Home Loan Focus

Underwater Loans, Not Poor Credit, At the Heart of Foreclosure Crisis

A recent article on the Wall Street Journal blog makes a bold claim: predatory lenders and liar loans are not the main cause of the current foreclosure crisis – the prevalence of underwater mortgages is the biggest contributing factor. Stan Liebowitz, the author, asserts that even subprime mortgages, now almost a dirty word, were not the main problem.  He says:

“The focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began — the third quarter of 2006 — during which more than 4.3 million homes went into foreclosure.)”

So, foreclosures are not on the rise because of low credit scores, upwardly adjusting mortgage rates, or all the loans made to people without documentation of their income. Why is simply owing more than your house is worth such a big problem?

“The important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.”

I don’ t think Mr. Liebowitz’ explanation is very complete. Borrowers are certainly more willing to walk away from their mortgages, but that doesn’t mean they will in the absence of other factors. So doesn’t it make sense that the other factors are important? If someone whose house is now worth half of the mortgage loan and they lose their job or their payments jump up, aren’t those really the things that caused the foreclosures? Being underwater just makes it easier for these borrowers to toss in the towel.

Source: Underwater Loans, Not Poor Credit, At the Heart of Foreclosure Crisis

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