The mortgage crisis has stirred up a lot of questions, but perhaps the most important is "Why did this happen?" Atif Mian and Amir Sufi of the University of Chicago think that mortgage originators shoulder much of the blame, and the answer can be found in one five-digit number: the ZIP code.
In their paper The Consequences of Mortgage Credit Expansion: Evidence From the 2007 Mortgage Default Crisis, they look at ZIP codes where in the mid-1990s a high number of homes had been denied mortgage loans, creating high unfulfilled demand. Mian and Sufi detect a shift of credit toward these ZIP codes after 2001. The problem: These same ZIP codes saw relative declines in income and jobs over the same period, making them breeding grounds for defaults. But the housing prices in these ZIPs kept climbing as mortgages were sold to investors shortly after origination, thus shielding the originators from risk. It was this practice that allowed so many bad loans to proliferate, the authors argue.