Securitization and the real estate bubble

Some researchers at the University of Chicago recently revised an interesting paper regarding The Consequences of Mortgage Credit Expansion. A few of the possible explanations for the growth in subprime mortgage lending:

• Income growth prospects: borrowers are earning more, so they can afford more credit
• House price appreciation expectations: houses are appreciating faster, so lenders are more willing to take on credit risk since the more valuable collateral reduces their loss given default
• Supply of credit growth: securitization enabled mortgage originators to sell loans to other entities, increasing their capacity to make more loans

Their study of zip code level data finds that in spite of flat or declining incomes and stagnant house prices, lending increased substantially from 2002 and 2005. Over that period, credit provided to subprime zip codes doubled and since 2006, the foreclosure rate for those same areas is three times as high as neighboring metropolitan areas. They cite securitization as the main force behind the expansion of subprime credit, a supply-based explanation. There may also be some moral hazard at work here: increased securitization is much more prevalent among subprime zip codes and default rates increase much more rapidly for loans originated in areas of high securitization.

The next question is: why did securitization increase so much? They leave that for another paper, but it might be related to technological innovations in risk management, demand from GSEs like Fannie and Freddie, or the flood of capital into the US during this time period.