MIT researchers are out with a white paper saying the Great Recession may have been caused by prime borrowers and not just sub-prime borrowing as has long been said. Over-optimism by prime borrowers was a major culprit.
Shashank Shekhar, the CEO of Arcus Lending, writes at The Housing Wire, the researchers’ theory is “one that revolves around ‘housing expectation,’ a phenomenon that happened when lenders caught the over-optimism bug and refused to admit that prices could come down once the bubble stage threw the economic fundamentals to the backburner.
Shekhar also says the researchers “determined lenders were fixated on the increasing collateral value, and this, in no small terms, skewed their mortgage assessments. Lenders felt that the skyrocketing home prices had given the housing collateral a far greater worth than what the loan-to-value ratio suggested, and thus they thought they were indemnified against any possible default.
“So, when house prices dropped and the collateral value went bust, lenders did not have a place to run for cover.”
To learn more about the MIT research, click on the image above.