Foreclosure Crisis Caused By Zero Money Down, Not Subprime Loans: Study

wsj.com:

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

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Read the whole story: wsj.com

Comments

[knosiswar]

"They Warned Us About the Mortgage Crisis"
State whistleblowers tried to curtail greedy lending—and were thwarted by the Bush Administration and the financial industry

http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm

The OCC "took 50 sheriffs off the job during the time the mortgage lending industry was becoming the Wild West "

[knosiswar]

Another good article buy the same authors.

"How Banks Are Worsening the Foreclosure Crisis"
How the banking industry is undermining efforts to keep people in their houses

http://www.businessweek.com/magazine/content/09_08/b4120034085635.htm

"By mid-2007, Bush Administration officials were deeply worried about the financial industry's unwillingness to confront the growing catastrophe. Even banking lobbyists say they realized that their clients had lapsed into denial. The K Street representatives agreed that Treasury Secretary Henry Paulson needed to step in, says Erick R. Gustafson, then the chief lobbyist for the Mortgage Bankers Assn. "It was like an intervention," he says. "We had to get Treasury involved to get the banks to give us information."

[brownstoness]

With consumer deleveraging and credit crunch - we cannot have any quick recovery - L is best case scenario. Speculative stock buying and PPT euphoria is no substitute for anything.

Credit is falling so much - private credit decreased by $1.8 Trillion is the first quarter, consumer credit by $90.7 billion (annualized). Household net worth down by $13.87 trillion.

There is no trigger for recovery - new technology, new markets, demographics, new ideas. Green is just a boondoggle and BRICs can only do so much. JPM and GS etc are just trying to create another bubble - it suits their ends not yours.

hat tip to http://iamned.blogspot.com

[BBackSoon]

All I can say is Bull Shite!

I put 20% down and am still having trouble. When I bought my house I made plenty of money to pay the bills and wife could stay home and volunteer at school. But in the past 8 years the only bill that has not jumped is my house payment, at least the principal is the same, taxes and insurance have doubled. Utilities and every other bill I pay have doubled or tripled, but my pay creeps up 3% a year, so I have less buffer zone.

I was responsible when I bought my home but I was stupidly thinking I would continue to make more and more money and prices would simply ratchet up at the rate they had for most of my adult life. How many years did we pay around $.90 to $1.50 for gas? From the mid 80’s to the early 2000’s prices were more or less fixed. That all changed with all of the Deregulation and lax enforcement at the end of the Clinton years and all throughout the W years.

[mjtaylor22]

That is so true, so true, I did not over shoot on my mortgage either, and I refused to allow them to count all my bonus income because I did not believe it was sustainable.
I am still in my house but it is truly a struggle,
I am making less money now than I did in 2003, I have worked hard to bring my income up, but am still a bit short from t hose 2003 numbers.
Yes a month after I bought my home, I was laid off from Wachovia Securities
I still have my hose but the struggle is intense

[FoonTheElder]

Horse ca-ca. There is no problem when someone receives a no money down loan for their principal home as long as they can be expected to make the payments. The market should be able to properly price that type of loan, as long as they understand the terms. Of course, that all goes out the window when fraud is involved.

The problem is when there has not been adequate investigation to see if that person can make the payment. The problem is when brokers and loan companies are so hungry for commissions and fees that they will approve anyone regardless of whether they can afford the payments or not. The problem is when groups of substandard loans are graded by the agencies as AAA.

The problem wasn't making home ownership easier for those who could afford it. The problem was that the brokers and mortgage companies could no longer depend on a huge flow of refinancing and were willing to do anything to approve unqualified buyers. With assistance of the rating agencies, they then covered up the true nature of the loans.

Besides, a 20% down payment won't help much when the value of your home goes down 35% due to financial system induced real estate bubbles.

[mjtaylor22]

good points

[Sherrie714]

Conventional loans asking for 5% - 10% and seller concession programs do work and have worked. What did not work are banks APPRAISING homes at bloated values so people paid more than what they were actually worth (and the bank makes more money). Then you have an UNDERWRITER who never thoroughly reviewed the buyer’s documentation but approved the loan. Any of you who have ever brought a home has probably heard “WELL YOU CAN REFINANCE IN A YEAR OR TWO”. When the bloated home values started to drop IN 2006/2007, equity was erased, no chance of refinancing equals crisis. In addition, the funky loan programs that would increase the mortgage after two years really hurt since people could not refinance. They were paying their mortgages until the Interest rate changed. Yes, you hold people accountable, but where are the controls? We will not get out of our housing crisis until we require full document loans, allow for lower down payments/seller concessions so buyers can have more cash reserves, and have better controls on valuing homes. The 20% down model (don’t forget closing cost) is simply unaffordable, especially in NY, and will leave to many homes vacant which will prolong the crisis. Banks need to be prudent, but more creative with financing options (ex. The 40 year mortgage) without hitting people with outrageous fees, pre payment penalties, and point tricks.

[Sherrie714]

Our housing crisis is so much more then targeting a group of buyers. You do not get the home until the BANK says yes…so let’s place blame were it needs to go. Our government and business community really dropped the ball: http://polecolaw.newsvine.com/_news/2008/07/13/1661765-what-caused-the-credit-crisis
I am from NY, so let’s do the math. An average 1 family home in NY will run 500k. A 20% down payment will run you 100k and you usually get hit with closing cost which can run us up to 6% of the loan value. Therefore, you need 130k to purchase a 1 family home in NY. This is not the 1960’s…it no longer cost 35k to buy a home. This is unrealistic and it is not going to happen. One thing no one talks about is 0% down loans is very expensive to the buyer but very profitable for the bank. They charge killer points on the front end and back end of the loan. This is why they did it. Greed plain and simple.

[mjtaylor22]

housing bubble was set to burst in 05, they proper ed up until the end of bush's term, but the massive fallout was so qquick that he coudl not totally hide until the end of his term

[mjtaylor22]

whatever, no money down, the issue has 12 to 20 levels of corruption, the center is the Enron loophole, people, moving from market to market, creating paper demand instead of real life demand, the big boys are trading billions in ownership stakes from internet companies, to energy, (remember California’s rolling black outs) now they are in our oil futures and the prices are inflated due tot he heavy trading in the paper ownership of these commodities instead of what they should be based on Real world supply and demand.

[mamacat]

I have much less faith in the WSJ since Murdoch purloined it, but there is something to be said for this argument. As the required down payment to purchase property was reduced from 20%, to 10%, to 5%, and then to 0%, the housing bubble kept expanding, creating temporary windfall profits for lending institutions. Even at 10% or 5% required downpayment, we might have avoided the worst effects of the housing bubble-and­-collapse. 0% down, without proof of collateral or ability to pay, made a fortune for Wall St., until it didn't.

FDR would be rolling in his grave if he knew what happened to the regulations his people put into place to protect us from this calamity. The bubble economy of the 1920s and the bubble economy of the Bush years are two images of the same failed business model. We were led to believe that an economy built on a Ponze scheme was in our best interests, when in reality it was a recipe for disaster. The difference between the Republican presidents of the 1920s and Bush? The Republican presidents of the 1920s didn't blow three trillion dollars on wars in the Middle East.

[RoloTomassi]

The thing to keep in mind when considering all of this is that all of the adjustments made to loan qualification requirements were made to pump up the volume of loans, loans that were extended in order to provide fodder for derivatives development--and perhaps most importantly, loans that lenders never expected to see repaid.

We will see every manner of twisted statistical analysis applied by Wall St. sycophants in unending attempts to shift the blame away from where it squarely belongs: on Wall St.

[totalliberal]

Every piece of property I own was purchased with 25% down. To do otherwise is foolish.

Rule of thumb, If you can't afford it, don't buy it. Rent.

[drymartini1]

NOBODY should qualify for a loan without 20% down (which cannot be substituted with any loan of any kind, it should be upfront cash).

Now thats responsible lending.

[mamacat]

I bought my first home with a guaranteed loan from the Veteran's Administration. I was not required to put anything down, but I did still have to prove that I could make the scheduled payments. The VA loans and CalVet loans are a big help to us vets, but they should not be combined with sub-prime loans, in my opinion.

[xmlman]

I've purchased two homes with no money down VA guaranteed loans. You don't know what you're talking about. I had prove my income and I didn't overbuy either. I bought was I could afford.

[ReedYoung]

Q: Why would an economist fail entirely to analyze the effects of zero-down and sub-prime loans on the general demand curve or even acknowledge that such effects exist and ought to be studied in future analysis?
A: Partisan hackery.

Assuming he hasn't also fudged the data, his observations are worth noting, but his policy recommendations are crap because he willfully refuses to look honestly at the big picture.
[
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.
]

Lending institutions offered loans to unqualified borrowers, after petitioning the government to rewrite the law to allow them to do so. **Every "professor of economics" knows that demand curves can be greatly affected by small perturbations to either supply or demand, ESPECIALLY SUDDEN AND/OR UNEXPECTED ONES, as the slackening of lending standards was -- to all market participants but those who bribed Congress to permit sub-standard lending laws.** So why not let housing prices fall and protect innocent borrowers by requiring the guilty lenders, who caused the problem, to bear the cost of their own corruption by re-adjusting loans to reflect the real, current market value of houses? That is what a government of the People, by the People, for the People would do.

[LeeCalif]

No, it boils down to Goldman Sachs greed and deregulation lobbying on their behalf. PERIOD.

[delta7777]

.
Headline is a bit misleading, although the substance of the article is correct. "No money down" is not at fault if the price of the home is rational, but not if it is hyperinflated by a corrupt free-for-all lending market.
True value of a home can be calculated in terms of replacement cost minus depreciation; or alternatively as indexed to the the equivalent cost of rental.
I do not see that replacement cost for homes has gone down significantly.
Currently the "market value" of homes is determined by foreclosure sales and the absolute unwillingness of lenders to provide financing. In many instances this artificial, foreclosure based, "market value" is substantially below replacement cost of the home.
Home equity determined by this measure is total nonsense and causing economic disaster.
Even a no down payment home that is reasonably priced within the affordability of the homeowner, and commensurate with prevailing rents should never be a candidate for foreclosure unless coupled with an unaffordable increase in adjustable loan rate or is impacted by homeowner job income loss.
.

[ROinReno]

http://www.youtube.com/watch?v=kNqQx7sjoS8

This link was posted by Rich Misty and deserves a second post.
As I understand it Bush had a housing crisis in Texas when he was Governor if you watch the other videos.
But I have said a hundred times this crisis is no different than the S&L and Wall Street crash that occurred under Reagan and of course GHW Bush was VP.
And you have to remember Neil Bush got $68 billion in that bailout.
These videos support the idea the housing crisis was planned from the time Bush took office and they had actually had a few practice runs.
A lot of money has disappeared into other pockets and the banks now are holding huge quantities of homes and land.
Same thing happened in the Great depression when BofA became the owner of many parcels farms and homes by way of foreclosure and ultimately profited handsomely