
Zero money down, not subprime loans, led to the mortgage meltdown - rglovejoy
http://online.wsj.com/article/SB124657539489189043.html
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apinstein
Wow that article is a perfect example of how people bastardize statistics.
Correlation != causation, people, say it with me! It's also pretty clueless in
general.

Stuff like:

> But 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

Yeah, that's because only a small % of all mortgages are subprime! But a
_huge_ percentage of subprime mortgages have defaulted, much higher than prime
mortgages (as you'd expect).

> The analysis indicates that, by far, the most important factor related to
> foreclosures is the extent to which the homeowner now has or ever had
> positive equity in a home.

You mean the most "correlated" factor. This doesn't imply causation. But of
course, if you have to ask _which_ borrowers are most likely to just walk
away, it's the ones with _nothing_ more to lose!

Such a sad, pointless article. If he is on to anything, you can't even know it
because his analysis is so poor.

If you really dig this stuff, follow this blog:

<http://www.fieldcheckgroup.com/blog/>

~~~
seldo
While correlation doesn't imply causation, I don't think that's quite what
he's doing here.

To your first point: even though the rate of default of subprime mortgages is
much, much greater, the massive losses that are bringing down banks are the
problem. So his point is that the rate of foreclosure doesn't matter so much
as the volume: so focus on what is causing foreclosures in the biggest
category.

To your second: the remedies currently being considered by congress all focus
on regulating the interest rate of mortgages. His point is that the rate,
while a factor in determining foreclosure, is much less important than
negative equity, and the remedies for preventing negative equity are
different.

~~~
apinstein
Fair enough rebuttal.

I do agree with a lot of his conclusions, but some are misguided.

He seems to think that only one factor can be the critical factor, but I think
he's missing the point. If someone cannot afford their mortgage, they are
pretty much going to get foreclosed on. It's just a matter of time. However,
the more negative equity they have, the sooner they are likely to do this.

Also, he craps on Obama's "making homes affordable" plan because of it's
target of 31% housing-to-income ratio. But this program is _only_ available
for those with Loan-To-Value ratios under 105%, precisely because frankly it's
pretty obvious that if you are way underwater on your house you are better off
walking away from it.

Now, I don't really think that we should've spent the money on pretty much any
program to save homeowners. Giving $3000 to a mortgage company for refi'ing a
loan that empirically goes to foreclosure anyway 50% of the time is a giant
waste of time and money. Both the banks and homeowners got screwed by entering
these loans, and they should be left to rot with them.

It probably would've been better to try to convince banks to just turn the
owners into renters for a 3-5 year period to let the mortgage market meltdown
run its course while somewhat punishing both parties that entered such
horrible deals.

Oh well.

------
grandalf
This is more of an insight into the perverse incentives created by
bankruptcy/foreclosure law than it is about the way in which un-hedged
systemic risk led to the crisis.

Still an interesting article.

~~~
bwd
No, the point is that unhedged systemic risk is only one component of the
crisis, despite what the rest of the media is blaring. The other, and perhaps
more important, component was zero down mortgages and cash-out refinancings
that left borrowers with no equity in their houses. Borrowers were just as
irresponsible as bankers and haven't gotten the bad press they deserve. "It's
the leverage, stupid" should be the mantra of this crisis.

~~~
jhancock
"Borrowers were just as irresponsible as bankers"

The borrower never has been and never should be the party to determine if they
can repay a loan or if the assets being leveraged will retain their value
through the life of the loan. This is the job of the lender. Yes, it was
"irresponsible" for people to borrow so much, but the burden goes to the
lender...and the regulators that allowed the lenders to behave that way...and
the people that voted for elected officials that enabled regulators to do what
they did.

In short, if you make money so freely available, you can expect people to take
it.

~~~
grandalf
Ironically, the borrowers just acted according to incentives, as did bankers.
Everyone knew fannie/freddie would get bailed out if mortgages went south, and
this fact drastically reduced anyone's incentive to care about how risky MBSs
were.

There is moral hazard created by the way bankruptcy law works (for people who
are significantly underwater) and also in banking regulations (and GSEs).

~~~
apinstein
Ironically?!

People _always_ behave the way they're incentivized (unless it's egregiously
immoral).

I've always found it pretty easy to predict the eventualities of markets based
on how the system works. You can't predict the twists and turns along the way,
but you usually know what the end looks like. Sadly though, not when.

On average people behave pretty predictably...

~~~
grandalf
I was being sarcastic :) I totally agree with you.

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jasonkester
No, the only thing that happened is that lots of people bought things they
couldn't afford and, unsurprisingly, couldn't pay for them. That's it.

It doesn't help at all to blame banks for this. It's readily apparent that if
you purchase a house, regardless of the terms, you will eventually need to pay
for a house. It's not rocket surgery. The corollary to this is that "if you
can't afford a house, don't buy a house." Anybody ignoring that simple fact is
likely to run out of money.

Many of us realized this, didn't buy things we couldn't afford, and therefore
still have money. It's amazing that people would expect to blame some random
3rd party for their own foolishness.

[http://www.hulu.com/watch/1389/saturday-night-live-dont-
buy-...](http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff)

------
viggity
this guy needs to familiarize himself with Bayes' theorem. I don't know the
real numbers, but I would hope and think that the number of prime mortgages
that we're given is 10-20 times larger than the number of sub-prime mortgages.

So, a better question might be what percent of prime mortgages and what
percent of subprime mortgages go into foreclosure. Not what percent of
foreclosures comes from prime vs subprime.

