Atif Mian

This is a nice companion work to Michael Lewis' The Big Short. If the Lewis book is the "Band of Brothers" equivalent of the cause of the Great Recession, than this might be the college lecture series on it, taught by the Economics Department. Lewis concentrated on the what one might call the "bad actors", while these authors concentrate on the bad system, emphasizing how household debt and how it is managed was the driving force on how the Great Recession developed and why it was so slow in gaining some recovery. "As it currently stands, the [American] financial system forces all the risk on the households that can least afford to bear it." Frankly, I can't imagine taking out a mortgage now without having all the insight that this book and Lewis' book have given me. I am reminded of the fact that our bank loan officer thought us stupid for not taking out a home equity loan to finance our latest car, instead of getting a car loan. The fact that this would have put our house at risk, was apparently not a factor to our lender...or maybe it was. This was before the collapse of 2008. This isn't rocket science. As reading this book will prove.… (plus d'informations)

In House of Debt, Atif Mian, an economist at Princeton University, and Amir Sufi, a finance professor at the University of Chicago, make the case that household debt was the 2008 recession’s main culprit. This is a nuanced view that differs slightly from the view that it was the 2007 home price decline.

Mian and Sufi point out that the poorest homeowners suffered the most from the crash in home prices. They relied the most on home equity for net worth. Richer homeowners had other non-real estate assets that were less directly affected by the decline in home prices.

You can compare the dramatically different effects on the economy between the 2003 crash in internet stocks and the 2007 crash in home prices. The 2003 crash mostly hurt those with enough wealth to be invested in the stock market. The housing price decline hid a broader section of the population. By losing their net worth, the poorest homeowners lost their spending power, which lead to a drop in sales, which lead to a loss in production, which lead to a dramatic increase in unemployment. The 2003 crash was followed by a very shallow and brief recession, with little job loss.

The mortgage default rate from the 2008 recession was unprecedented. Since 1979 the mortgage default rate had never been above 6.5%. In 2009 the rate spiked above 10%. Loans were originated that went into default a few months later. The models for the securitized loans failed to address the widespread defaults.

There is no denying that some consumers were manipulated by lenders into taking out a lot of terrible home loans. There was a lot fraud and looking the other way on all sides of the mortgage loan closing table. But there was money to be made. Lenders flooded low-credit quality neighborhoods with credit despite the lack of indications that these loans could be repaid by the borrower.

The authors’ solution is a “shared-responsibility mortgage.” The lender takes some risk additional risk on the decline in value of the home and also gets a slice of the appreciation in value of the home. The monthly mortgage payment and amortization schedule gets reduced proportionally if housing prices fall. If prices increase, the lender gets a share of the appreciation. I think it’s an interesting idea, but not one that would work practically.

Regardless, the book is interesting look back at 2008 using empirical data.

This review first appeared: http://www.compliancebuilding.com/2014/09/13/weekend-reading-house-of-debt/… (plus d'informations)

A well written clear articulation of a specific thesis that marshals interesting empirical evidence, some relatively standard (although not necessarily widely appreciated) theories, and combines them with both retrospective and prospective policy advice. The thesis is that crisis--including the Great Depression--are caused by overlending and that when the bubble bursts highly leverage low net worth households greatly reduce their consumption--leading to a big reduction in consumer spending and a large contraction. The authors portray this household debt side story as an alternative to the "lending view" that bank lending contracts in the aftermath of the crisis.… (plus d'informations)