insuring 44 percent in 2003 to insuring 22 percent of all subprime loans in 2005).<sup>65</sup> Mian and Sufi (2009) show that the number of mortgages obtained in a zip code was _negatively_ correlated with household income growth. At its prime in 2006, 25 million out of 55 million mortgages were subprime mortgages.<sup>66</sup> This vastly expanding role of the private sector in providing subprime mortgages was motivated by its high profitability and the expectation of an implicit government bailout.<sup>67</sup> 89. In addition, it was encouraged by a range of new government policies favoring lending to subprime borrowers. These policies had been catalyzed by lobbying of the financial sector which realized that policies aimed at expanding the mortgage market to low-income households would appeal to politicians representing low-income constituencies. An empirical study of the political economy of the subprime mortgage credit expansion carried out by Mian, Sufi and Trebbi (2011) finds that special interests, as measured by campaign contributions from the mortgage industry and constituent interests, and measured by the share of subprime borrowers in a congressional district, influenced U.S. government policy toward the housing sector during the subprime mortgage credit expansion from 2002 to 2007.<sup>68</sup> Specifically, from 2002, mortgage industry campaign contributions increasingly targeted U.S. Representatives from districts with a large fraction of subprime borrowers. The researchers find evidence that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward housing finance during the subprime mortgage credit expansion. While the empirical evidence shows an influence of both factors, it does not determine their relative weight, i.e., whether the strong influence of constituents from low-income households or the campaign contributions by lobbyists were the key factors explaining the voting behavior of congressmen. However, given that the composition of congressmen‘s constituencies has been unchanged for a long time, while the support through lobbyists for key legislative changes peaked around 2003-2006, one may conclude that influence by lobbies representing the financial sector was the most important factor explaining the expanding government support for the subprime market in the run-up to the crisis.<sup>69</sup> 90. The subprime mortgage market was also fuelled by both public and private sector investments from Germany, Japan, China and a range of emerging economies that had large

> 65 New York Times: October 4, 2008:   “Pressured to take risk, Fannie reached tipping point.” 66 Mian and Sufi (2010).

> 67 This is the so-called “Greenspan Put”. See also paragraph 80.

> 68 Key legislation adopted by congress includes the American Dream Downpayment Act of 2003, which aimed to increase homeownership among low-income communities by providing down payment and closing cost assistance. In addition, a number of laws that would have prevented predatory lending and weakened protection by the government in the case of default were discussed, but never put up for votes, including the Responsible Lending Act of 2005, the Prohibit Predatory Lending Act of 2005 and the Federal Housing Finance Reform Act (2005).

> 69 Rajan (2010) argued that it was the increasing income disparity since the 1990s that led politicians to expand the mortgage market to low-income households so as to obtain the low-income constituencies’ support. The empirical evidence here does not support his argument.

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