Whose Fault are the Defaults? Prof Offers New Ideas
Subprime Lenders Blamed Too Often in Mortgage Crisis, Liebowitz Writes
July 6, 2009
Media and politicians blame subprime mortgage lenders for a litany of problems, but when it comes to home foreclosures, the evidence doesn't completely support the accusation, economics professor Stan Liebowitz says.
The Wall Street Journal:
"New Evidence on the Foreclosure Crisis" by Dr. Stan Liebowitz
Instead of faulting predatory subprime lenders, research by the School of Management faculty member casts a darker gaze on homeowners who have negative equity — that is, owing more on a home loan than the home is worth.
Liebowitz's article, printed in a recent Wall Street Journal opinion section, is titled, “New Evidence on the Foreclosure Crisis — Zero Money Down, Not Subprime Loans, Led to the Mortgage Meltdown.”
Liebowitz says an individual who has a home with negative equity is at greater foreclosure risk because he “is more willing to walk away from the loan.”
Such negative equity cases can be caused by paying little or no down payment on a home that later sinks in value or by using a home as collateral to borrow money beyond the home's worth during a home refinancing.
Analyzing foreclosure records from December 2008, Liebowitz found that only 12 percent of homeowners had negative equity, but that they were linked to almost half of all foreclosure cases.
“Many policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates,” Liebowitz wrote. “Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.”
One problem with that reasoning is that slightly more than half of all foreclosed homes had prime, not subprime, mortgages, Liebowitz wrote. Further, figures from the third quarter of 2006 show that the foreclosure rate for prime loans grew at almost twice the rate of foreclosures for subprime loans.
“The important factor is whether or not the homeowner currently has or ever had an important financial stake in the house,” Liebowitz wrote.
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