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10.06.20

Subprime May Not Have Caused the 2000s Housing Crisis, Finds Cleveland Fed Researcher

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During the 2000s housing boom and bust, Cleveland witnessed both high growth in subprime debt and high foreclosure rates. Despite this pattern, it is not clear that these two facts are directly linked. In this Economic Commentary, Cleveland Fed researcher Lara Loewenstein explains how the housing boom and bust in Cleveland supports the narrative that subprime was largely a consequence of a broader national phenomenon as opposed to a primary cause of subsequent foreclosure crisis.

This Economic Commentary compares Cleveland’s Slavic Village neighborhood, which was a prime example of the subsequent foreclosure crisis because of its high amount of subprime borrowing and high number of foreclosures, with a higher-income Cleveland neighborhood, and finds that the percentage change in default rates during the bust was no larger in Slavic Village despite its higher subprime mortgage debt growth.

While subprime debt was a prominent source of debt in Cleveland and especially in its Slavic Village neighborhood during the 2000s, it is difficult to peg subprime debt as playing a causal role in the subsequent foreclosure crisis.

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

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