy, they will tend to underestimate the number of defaults. Non-resident speculators are far more likely to default than occupying owners, especially if the value of their home has fallen below the amount they owe on the mortgage. This looks like it is going to get worse before it gets better.
Speculators May Have Accelerated Housing Downturn [Wall Street Journal]