VoxEU / Mint

Mortgage default during the Great Recession came from real estate investors, not subprime credit holders

The Global Crisis narrative has suggested that an expansion of subprime credit was the reason for rising mortgage defaults, leading to the large-scale recession in 2007-09, but a new paper, co-authored by GSEM Professor Giacomo De Giorgi, Director of the Institute of Economics and Econometrics; Prof. Stefania Albanesi (University of Pittsburgh), and Prof. Jaromir Nosal (Boston College), offers an alternative narrative.

The paper takes a closer look at the characteristics of subprime credit holders over the period and examines the evolution of mortgage debt and defaults during the credit boom and throughout the financial crisis and its aftermath. It presents that the growth in mortgage defaults did not occur predominantly amongst subprime credit holders. Instead, it was real estate investors that played a critical role in the rise in mortgage debt, specifically among the middle and the top of the credit score distribution.

Prof. De Giorgi’s results also offer new perspectives for policies aimed at preventing or remediating turmoil in the mortgage and housing markets. First, increasing restrictions on loans to subprime borrowers may be misguided, and second, real estate investors are the major driver of aggregate mortgage balances and defaults. These findings point to the role of this segment being critical for future policy and research.

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