“And Then They Blamed…Poor People”: The Role of the Middle Class in the Mortgage Crisis

Earlier this year, a new study was published in The Review of Financial Studies that “highlights the importance of middle-class and high-FICO borrowers for the mortgage crisis.” In an excellent summary by The Washington Post‘s Robert Samuelson,[ref]This is of the 2015 working paper version.[/ref] he summarizes the three main findings:

First, mortgage lending wasn’t aimed mainly at the poor. Earlier research studied lending by Zip codes and found sharp growth in poorer neighborhoods. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn’t true. They were much richer than average residents. In 2002, home buyers in these poor neighborhoods had average incomes of $63,000, double the neighborhoods’ average of $31,000.

Second, borrowers were not saddled with progressively larger mortgage debt burdens. One way of measuring this is the debt-to-income ratio: Someone with a $100,000 mortgage and $50,000 of income has a debt-to-income ratio of 2. In 2002, the mortgage-debt-to-income ratio of the poorest borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers also remained stable during the housing boom. The essence of the boom was not that typical debt burdens shot through the roof; it was that more and more people were borrowing.

Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. In 2006, the wealthiest 40 percent of borrowers represented 55 percent of new loans and nearly 60 percent of delinquencies (defined as payments at least 90 days overdue) in the next three years.

Remember this the next time you hear someone blaming the financial crisis on the “irresponsible poor.”

1 thought on ““And Then They Blamed…Poor People”: The Role of the Middle Class in the Mortgage Crisis”

  1. Those “blaming the poor” are simply suggesting that they, among others, took on debt burdens beyond their abilities. Many who were not so poor did the same. Of course, most of the popular blame was directed at financial institutions who allowed them to do it, but that’s certainly the most unfair, misdirected criticism of the issue. Banks were under tremendous pressure because of “fair housing” regulation. As far as many of those same banks taking opportunistic risks, this was nothing more than them attempting to cut their losses. Any responsible business would have acted likewise.

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