Mortgage

Subprime mortgages didn’t cause the financial crisis

So what did?

Journalists pinned subprime lenders as the villains behind the financial crisis, along with irresponsible borrowers who were their customers, at least that is what one blogger with Fortune argues.

The blog’s author, Chris Matthews, started a new tale, saying that if journalism is the first-draft of history, then it’s about time for a second draft. In a new working paper by Wharton economists Fernando Ferreira and Joseph Gyourko, the authors argue that the idea that subprime lending triggered the crisis is misguided.

As for what really sparked the beginning of the financial crisis, try normal, credit worthy borrowers.

While subprime borrowers default at a higher rate than prime borrowers, Fierra said in an interview with Fortune that the data shown above suggest that the foreclosure crisis would have happened even in the absence of such risky lending. “People have this idea that subprime took over, but that’s far from the truth,” says Ferreira. The vast majority of mortgages in the U.S. were still given to prime borrowers, which means that the real estate bubble was a phenomenon fueled mostly by creditworthy borrowers buying and selling homes they simply thought wouldn’t ever decrease in value.

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