Foreclosure Crisis Driven By Severe Decline In Housing Prices, Not Relaxation Of Underwriting Standards

the foreclosure crisis was primarily driven by the severe decline in housing prices that began in the latter part of 2005, not by a relaxation of underwriting standards

according to a research paper by the Federal Reserve Bank of Atlanta, "Decomposing the Foreclosure Crisis: House Price Depreciation versus Bad Underwriting" by Kristopher Gerardi, Adam Hale Shapiro, and Paul S. Willen, Federal Reserve Bank of Atlanta Working Paper 2009-25, September 2009.

From the abstract:

conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices that began in the latter part of 2005, not by a relaxation of underwriting standards on which much of the prevailing literature has focused. We argue that relaxed underwriting standards did severely aggravate the crisis by creating a class of homeowners who were particularly vulnerable to the decline in prices. But, as we show in our counterfactual analysis, that emergence alone, in the absence of a price collapse, would not have resulted in the substantial foreclosure boom that was experienced.

The abstract is available here. The paper is available here.

The paper's authors are:
Kristopher Gerardi, Research Department, Federal Reserve Bank of Atlanta;
Adam Hale Shapiro, U.S. Department of Commerce, Office of the Chief Economist, Bureau of Economic Analysis;
Paul S. Willen, National Bureau of Economic Research and Research Department, Federal Reserve Bank of Boston.