![]() ![]() Low credit score borrowers are much younger than those with higher credit scores. Figure 1 reports the age distribution of borrowers by credit score quartiles and Figure 2 plots the evolution of credit scores over time of individuals based on their initial credit score. Young borrowers exhibit steep growth in income and debt in subsequent years, and their credit score also rises rapidly as they build their credit history. We show that this approach mainly captures life cycle credit demand for borrowers who have low credit scores at the beginning of the sample, because low credit score borrowers are predominantly young. Previous credit score-based analyses used initial, i.e. Additionally, recent credit scores incorporate more information on the borrower’s past performance. ![]() We show that recent credit scores are tightly related to labour income, which is obviously important determining whether a borrower will be able to make payments on newly contracted debt. We argue that a relatively recent credit score should be used to assess default risk at the time of borrowing. The credit score is the principal summary measure of individual default risk in US household credit markets, as it summarises a borrower’s past history of debt and defaults. Individual-level evidenceĪ critical factor in any explanation of the credit boom and the financial crisis is the distribution of debt and defaults by credit score. Our findings point to the role of this segment being critical for future policy and research. Second, real estate investors are the major driver of aggregate mortgage balances and defaults, suggesting that owner-occupied housing is less sensitive to movements in real estate values. First, increasing restrictions on loans to subprime borrowers may be misguided, as these borrowers contributed to the boom-bust in credit only marginally. ![]() Our results then offer new perspectives for policies aimed at preventing or remediating turmoil in the mortgage and housing markets. We find that investors were responsible for most of the growth in balances and virtually all of the rise in defaults for prime borrowers. Our analysis points to a large role of real estate investors – mortgagors who held multiple first liens – in both the boom and bust of the housing market. ![]() As a result, the fraction of foreclosures accounted for by the highest three quartiles of the credit score distribution rose from 35% to 70%. While borrowers with low credit scores typically had higher default rates than those with higher credit scores, default rates for borrowers with higher credit scores rose substantially during the financial crisis. We also find that the rise in defaults during the 2007-09 crisis was concentrated in the middle of the credit score distribution. Borrowing by individuals with low credit scores was virtually constant during this period. Specifically, we show that credit growth during the boom was concentrated in the middle and at the top of the credit score distribution. Our findings suggest an alternative narrative, which challenges the view that an expansion of the supply of mortgage credit to subprime borrowers played a large role in the credit boom in 2001-06 and the subsequent financial crisis. These administrative data contain the full history of borrowing and defaults for a nationally representative panel of borrowers, as well as their credit score and demographic information, allowing us to provide a comprehensive assessment of their behaviour. In a new paper, we also examine the evolution of mortgage debt and defaults during the credit boom and throughout the financial crisis and its aftermath, using individual-level data from the Federal Reserve Bank of New York Consumer Credit Panel (Albanesi et al. (2017), who point out that credit did not shift towards lower income individuals or locations in the run-up to the crisis. (2016), who emphasise the role of the “middle class”, as well as Foote et al. That popular narrative has been challenged more recently by Ferreira and Gyourko (2015), who argue that debt growth was similar for prime and subprime borrowers, Adelino et al. According to that narrative, the expansion of subprime credit then led to a rise in mortgage delinquencies and foreclosures, which caused the housing crisis and the subsequent 2007-2009 recession (Mian and Sufi 2010, 2011, Mian et al. A popular narrative, based on the findings in Mian and Sufi (2009), suggests that most of the growth in credit during the 2001-2006 boom was concentrated in subprime zip codes, even though income did not rise over the same period for these areas. Understanding the fundamental factors behind the boom and bust in credit has been a hotly debated topic in academic and policy circles. ![]()
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