Mortgage Meltdown - Causes Aren't What You Think

Mortgage foreclosures have been increasing exponentially since 2007. The common practice has been to blame subprime mortgage lenders and the so-called 'liar loans.' However, an analysis of loan-level data from McDash Analytics, a component of Lender Processing Services Inc., paints a vastly different picture.

The analysis was conducted by Stan Liebowitz, a professor of economics and director of the Center of Analysis of Property Rights and Innovation in the management school at the University of Texas in Dallas. The loan-level data from McDash Analytics is the largest source of such data available, covering more than 30 million mortgages.

Mr. Liebowitz's analysis indicated that the most important factor, by a large margin, related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. Although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

As reported by the Mortgage Bankers Association, 51% of all foreclosed homes had prime loans, not subprime. Also, the foreclosure rate for prime loans grew by 488% as opposed to a growth rate of 200% for subprime foreclosures.

Other factors that had some impact on foreclosures are FICO scores (i.e., creditworthiness), income levels, unemployment rates and whether the house was purchased for speculation. However, the 2 villains of the foreclosure mess, teaser rates and liar loans, had virtually no impact on foreclosures.

This data is important because most of the 'solutions' being pushed by various lawmakers and others are directed at the teaser rates, liar loans and other subprime issues that have no significant relationship to the mortgage meltdown and therefore cannot reasonably be expected to solve the problem.

For more information, check out Stan Liebowitz's article* published in the Wall Street Journal on July 3, 2009.


*links to WSJ articles online generally go stale in a week.