New Foreclosure Research

My friends at the Fed of Boston have released an important general interest paper on the causes of the foreclosure crisis.  In this post, I would like to highlight what I like about the paper written by

Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen.

Here is their sexy intro:

"More than four years after defaults and foreclosures began to rise, economists are still debating the ultimate origins of the U.S. mortgage crisis. Losses on residential real estate touched

off the largest financial crisis in decades. Why did so many people—including homebuyers

and the purchasers of mortgage-backed securities—make so many decisions that turned out

to be disastrous ex post?"

The paper contains many interesting claims.

1.  Fancy, complicated adjustable rate mortgages are not to blame for the rising loan default rate

2.  Investment bankers were not snake oil salesmen doing their best P.T Barnum imitation as they looked to sell sophisticated products to naive suckers.

3.   The authors' favorite story for recent events focuses on a contagion of optimism about ever rising home prices and this "infection" impacted both buyers of real estate and the financial industry.  "The bubble theory therefore explains the foreclosure crisis as a consequence of distorted beliefs rather than distorted incentives."