Subprime May Not Have Caused the 2000s Housing Crisis: Evidence from Cleveland, Ohio

Lara Loewenstein of Cleveland Fed in this research points out that foreclosures were mainly an outcome of low economic growth in the region. These economic conditions propelled people to opt for subprime loans. Even without these loans, there would have been foreclosures.

Cleveland’s experience of the housing boom did not follow the newsworthy narrative of high house price and mortgage debt growth. Instead it saw low and steady house price growth and moderate mortgage debt growth. Despite this, a neighborhood of Cleveland—Slavic Village—was the poster child of the subsequent foreclosure crisis because of its high amount of subprime borrowing and high number of foreclosures. What was underappreciated at the time was that mortgage defaults and foreclosures were not new to Slavic Village but had been a feature of the neighborhood since before the housing boom and the emergence of subprime.

Cleveland has struggled over the past few decades. During the 2000s, manufacturing employment in the United States declined, directly affecting Cleveland (Schweitzer, 2017). As employment declined, population declined. Between 2000 and 2007, the city of Cleveland lost over 10 percent of its population. Because of this history, Cleveland has a relatively large number of low-credit-score borrowers. The median resident of Cleveland has both lower income and credit quality than the median resident of the United States. In 2005, the median household income earned in Cleveland was $24,000, compared to $46,000 for the country. The median Equifax Risk Score for all households in Cleveland in 2005 was 623; in the country it was 709. The population of Cleveland has also reallocated itself within the city, with more people moving out of low-income neighborhoods and into higher-income neighborhoods, a process that sped up during the Great Recession (Nelson and Klesta, 2017). Neighborhoods such as Slavic Village have borne the brunt of this change.

Despite its prevalence, there is no evidence that subprime debt per se was a catalyst in this process. While it is impossible to know for sure, a story that fits the facts is that subprime was simply a lenient and relatively low-cost way of obtaining mortgage debt. Cleveland borrowers who would have otherwise relied on the FHA or GSEs for debt switched to subprime because it allowed them to avoid long wait times, cumbersome application processes, and the requirement that they purchase private mortgage insurance. Because of its history, Cleveland had a relatively large share of borrowers for whom this switch made sense.

It is certainly possible that had subprime not existed, Cleveland—and Slavic Village—still would have seen a similar number of foreclosures. It simply would have been foreclosures on properties backed by FHA and GSE-insured loans instead of subprime.


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