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From the Cleveland Fed: Ten myths about subprime mortgages

Posted by: Peter Coy on July 22, 2009

Yuliya Demyanyk, a senior research economist at the Federal Reserve Bank of Cleveland, has just written an article called “Ten myths about subprime mortgages.” I don’t buy everything she says. For one thing, I think the piece leaves the impression that subprime mortgages weren’t a big problem. Clearly they were. Still, the piece makes for interesting reading. Here’s a synopsis of her “myths”:

Myth 1: Subprime mortgages went only
to borrowers with impaired credit

Myth 2: Subprime mortgages promoted homeownership

Myth 3: Declines in home values caused
the subprime crisis in the United States

Myth 4: Declines in mortgage underwriting standards
triggered the subprime crisis

Myth 5: Subprime mortgages failed
because people used homes as ATMs

Myth 6: Subprime mortgages failed
because of mortgage rate resets

Myth 7: Subprime borrowers with hybrid mortgages
were offered (low) “teaser rates”

Myth 8: The subprime mortgage crisis in the United States
was totally unexpected

Myth 9: The subprime mortgage crisis in the United States
is unique in its origins

Myth 10: The subprime mortgage market was
too small to cause big problems

Reader Comments

bench in Toronto

July 22, 2009 10:14 PM

Yuliya Demyanyk needs to go back to school to re-learn statistics.

Specifically, she needs to be reacquainted with something called Naive Bayes Classification.

1. She talks about P(loan was subprime | impaired credit) when she should be considering P(impaired credit | loan was subprime).

2. Here she's confusing herself and taking the word "promoted" to mean "achieved".

3. Falling home prices didn't cause the subprime crisis. The subprime crisis caused home prices to fall.

4. Again, she's measuring P(subprime loan | lax lending standards) when she should be measuring P(lax lending standards | subprime loan).

5. Again, she's measuring P(subprime loan | home used as ATM) when she should be measuring P(home used as ATM | subprime loan), and compare that with P(home used as ATM | non subprime loan). But this point is neither here nor there. Rising home prices caused people to use their homes as ATMs, since you can't extract equity without equity; and you only get equity by either a) paying the mortgage, and/or b) home prices rise.

6. I'll have to save this for later...

7. Here she's completely missing the point. The problem isn't that that hybrid mortgage teaser rates were lower than prime teaser rates. The problem was the fact that *were* teaser rates at all! This compelled people to feel they could afford houses they couldn't actually afford, but threw caution into the wind when they speculated their homes would be worth much more when their rate was due to reset, at which point they would simply sell.

8. It was very expected. Home prices skyrocket but average and median incomes don't increase to match? At the end of the day *somebody* has to pay the mortgage.

I don't have time to read the rest.

Bottom line is, if her level of critical thinking/reasoning is what it takes to be a Senior Research Economist at a Federal Bank, god help you U. S. of A.

Legacy Flyer

July 22, 2009 11:43 PM

I must say that I believe(d) some of these myths. For example:

Myth 2
Myth 3
Myth 4
? Myth 5
Myth 7

Now is she going to tell us why these are myths?

David Doney

July 26, 2009 2:17 AM

A very insightful analysis from Ms. Demyanyk. Keep the facts coming. She says: "...the housing boom allowed homeowners to refinance even the worst mortgages..." So what exactly caused the availability of credit for refinancing to suddenly stop? Was it the decline in housing prices, shattering the myth that they always go up? Fears in the capital markets (if so, triggered by what specifically?) She seems to say in Myth #4 that it was housing prices, but then says it wasn't in her concluding remarks. I'd like a more clear conclusion in the sequel!


July 26, 2009 3:41 PM

The Federal Reserve is comprised of several greedy private bankers in pursuit of their own financial interest at the expense of the American people. Its agenda is to confuse and conceal the effects of its “Monetary Policy” that has robbed Americans of their savings and wealth. Because it was the Federal Reserve that caused the real estate asset bubble and Wall St financial collapse, Federal Reserve's Demyanyk is now trying to do damage control by spinning the truth as "myth." Recent financial turmoil have caught the hands of the Federal Reserve’s private bankers stealing money from the cookie jar and consequently placed the Federal Reserve under the crosshair. Demyank’s propaganda tries to destroy the incriminating evidence before detection. Without providing any facts in support of her position, Demyanyk’s specious argument is an attempt to deflect the blame and wash the dirty hands of the Federal Reserve. Since its creation in the early 1900s, the Federal Reserve's manipulation of money supply has been instrumental in causing the boom/bust cycles and its resulting misery. In every boom/bust cycle, the private bankers of the Federal Reserve reap the benefit by printing ever more green-backs as it pursues the policy of "quantitative easing" while giving themselves free money in the name of "injecting liquidity" into the economy. Just as there is no free lunch, there is no free money. Any guess who has to pay? The American consumer has seen his one dollar earned in 1910 worth 5 cents today, representing a loss of purchasing power of 95% as measured from early 1900s. This is theft by inflation via the invisible hand of the Federal Reserve. During the first half of the 20th century, Communist Russia and China instituted "Land Reform" laws that stole land from capitalist landlord. Today in America, the Federal Reserve institutes an obscure "Monetary Policy" that apparently steals money from every American, reducing many of them to rely on the government social programs or hand-outs in their old-age or as pitiful paupers living off food-stamps, welfare, and garbage cans. If America wants to save capitalism, America must abolish the Federal Reserve, and just as well, send Damyanyk’s to the rehabilitation camp.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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