Comments on: The Causes of Mortgage Defaults

By: Jeff

Jeff — Sun, 20 Sep 2015 17:13:34 +0000

The trouble with stories 1 and 2 is that neither one explains why housing prices in Houston didn’t collapse. Story 3, Arnold’s preferred explanation, sort of does: Prices in Houston didn’t go up much during the boom, so they didn’t have far to fall when the boom was over.

And of course, the reason prices in Houston didn’t zoom during the boom, despite the fact that it was a very high growth area, is the lack of restrictive zoning. When prices started to rise, there was a big supply response.

I find it interesting that in two of the biggest econ stories of late, medical care and housing, almost all attention gets focused on things that affect demand, and very little on government-imposed supply restrictions. The Houston housing market and the existence of medical tourism prove that supply is a very important part of both stories, but it is routinely ignored.

By: Andrew'

Andrew' — Wed, 16 Sep 2015 12:39:58 +0000

Also that the last straw isn’t the problem. The description of this paper seems to make this error.

“Prime loans were also a problem”

Well, did they become a problem after less than prime and home equity bid up prices, credit, and instigated a recession that hit Prime borrowers?

By: Steve Sailer

Steve Sailer — Tue, 15 Sep 2015 14:54:08 +0000

The housing bubble in the Sand States burst at the end of 2006, with the first bankruptcies of subprime firms like New Century in winter 2007. But the Dow Jones averaged peaked in the fall of 2007 because stock market investors didn’t understand how bad things were.

I think a reason for these persistent misconceptions about recent economic history is that people don’t really grasp how big a part of the national wealth consists of California real estate. If California has 1/8th of the national population and if California home prices in 2005 were triple the national average, well …

By: Handle

Handle — Tue, 15 Sep 2015 11:49:55 +0000

One problem with the methodology of looking at 'money down at the time of mortgage' is that it ignores HELOC's and other Mortgage-Equity-Withdrawal ways people could use their homes as ATM's based on the paper-values at the peak of the bubble. Here is the key chart, courtesy of Bill McBride. MEW was huge at the peak of the bubble, nearly 10% of all disposable income! Think of the impact on aggregate demand, both on the way up, and when that all reversed to a negative percent after the bust when people started paying back their loans like normal again. And even 'prime borrowers' were allowed to take their down payments (and more) back out through these mechanisms. All this happened a long time before NGDP trends changed. I don't see how this study or Sumner's assertion survives a fact like that. So, sure, someone started out as a prime borrower with 20% down, but then the bubble started, some lender was willing to let them take 30% out since there was still some equity left 'on paper', but then prices declined and the 'prime' borrower went underwater. The important thing is that the HELOC, etc. loans were second in line, and so if the borrower goes underwater on the first mortgage, these debts would get wiped out entirely in a foreclosure. And, especially if you can't sell in the decline because market liquidity dried up, that creates a huge incentive to mail the keys to the bank and let the second-mortgagors eat dust.

By: Andrew'

Andrew' — Tue, 15 Sep 2015 08:36:27 +0000

As an aside, with the changing social climate maybe “Fortune” should consider changing their name to the less offensive and more inclusive and sensitive sounding “Misfortune.”

By: Andrew'

Andrew' — Tue, 15 Sep 2015 07:17:00 +0000

I get 2 sentences in with Scottand I’m pulling my hair out as usual. “But why NGDP drop?” And I suppose his answer is because we didn’t stop it from dropping. It is the new aggregate demand.

By: Andrew'

Andrew' — Tue, 15 Sep 2015 01:22:50 +0000

1. I thought the defaults correlated to negative equity PLUS a loss of income/job

2. Did loosening of credit standards cause or follow increase in credit supplied?

By: Lord

Lord — Mon, 14 Sep 2015 20:17:16 +0000

Problem is, it is not little or no money down, but the lessening of it, and not just down payments but any relaxation in lending standards, including changes in loan forms and terms, credit acceptance, and failure to qualify and verify, but when lenders come to believe they don’t need to worry about credit, or establish capacity, and collateral is sufficient, it will be self fulfilling until it is not.