Did the U.S. Housing Crisis Start in 2003? The Impact of Borrower Subsequent Debt

Abstract

This article examines two apparent anomalies concerning the credit performance of conforming mortgage loans. First, the 2003–2004 loan vintage displayed high default rates, even though it suffered little home price depreciation. Second, the refinance loans from the 2006–2007 vintage displayed markedly higher default rates than contemporaneous purchase-money loans. Based on an analysis of credit bureau data, the authors conclude that subsequent debt fully explains the default performance of the 2003–2004 vintage but not of the 2006–2007 vintage. The authors suggest that appraisal bias may account for higher default rates on loans in the latter vintage. The article proposes the use of a vintage-based subsequent debt risk index to augment mortgage credit risk management for market participants as well as policymakers.