We’ve long heard that most of the so-called victims of the mortgage crisis are people who bought houses they couldn’t afford, which tends to make us unsympathetic to such “victims”. It turns out that narrative isn’t true; most of the “victims” are even less sympathetic than that:
One of Alan Greenspan’s lesser-known contributions to the annals of the credit crisis was a pair of studies he co-authored for the Fed, sizing up exactly how much Americans borrowed against their home equity in the bubble and what it was they were spending their newfound (phantom) wealth on. Greenspan estimated that four-fifths of the trifold increase in American households’ mortgage debt between 1990 and 2006 resulted from “discretionary extraction of home equity.” Only one-fifth resulted from the purchase of new homes. In 2005 alone, U.S. homeowners extracted a half-trillion-plus dollars from their real estate via home-equity loans and cash-out refinances. Some $263 billion of the proceeds went to consumer spending and to pay off other debts.
Only a fifth of the explosion in mortgage debt was actually people buying houses! Four-fifths was people extracting money from their houses, and about half of that went to consumer spending and other debts.
(Via Will Collier.)
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