The Real Subprime Story
By Arnold Kling
We attribute most of the dramatic rise in foreclosures in 2006 and 2007 in Massachusetts to the decline in house prices that began in the summer of 2005. Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages.
The villain-victim story, in which lenders will villains and borrowers were victims, is wrong. Both borrowers and lenders acted as if home price appreciation is a law of nature. When this proved to be incorrect, some people got stuck in homes that they could not afford.