WSJ: Real culprit in the foreclosure crisis is not subprimes, it’s negative equity loans

Excellent piece in today’s Wall Street Journal on what’s really behind the explosion in foreclosures.

It’s not subprime mortgages or liar loans or even rate resets, according to the author, who lays out some compelling research conclusions; instead, it’s “whether or not the homeowner has or ever had an important financial stake in the house.” That being the case, he goes on to assert that the Obama Administration’s efforts to stanch the bleeding is focused on the wrong things. Lowering obligation ratios, he writes, isn’t the issue: “A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising.”

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.

Read it here.

This entry was posted in Uncategorized. Bookmark the permalink.

5 Responses to WSJ: Real culprit in the foreclosure crisis is not subprimes, it’s negative equity loans

  1. Pingback: WSJ: Real culprit in the foreclosure crisis is not subprimes, it’s negative equity loans

  2. “whether or not the homeowner has or ever had an important financial stake in the house.”

    The statement above is exactly why I can not see increasing the LTV rate to 125%…
    see:
    http://varbuzz.com/harp-throws-life-line-to-upside-down-homeowners/

    I may never understand this one…

  3. Bob Jurgensen says:

    Charles: what’s not to understand? You owe $400,000 at 7%; your home is worth $325,000 now; you have few options: 1) continue on, paying more than the market rate; 2) walk-away/short sale (like so many others have); 3) fall behind and lose your home to the bank anyway, or 4) refinance what you owe at 5.5%, saving yourself $500/mo in payment, making it far less likely you will lose your home and saving yourself $6000/yr. Option 1 only offers more of the same. Seems like a no brainer that FNMA would offer this versus the blood letting that has been occuring for what, 18-24 months now? Think about it.

  4. Bob,
    I totally understand what you are saying.
    but using your scenario, what happens when the home is worth 275,000? or 225,000?
    It is happening in more than one area of our country.
    Certainly not an easy solution IMO

  5. Jim Rake says:

    …”the government’s efforts to artificially increase homeownership” has been, since the Clinton Administration, a misguided objective. Do we wonder why, under normal circumstances, these folks cannot afford a home? Risk assessment is not something our gov’t, or lenders, seem to very good at.
    While the objective of homeownership for a larger segment of society is worthwhile, cutting corners, in any venture, always seems to catch up to you. And, it sure did, in our ongoing Mortgage Crisis.
    Where do we go from here? While it may seem like this happened overnight, it actually took a few years, and will likely take a few to get back on our feet through a combination of gov’t and market initiatives.
    Bob – how many homeowners do you think have actually followed your common sense advice, “refinance what you owe at 5.5%, saving yourself $500/mo in payment”?

    My guess….not nearly enough.

Leave a Reply

Your email address will not be published. Required fields are marked *