It is said that to come up with a solution, you first need to identify the problem. We know that foreclosures keep on coming like they are powered by the Energizer Bunny, but what has created this problem? Is it subprime? Predatory lending? Mortgage resets?
While those are part of the problem, check out this chart from yesterday’s Wall Street Journal: [Thanks to everyone that forwarded this!]
According to author and professor Stan Liebowitz:
[B]y 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.
Does Liebowitz believe that housing bailouts will solve the problem?
Although the government is throwing money — almost $2 trillion and counting — at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted. While Federal Reserve actions have succeeded in reducing mortgage interest rates, low interest rates induce refinancings more than they do home purchases.
To be sure, refinancings may put money in peoples’ pockets, but it is home purchases that directly impact house prices. Nevertheless, housing prices are likely to stop falling fairly soon with or without government policies. That’s because current prices are approaching their long-term, inflation-adjusted pre-bubble level. These pre-bubble prices appeared to be a long-term equilibrium, meaning that prices would be expected to return to those levels once the government’s efforts to artificially increase homeownership receded. Unfortunately, recent attempts by politicians such as Barney Frank (D., Mass.) to again artificially increase homeownership levels might delay this return to sustainable equilibrium prices.
So we should let prices alone and let them find their own level? Gee- where have we heard that before? : )
What it takes to fix housing? THAT, is the question.
It takes viable full employment paying wages that correspond to today’s home prices; which at this time is physically impossible.
The U.S. has violated the most elementary laws of physics in our ill conceived quest for exponential growth. Physics won.
And now with Barney Frank wanting to loosen up loan requirements with Fannie and Freddie the insanity continues.
Every federal loan should be non-recourse for the first 20% of the properties value. This would make it harder for these borrowers to walkway without taking any responsibility. These loans are taxpayer backed and should have stricter requirements.
in my case it’s simple:
no job, no mortgage payment.
…and nothing on the horizon.
8 months of this has destroyed my eleven year effort. not to mention the decimation of my career.
i wasn’t in negative equity, but when i contacted the “helpful professionals” who wanted to short sale my house, they all said the same thing: don’t expect to get anything from it.
realtors said this: “my fee is 6%, sorry… not negotiable because there are just so-o many of you”.
sharks in the water.
B of A can take the loss. i’m already ruined.
ps… love your anti-spam word: ” ridiculous”
poignant.
aztrader,
I agree with your sentiments. We are attempting to get the cart well ahead of the horse. There are presently 19.6 Million Americans who are unemployed. Some 200,000 jobs should be added each and every month to stabilize incoming first time employment. Double that rate to rehire the unemployed within TEN YEARS! As I stated before, physics won.
Mr. Frank seems to lack the knowledge that employment is the long term basis for housing construction, housing construction is not the long term basis for employment…after all, we have impressively demonstrated the catastrophic results of the latter approach.
I like that chart. It neatly shows the whole downward spiral we are in, and the economists apparently couldn’t see. Negative equity is causing, and caused by, foreclosures. The other four items caused negative equity to hit a point where it kept feeding itself.
It’s interesting how the author apparently can see that, but does not think prices will below the previous median. As mtnmike and aztrader pointed out – government intervention is sustaining the other four items, so why should the downward spiral stop just because we get to “historic levels”? Prices may be at historic levels, but unemployment won’t be, the number of bad loans being made won’t be, and government spending (and the taxes to compensate for it) won’t be.
I’m thoroughly confused by the graphic.
How is “Negative Equity” not related to “Less than 3% down”? I know they’re both associated at the bottom, but they’re one and the same problem.
In addition, how in the freak is a Subprime FICO score a cause of foreclosure? Whaaa? I’ve heard of predictive models, but I’m yet unaware that someone in their mind says they’re not going to make their payment because their FICO is low. Besides, by the time the foreclosure or short sale happens, their credit is trashed and every one of them has a subprime FICO. Why don’t we just solve the problem and give these people higher FICOs so they’ll continue to make their payments. That’s basically free, a lot cheaper than the trillion-dollar bailouts we’re working with. Just legislate anyone in danger of defaulting to have a 750 FICO and we could have saved almost 150,000 foreclosures in just 6 months. No government program to date can attest to such results.
Absurd
i’m with chuck. i don’t get the graph? while i find it interesting, it’s a bit confusing? are some foreclosures included in more than one category or did the professor just make a best guess as to the situation and then categorize it? i would think that many had negative equity AND put less than 3% down AND had a reset AND had a low FICO AND may be unemployed. are they included in every category? or was the sample just given a questionaire that said “why was your home foreclosed? choose a,b,c,d, or e?”
I had the same questions as AZSALUKI about how the numbers where compiled. More important, I think the entire premise of the graph is deceptive. How can those be the CAUSE of a foreclosure? If someone paid down 3% or less that doesn’t cause anything other than a higher mortgage payment and crappy terms. Similar arguments can be made for the others except unemployment. What’s the phrase? Correlation does not mean causation?