People who worked in the financial industry on the eve of the mortgage meltdown may themselves have believed that home prices would continue to rise.

As evidenced by their own home purchases, executives who handled mortgage securitizations showed little anticipation of the subprime crisis and subsequent crash in the housing market, according to a paper published recently by economists Ing-Haw Cheng and Sahil Raina at the University of Michigan and Wei Xiong at Princeton.

The economists, who set out to test the theory that mortgage professionals were aware the housing market was in trouble yet did little to dampen speculation, sampled a group drawn from attendees at the American Securitization Forum's 2006 meeting in Las Vegas.

After screening out attendees who worked for credit card, student loan and other finance companies, the economists came up with a group of 400 investors and issuers who worked as senior and midlevel managers at JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (NYSE:C), Wells Fargo (WFC), Countrywide, Lehman Brothers and other firms that securitized mortgages.

The economists, whose work was first reported in the Wall Street Journal, used a database of public records from Lexis-Nexis to collect data on the houses members of the group owned over roughly two years that preceded the bust that began in 2007. They researchers next set up two control groups: one consisting of equity analysts who did not cover the housing industry and a second made up of lawyers who did not work in real estate law who reflected how people who worked outside the mortgage industry acted during the run-up to the crisis.

The economists found that the mortgage professionals — particularly those who invested in mortgage-backed securities — during the boom were more likely to buy more expensive homes or second homes than people in the control groups. Members of the survey sample who worked at Lehman Brothers and Countrywide, which both fared poorly during the crisis, did worse in their own housing investments than people who worked at such firms as Wells Fargo (WFC), BB&T (BBT) and BlackRock (BLK), which performed better.

"Our analysis shows little evidence of securitization agents' awareness of a housing bubble and impending crash in their own home transactions," the researchers wrote. The mortgage professionals "neither managed to time the market nor exhibited cautiousness in their home transactions."

If financial firms "were complicit in relaxing lending standards in the subprime borrower market, our evidence suggests they did so without expecting it to lead to a wider crash in housing markets," the economists added.

Assessments of the financial crisis thus far reflect the challenge of separating behavior of mortgage professionals that reflected their beliefs, from conduct motivated by financial incentives, according to the economists, who call for more research into both.

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