Posted by David Bernstein:
No Money Down Mortgages--A Predictable Problem:
http://volokh.com/archives/archive_2009_07_05-2009_07_11.shtml#1246841895
On Friday, [1]co-blogger Kenneth linked to [2]this piece in the Wall
Street Journal explaining that the main cause of the "foreclosure
crisis" is no-money-down mortgages. The author of the piece and
critics disagree on whether the problem was primarily in non-subprime
mortgages, but everyone seems to agree that 100% loan to value loans
were a major factor in the wave of foreclosures.
It's always easy to say something is predictable in hindsight, but I
can say this was eminently predictable, because I predicted it (see
below), though I linked the problem more to "nonrecourse" mortgages
than likely was warranted, given that lenders rarely seemed inclined
to go after debtor assets regardless. The wonder is that the geniuses
in charge of risk management at various financial institutions, public
and private, and the raters at the major rating agencies, didn't.
[3]Here's what I wrote in August 2005, just when the housing bubble
was peaking:
Just read that 61% of all new California mortgages this year are
interest only, no money down.... If prices drop significantly in
the next couple of years, as they likely will (given that only 17%
of Californians can now afford the median house), thousands of
people are going to walk away from their loans and let the bank
foreclose.... Sure, it will ruin their credit record, but how much
is a good credit record worth? Probably not $120,000 (the negative
equity on a $600K loan--median single family home price in
California--if prices decline a modest 20%). Anyway, many of the
loans are adjustable with "teaser" rates used to qualify the
buyers, who understand that in two years they will have to
refinance or sell, because they won't be able to afford the new
payments. They are counting on interest rates being lower, or on
being able to "flip" the house for more money, and using the
proceeds to get "back in the game." And they are likely to lose
their homes, and the mortgage[e]s are likely to lose a good chunk
of the money they are lending.
References
1. http://volokh.com/archives/archive_2009_06_28-2009_07_04.shtml#1246650505
2. http://online.wsj.com/article/SB124657539489189043.html
3. http://volokh.com/archives/archive_2005_08_14-2005_08_20.shtml#1124513110
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