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Saturday, July 4, 2009

Why Did Foreclosures Happen

Stan Liebowitz took on this question in a study he headed and he summarized his results today in the Wall Street Journal. He makes this simple conclusion: more than anything no or negative equity caused the burgeoning foreclosure crisis.
Professor Liebowitz', a professor of economics at the University of Texas at Dallas, conclusions mostly match up to what I have heard anecdotally over the last two years or so. For instance he puts the myth to rest that sub prime loans, and stated loans in particular, were the primary cause of the crisis. In fact, according to Liebowitz' data, prime loans have been the primary culprits for foreclosures since the second half of 2008. When Alt A went into crisis, more than one bank rep told me that their bank's analysis of defaults found that more high credit score borrowers were defaulting on no money down loans than low score borrowers. That was the problem with Alt A. Once analysis was done there was no longer anything redeeming. More often than not, it was no money down loans that were cited as the most problematic. It's why no money down went away long before stated loans did.
I found Liebowitz' conclusions lacking in this way. I believe the real culprit of the foreclosure explosion is the so called layering risk. In other words, I believe the real problem wasn't merely that there was a growth in no money down loans, but that no money down was created for poor score borrowers and included stated.
Liebowitz doesn't appear to have seen how many no money down loans that went into foreclosure were also done stated. He didn't measure how many no money down loans that went into foreclosure were also for borrowers below 620 scores. The combination of the three would likely have also found an enormous amount.
What Liebowitz' research does point out is that borrowers were much more responsible for the foreclosure explosion than the common narrative in the MSM. His research indicates that borrowers are getting foreclosed on because they never put any money into the property more often than any other reason. The common narrative is that borrowers were tricked into complicated loans. Liebowitz' research found that this reason was far less significant than borrowers never putting any money down when buying the property. Because these people have no equity, they have no equity to lose in case of a foreclosure.
Liebowitz' research again proves that the mortgage crisis was a complicated set of events and blaming the big bad mortgage professionals exclusively is terribly simplistic.

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