Posted by Kenneth Anderson:
Zero Money Down, Not Subprime Status, Leads Foreclosures
http://volokh.com/archives/archive_2009_06_28-2009_07_04.shtml#1246650505
according to S[1]tan Liebowitz, reporting in the WSJ today (Friday,
July 3, 2009 not sure if publicly available) on a regression analysis
he conducted of home mortgage foreclosures. I wonder what co-blogger
Todd makes of this; I'm not expert enough in the numbers surrounding
home mortgages to say. However, as the article says, there certainly
are policy implications, one way or the other. Here's a little bit:
What is really behind the mushrooming rate of mortgage foreclosures
since 2007? The evidence from a huge national database containing
millions of individual loans strongly suggests that the single most
important factor is whether the homeowner has negative equity in a
house -- that is, the balance of the mortgage is greater than the
value of the house. This means that most government policies being
discussed to remedy woes in the housing market are misdirected.
Many policy makers and ordinary people blame the rise of
foreclosures squarely on subprime mortgage lenders who presumably
misled borrowers into taking out complex loans at low initial
interest rates. Those hapless individuals were then supposedly
unable to make the higher monthly payments when their mortgage
rates reset upwards.
But the focus on subprimes ignores the widely available industry
facts (reported by the Mortgage Bankers Association) that 51% of
all foreclosed homes had prime loans, not subprime, and that the
foreclosure rate for prime loans grew by 488% compared to a growth
rate of 200% for subprime foreclosures. (These percentages are
based on the period since the steep ascent in foreclosures began --
the third quarter of 2006 -- during which more than 4.3 million
homes went into foreclosure.)
Sharing the blame in the popular imagination are other loans where
lenders were largely at fault -- such as "liar loans," where
lenders never attempted to validate a borrower's income or assets.
This common narrative also appears to be wrong, a conclusion that
is based on my analysis of loan-level data from McDash Analytics, a
component of Lender Processing Services Inc. It is the largest
loan-level data source available, covering more than 30 million
mortgages.
There's a very interesting graphic that goes with the story, titled
"No Skin in the Game" summarizing the data.
The analysis indicates that, by far, the most important factor
related to foreclosures is the extent to which the homeowner now
has or ever had positive equity in a home. The accompanying figure
shows how important negative equity or a low Loan-To-Value ratio is
in explaining foreclosures (homes in foreclosure during December of
2008 generally entered foreclosure in the second half of 2008). A
simple statistic can help make the point: although only 12% of
homes had negative equity, they comprised 47% of all foreclosures.
Further, because it is difficult to account for second mortgages in
this data, my measurement of negative equity and its impact on
foreclosures is probably too low, making my estimates conservative.
What about upward resets in mortgage interest rates? I found that
interest rate resets did not measurably increase foreclosures until
the reset was greater than four percentage points. Only 8% of
foreclosures had an interest rate increase of that much. Thus the
overall impact of upward interest rate resets is much smaller than
the impact from equity.
To be sure, many other variables -- such as FICO scores (a measure
of creditworthiness), income levels, unemployment rates and whether
the house was purchased for speculation -- are related to
foreclosures. But liar loans and loans with initial teaser rates
had virtually no impact on foreclosures, in spite of the dubious
nature of these financial instruments.
Instead, the important factor is whether or not the homeowner
currently has or ever had an important financial stake in the
house. Yet merely because an individual has a home with negative
equity does not imply that he or she cannot make mortgage payments
so much as it implies that the borrower is more willing to walk
away from the loan.
References
1. http://online.wsj.com/article/SB124657539489189043.html
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