According to liberal wisdom, unbridled capitalism is largely to blame for the current foreclosure mess. It was those subprime lenders. First, they made so many "liar loans," loans where lenders never bothered to do any income verification. On top of that, those unscrupulous subprime lenders supposedly misled borrowers into taking out adjustable rate mortgages that they would never be able to afford when monthly payments inevitably went up.
Not so, says Stan Liebowitz, professor of economics at the University of Texas.
'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.)
[...[
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.'
The most important factor was the amount of homeowner equity in the house. In other words, if forced to sell would the homeowner get enough from the sale of the house to pay off the existing mortgage. When the answer is no, foreclosure is a likely result.
How many homeowners have been forced to sell because they lost their jobs? The solution to the foreclosure crisis is strong economic growth and job creation. Unfortunately, the Obama administration has chosen to pursue policies aimed at income redistribution rather than economic growth.
Comments