When "New Evidence on the Foreclosure Crisis" on The Journal's Op-Ed Page Is Really a Pretext to Impugn the Democrats
"What is really behind the mushrooming rate of mortgage foreclosures since 2007?" asked Professor Stan Liebowitz of the University of Texas, Dallas on the op-ed page of the Wall Street Journal. His answer might have seemed revelatory to someone utterly bereft of common sense. After studying a huge national data base, he said the evidence "strongly suggests that the single most important factor is whether the homeowner has negative equity in a house."
Duh. That's like saying, "What is really behind the poverty rate? Evidence strong suggests that the most single important factor is a lack of money."
Think about it for 10 seconds. If you can't afford your mortgage payments and you have positive equity, you either refinance or sell your house. If you have negative equity, you don't have those options, so the lender forecloses. In key markets in California, Florida, Nevada and Arizona, home prices have fallen about 50% since their 2006 peaks.
It's an old and familiar stunt. Professor Liebowitz knocks down the proverbial straw man in order to justify his unsupported claim, or as he puts it, "This means that most government policies being discussed to remedy woes in the housing market are misdirected."
Professor Liebowitz' intent was not to explain or to analyze, but to confuse. First he confuses readers as to the causes (e.g. subprime securitizations, liar's loans) with the effects (e.g. negative equity) of the real estate bubble. Then he gets to his real point, which is to trash the Democrats.
What policies are being misdirected?
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."
How is Professor Liebowitz disingenuous? Let's count the ways:
1. With regard to the Fed's low interest rate policy, he insinuates some false distinction between stimulating the housing market and stimulating the overall economy, which has been teetering on the brink of disaster for a while now.
2. He suggests that housing prices are likely to stop falling fairly soon with or without government policies. But he has no real evidence to back up his claim. About one in three homeowners in California has negative equity. If all those homeowners walked away, market prices would spiral further downward in a state with rising unemployment and a paralyzing fiscal crisis.
3. All of this sets up the hit-and-run smear, wherein Liebowitz calls Barney Frank's efforts to arrest the downward spiral in the mortgage markets as an attempt "to again artificially increase homeownership levels [that] might delay this return to sustainable equilibrium prices."
But here's the kicker:
Other government policies are likely to be even less effective in reducing foreclosures. The Obama administration's 'Making Homes Affordable' plan focuses on having the government help lower obligation ratios (the share of income devoted to house payments) down to 31% from levels somewhat above 38%. But my analysis finds that mortgages having such obligation ratios at closing did not later experience high foreclosure rates. This suggests that reducing these ratios is not likely to significantly improve the foreclosure problem"
Once again, Liebowitz tries to confuse his readers as to cause and effect. He claims that 38% obligation levels do not correlate to high foreclosure rates. But the "Making Homes Affordable" plan was not created to lower obligation ratios. It's extended only homeowners who are at serious risk of foreclosure, either because they have negative home equity or because they have suffered some documented economic hardship.
Don't be surprised if Liebowitz, the director of the Center for the Analysis of Property Rights and Innovation, starts making the rounds on the right wing talk show circuit.
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Every meaningful proposal to date to stem the foreclosure tsunami has required the voluntary cooperation of the lending institutions, of which it is plain at his point we are not going to get. Until they are forced to change their business as usual mindset, the number of displaced families will continue to accelerate and plummeting housing values will continue to wreak havoc on any chance of an economic recovery.
Professor Liebowitz is correct in that people who are underwater in their homes who can pay will still walk away because of the negative equity loss in the home. However, what he fails to leave out of his argument is why the homes are underwater in the first place. Fact is, foreclosures will continue to increase as long as home values continue to decrease and unemployment continues to increase. What may have started in the mortgage market has spread too deep into the whole economy to be stopped now unless the government bails out the homeowner for the amount the home is underwater in the current market. Then homeowners who can pay have an incentive to pay because they are no longer dumping their money down a financial drain that allows the banks to steal more of their money in time installments. People aren't that dumb banksters. Pride doesn't pay for your retirement or your medical bills to live another day. And, if your house can't protect you then give it back before it sinks you. It's simply common sense at work in the housing markets now. Incentives work! Time to stop the tricks and get back to basics IMHO.
"However, what he fails to leave out of his argument ..."
What I meant to say is this: However, what he fails to include in his argument is why the homes are underwater in the first place.
OR
However, what he leaves out of his argument is why the homes are underwater in the first place.
Sorry to confuse. I had a brain meld while I was typing and didn't catch it before it posted. My bad.
; ~)
I read part of the original article and was dumbfounded that the author totally dismissed the sub-prime lending quotient which has contributed to the economic mess.
Yes homeowners are walking away from negative equity, etc, however he doesn't adress the ARM's which were provided to borrowers who would clearly not be able to keep up with payments once the mortgaged adjusted, be it from actual income, or if 1 or both lost thier jobs or got sick and was unable to work. This is a FACT of the whole mortgage mess and if anyone thinks different, come to Florida and I'll show you how many people were given ARMs because they really, really wanted that house and figured, I'll re-finance before it adjusts. Then boom! Lost job, prices dropped, got sick, got in a car wreck and can't refinance the house. The arm adjusts, homeowner can't keep up with the payments, walks away.
You state: "If you can't afford your mortgage payments and you have positive equity, you either refinance or sell your house. If you have negative equity, you don't have those options, so the lender forecloses."
I think the point the author was trying to make is that people who CAN afford their payments if they tightened up but don't want to because they have negative equity. They don't see it as 'worth it' so they walk away. Of course we know that if you can't afford it, you foreclose either way frankly because nobody is buying homes in this market and banks aren't refinancing without a ton of upfront money either. So your point is just as moot at the first.
Sub-prime = small or zero down loan
Even 10 to 20% down loans = Negative territory after a 40% to 60% decline in most markets.
Wall Street = NO concern or care where the mortgages for their derivatives came from
Wall Street = needed "SURE FAIL with TRICKS and TRAPS" Mortgage FODDER to make into Sure Fail Derivatives
Banks + Hedge Funds = Placed Massive Casino Bets the Mortgage Derivatives would FAIL
Banks + Hedge Funds = Sat back and collected on their Manufactured Insider Trading Bets!
I have a loan that was nothing down, but it wasn't sub-prime. Definitely a prime loan, with that mortgage insurance which is gone now!
You assumed "can't make mortgage payments" in your foreclosure formula. That shouldn't be assumed.
There are many out there seeing themselves 70k in negative equity who are choosing foreclosure even though they CAN make the payments. Many are making the decision that it isn't worth it.
FHA looks back two years at a foreclosure/bankruptcy. These people can walk away, dump there 70k in negative equity on the bank, and then buy again in a couple of years with just a few thousand dollars down.
Now that Wall Street Journal is owned by Rupert Murdock. It is just like FOX NEWS- manufactured news. Wall Street Journal is very skewed now.
Im just curious - what kind of serious economic critique would take time out for YET ANOTHER hit and run on Barney Frank?
Thank you David for adding a little balance to this discussion. There are many factors which contributed to the collapse of the housing bubble, but at the end of the day it was a bubble and bubbles always collapse! The unsustainable path is not sustainable and therefore must, by definition, eventually end.
The Wall Street Journal trying to make political hay from this is of course entirely predictable. Fortunately there are those such as yourself who call them on their simple-minded hypocrisy. Again, thanks.
Not a very good summary of the WSJ opinion piece, and totally off base. Part of what caused the housing market to get over heated and prices to rise too fast was Barney Frank's proposals that became law. Now the brilliant Barney Frank is trying to double down on those same wrong headed policies. 0% down home loans mean a person is in negative equity situation from Day 1, when you figure closing costs into the transaction.
Dear Photofarm,
Less than 5% of foreclosures are from the Community Reinvestment Act. If by "part" you mean 5%, you would be right. However, by your language, you insinuate facts which are simply not true. Actually, history has shown loans to people unable to obtain "standard" bank loans, such as Neamiah loans, actually have a lower rate of default. Look it up.
Sigh, why do you not read what the statement was and comment on that, instead of changing the subject matter.
I have wondered where that 5% statistic comes from. Can you tell me?
I think it's crap. It seems to me that the only way to get to that number is to use some obscenely narrow definition of what is a CRA loan.
I did these loans for a living. I know a little bit about them, and there were a ton of them.
"Part of what caused the housing market to get over heated and prices to rise too fast was Barney Frank's proposals that became law. "
How do you expect to have your writings taken seriously? So one man caused "part" of the meltdown? The one guy who happens to be a democrat? And you're sure no republican was involved? Where were they when they ran the govt in 06? Here's the problem with your opinion. You could at least spread the blame around a little starting with the mirror and both parties. No one would argue with that. But this parlor game of "blameeverythingonthedemocrats" is just plain stupid and intellectually dishonest and not even remotely convincing. You need better BS.
THIS!
thanks,David for another good analysis for us
Thank you for that.
This article is based on a logical fallacy that keeping housing prices inflated is somehow a good thing.
logical fallacy?
isn't that a contradiction of terms?
and ,no, the article does not state anywhere that keeping housing prices inflated is good..
it talks about Liebowitz efforts to confuse/dupe readers about cause and effect in the mortgage foreclosure crisis
Do you wish to use pathetic phallacy in lieu of logical fallacy? There are times when erudite words may be cutting.
"MANUFACTURED INSIDER TRADING BETS" PAID OFF for G0LDMAN and the Rest!
Sub-prime = small or zero down loan
Even 10 to 20% down loans = Negative territory after a 40% to 60% decline in most markets.
Wall Street = NO care where the mortgages for their derivatives came from
Wall Street = needed "SURE FAIL with TRICKS and TRAPS" Mortgage FODDER to make into Sure Fail Derivatives
Banks + Hedge Funds = Placed Massive Casino Bets the Mortgage Derivatives would FAIL
Banks + Hedge Funds = Sat back and collected on their Manufactured Insider Trading Bets!
Finale = everything imploded in on Banks and A1G and then Main Street footed the $14 Trillion bill
Wall Street Greed and Corruption = Rewarded By Geithner/Paulson/Summers + Obama/Emanuel
Wall Street GAMED the Failure of America's Housing!
This is a PURE and SIMPLE FELONY CHARGE!
___________________________________________
It was a relatively simple scheme with many accomplices along the way.
1. Mortgage servicing subsidiaries of i-banks or contract servicers utilized MORTGAGE SERVICING FRAUD to manufacture bogus defaults.
2. I-banks targeted certain mortgage REITs for servicing fraud which were then listed in ABX series of 20 REITs which changed every 6 months.
3. Then their traders using this insider information shorted those REITs with Credit Default Swap bets on ABX Index.
4. Despite toothless FTC settlements Mortgage Servicing Fraud goes on because Wall St. makes more money through dishonest servicers manufacturing mortgage defaults and foreclosures than it would otherwise.
Yeah, I read that piece of garbage. HuffPo had it at the top of the page.
Listen for absurd Erroneous assertions by Washington Post people on Washington Week as:
"Moderates verus liberals"
Moderates is now the term refering to right wing Democrats. Implying that liberals or not moderate WHICH BY ANY OBJECTIVE STANDARD THEY ARE..
Yesterday NPR had an entire psychologically abusive show about torture.
Failing to point out that precise definitions for torture ALREADY exiisted until Bush Cheeney
Tried to redefine it and acted on their new definitions. Instead they acted as if there is a moral
(AND LOGICAL) equivelance between the 2 sides!
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