The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis *

We conduct a within-county analysis using detailed ZIP code-level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The sharp increase in mortgage defaults in 2007 is significantly amplified in subprime ZIP codes, or ZIP codes with a disproportionately large share of subprime borrowers as of 1996. Prior to the default crisis, these subprime ZIP codes experience an unprecedented relative growth in mortgage credit. The expansion in mortgage credit from 2002 to 2005 to subprime ZIP codes occurs despite sharply declining relative (and in some cases absolute) income growth in these neighborhoods. In fact, 2002 to 2005 is the only period in the past…