Tuesday, July 07, 2009

New Evidence on the Foreclosure Crisis - WSJ.com

Here is a little game for you. Do ask ten people on the street what caused to all of the defaults and problem loans that led to the bank failures that led the the economy falling?

Chances are subprime lending and lying banks will be fairly high on the list of answers. Unfortunately, an article in the WSJ by Stan Liebowitz suggests that these common answers are wrong.

What caused the problem? Low and no-money-down borrowing.

The article: New Evidence on the Foreclosure Crisis - WSJ.com:
"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."

and later

"...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."

and later yet:

"...stronger underwriting standards are needed -- especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell"

HT to John Carney and the good folks over at ClusterStock's Business Insider

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