A new report from the Federal Reserve Bank of Boston speculates that overly optimistic impressions of home prices at the housing market's peak is what sparked the financial meltdown, rather than negligence in the mortgage industry.
Prior to this claim, a number of experts felt that mortgage financial firms and industry insiders were to blame for the events that unfolded roughly six years ago. Now, the Boston Fed believes that an incorrect assumption that property values would continue to appreciate gave lenders a false sense of safety and soundness to grant mortgage high-risk borrowers.
"If both groups believed house prices would continue to rise rapidly for the foreseeable future, then it is not surprising to find borrowers stretching to buy the biggest houses they could and investors lining up to give them the money," the report said. "Rising house prices generate large capital gains for home purchasers. They also raise the value of the collateral backing mortgages, and thus reduce or eliminate credit losses for lenders."
Payment shocks not the culprit
Additionally, it was noted that shocks to the payment process of adjustable-rate mortgages did not result in a number of the home loan defaults that occurred in the wake of the housing market collapse. The report examined a number of ARMs originated in 2005 and 2006, and while the mortgages originated in 2005 experienced less of an overall payments shock, loans from this year had a much higher rate of default.
In conclusion, the report determined that minor changes in government regulation were also not a primary factor behind the industry fallout, and instead, investors and buyers alike based their short-term and long-term housing decisions based on overly optimistic views of potential home prices appreciation in the future.
Delinquency rate slowing
Regardless of what caused the wave of mortgage default in the years after the economic recession, the most recent National Consumer Credit Trends Report from Equifax indicates that overall mortgage defaults trended lower in March.
According to the report, delinquencies totaled under $500 billion during the month. This is lowest this total has been since January 2009. In addition, this dollar total accounted for an estimated 49.5 million individual loans. While this is still a significant number, it is an 11 percent decrease from when the total peaked in March 2008 at 55 million.