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.