I will say it again, we have misunderstood the GFC and making the same mistake twice!
The St. Louis Fed said back in 2014 (see link below): “In our view, the ultimate underlying cause of the foreclosure crisis was the emergence of a significant housing price bubble and its subsequent collapse.”
After reviewing foreclosure data their conclusion was that predatory lending was not the root cause but a housing bubble and the end of a leveraging cycle.
It was not just subprime, as more prime lenders defaulted. It wasn’t underwater homes, as more positive equity borrowers defaulted and were foreclosed on from 2006 to 2009.
They even said, “Consequently, strong predatory lending restrictions, while desirable, would likely be insufficient to avoid a future foreclosure crisis should another housing bubble emerge.” A Nostradamus prediction?
The GFC was greatly misunderstood because we wanted to blame a few predatory lenders that went bankrupt and poor and uneducated borrowers. In fact, their data showed that “We found that many foreclosed households were young with relatively high income and education levels.”. Not exactly the narrative we were told in the media.
Today we are facing the same issues. A large over-leveraging cycle (households have accumulated debt at nearly the same rate from 2020-2022 as from 2004-2008), created a housing bubble, and are hiding behind high equity gains and lending standards thinking that those will pay the mortgage and not generate a foreclosure crisis.
If the Fed cannot orchestrate a soft landing we are in trouble. The only question now is, can the Fed stick the landing and save the housing market from a GFC 2.0?