Zero money down, not subprime loans, led to the mortgage meltdown

http://online.wsj.com/article/SB124657539489189043.html

by rglovejoy • 17 years ago

26 15 17 years ago

online.wsj.com

grandalf4• 17 years ago

This is more of an insight into the perverse incentives created by bankruptcy/foreclosure law than it is about the way in which un-hedged systemic risk led to the crisis.

Still an interesting article.

bwd• 17 years ago

No, the point is that unhedged systemic risk is only one component of the crisis, despite what the rest of the media is blaring. The other, and perhaps more important, component was zero down mortgages and cash-out refinancings that left borrowers with no equity in their houses. Borrowers were just as irresponsible as bankers and haven't gotten the bad press they deserve. "It's the leverage, stupid" should be the mantra of this crisis.

grandalf4• 17 years ago

Well, I don't disagree...

It's an example of moral hazard. How much is your pristine credit rating worth? If your house is under water by $100K maybe it's worth taking a hit -- it may be easier to rebuild your credit rating over five years than to repay $100K.

jhancock2• 17 years ago

"Borrowers were just as irresponsible as bankers"

The borrower never has been and never should be the party to determine if they can repay a loan or if the assets being leveraged will retain their value through the life of the loan. This is the job of the lender. Yes, it was "irresponsible" for people to borrow so much, but the burden goes to the lender...and the regulators that allowed the lenders to behave that way...and the people that voted for elected officials that enabled regulators to do what they did.

In short, if you make money so freely available, you can expect people to take it.

apinstein3• 17 years ago

Wow that article is a perfect example of how people bastardize statistics. Correlation != causation, people, say it with me! It's also pretty clueless in general.

Stuff like:

> 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

Yeah, that's because only a small % of all mortgages are subprime! But a huge percentage of subprime mortgages have defaulted, much higher than prime mortgages (as you'd expect).

> 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.

You mean the most "correlated" factor. This doesn't imply causation. But of course, if you have to ask which borrowers are most likely to just walk away, it's the ones with nothing more to lose!

Such a sad, pointless article. If he is on to anything, you can't even know it because his analysis is so poor.

If you really dig this stuff, follow this blog:

http://www.fieldcheckgroup.com/blog/

seldo• 17 years ago

While correlation doesn't imply causation, I don't think that's quite what he's doing here.

To your first point: even though the rate of default of subprime mortgages is much, much greater, the massive losses that are bringing down banks are the problem. So his point is that the rate of foreclosure doesn't matter so much as the volume: so focus on what is causing foreclosures in the biggest category.

To your second: the remedies currently being considered by congress all focus on regulating the interest rate of mortgages. His point is that the rate, while a factor in determining foreclosure, is much less important than negative equity, and the remedies for preventing negative equity are different.

apinstein3• 17 years ago

Fair enough rebuttal.

I do agree with a lot of his conclusions, but some are misguided.

He seems to think that only one factor can be the critical factor, but I think he's missing the point. If someone cannot afford their mortgage, they are pretty much going to get foreclosed on. It's just a matter of time. However, the more negative equity they have, the sooner they are likely to do this.

Also, he craps on Obama's "making homes affordable" plan because of it's target of 31% housing-to-income ratio. But this program is only available for those with Loan-To-Value ratios under 105%, precisely because frankly it's pretty obvious that if you are way underwater on your house you are better off walking away from it.

Now, I don't really think that we should've spent the money on pretty much any program to save homeowners. Giving $3000 to a mortgage company for refi'ing a loan that empirically goes to foreclosure anyway 50% of the time is a giant waste of time and money. Both the banks and homeowners got screwed by entering these loans, and they should be left to rot with them.

It probably would've been better to try to convince banks to just turn the owners into renters for a 3-5 year period to let the mortgage market meltdown run its course while somewhat punishing both parties that entered such horrible deals.

Oh well.

jasonkester• 17 years ago

No, the only thing that happened is that lots of people bought things they couldn't afford and, unsurprisingly, couldn't pay for them. That's it.

It doesn't help at all to blame banks for this. It's readily apparent that if you purchase a house, regardless of the terms, you will eventually need to pay for a house. It's not rocket surgery. The corollary to this is that "if you can't afford a house, don't buy a house." Anybody ignoring that simple fact is likely to run out of money.

Many of us realized this, didn't buy things we couldn't afford, and therefore still have money. It's amazing that people would expect to blame some random 3rd party for their own foolishness.

http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-...

viggity• 17 years ago

this guy needs to familiarize himself with Bayes' theorem. I don't know the real numbers, but I would hope and think that the number of prime mortgages that we're given is 10-20 times larger than the number of sub-prime mortgages.

So, a better question might be what percent of prime mortgages and what percent of subprime mortgages go into foreclosure. Not what percent of foreclosures comes from prime vs subprime.

Zero money down, not subprime loans, led to the mortgage meltdown

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