Mar102015

Irrefutable proof the housing bubble was not caused by subprime borrowers

The housing bubble was not a subprime problem: it was a middle-class prime borrower problem.

Conventional wisdom holds that the housing bubble and bust was caused by loaning money to subprime borrowers who defaulted in large numbers and fell into foreclosure, resulting in a dramatic price crash. Many believe the housing crash would have been avoided if lenders simply hadn’t loaned money to subprime borrowers. The conventional wisdom is wrong.

The collapse of the housing bubble was inevitable because the loan products upon which pricing depended were unstable. Although the subprime borrowers defaulted first, all borrowers defaulted in large numbers because the loans there were given were toxic; in fact, delinquency rates were many times normal for prime borrowers as well as subprime.

Ben Bernanke famously and inaccurately quipped that the housing bust was “contained” to subprime and it wouldn’t bleed over to prime borrowers. He was either knowingly lying or astonishingly ignorant; neither alternative casts him in a positive light. While bankers clung to wishful thinking and feeble hope, their alt-a and prime borrowers also defaulted in large numbers, a fact often overlooked by those who want to characterize the housing bubble as a subprime problem.

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Besides the hidden racial bias, the worst part about the “blame the poor subprime borrower” meme was the gross distortion of truth. This wasn’t primarily a subprime problem that caused problems with better borrowers — the problem with delinquency was primarily a problem of higher wage earners and wealthy borrowers; in fact, the bigger the loan, the more likely the borrower was to become delinquent.

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At first banks allowed these borrowers to squat because foreclosing on them assured the banks of losses far in excess of what they could afford; thus you get borrowers like Peggy Tanous who lived payment-free for over six years. Since banks are financially stronger because the federal reserve diverted the interest income from seniors to the banks over the last several years, and since prices are higher, the banks now foreclose on wealthy squatters to get their loan money back. It’s about time, wouldn’t you say?

Bigger Mortgages Likelier to Go Into Foreclosure

Since the recession, the foreclosure rates for more-expensive homes have consistently surpassed those for the overall market.

By Adam Bonislawski, March 5, 2015 11:10 a.m. ETamerican gothic parody 200309

“Mo’ money, mo’ problems,” proclaimed the late Brooklyn rapper Notorious B.I.G.

He wasn’t talking about the current U.S. foreclosure market, but he could have been.

According to numbers from real estate analytics firm CoreLogic , in December 2014 the country’s foreclosure rate fell to 1.4%, the lowest level since March 2008. But while the overall market is well on the way to recovery, elevated foreclosure rates persist at the high end. In December, the rate for mortgages of $750,000 or more was 2.5%.

This disconnect has characterized the 2008 crash and its aftermath, says Sam Khater, CoreLogic’s deputy chief economist. High-end housing had traditionally seen fewer foreclosures than the market at large, but, he notes, the last decade’s recession turned that convention on its head.

The CoreLogic data shows that in January 2006, the foreclosure rate for mortgages of $750,000 or more was 0.1%, compared with an overall rate of 0.5%. By March 2008, though, these numbers had crossed over, with the high-end rate up to 1.5%, versus 1.4% for the overall rate.

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Ultimately, the foreclosure rate for $750,000-plus mortgages topped out in May 2012 at 6.8%, almost double the peak of 3.6% that the overall market reached in October 2011. And while both rates declined for the last 2½ years, the upper end of the market continues to see higher foreclosure levels.

What accounts for this role reversal, which runs contrary to the broader U.S. trend of accelerating gains at the top of the income bracket?

posersThe CoreLogic economist provided some plausible sounding but bogus reasons for the change. The real reason for the higher foreclosure rates is simple: far too much money was loan to people who didn’t have the capacity to pay it back. They never had the capacity; it wasn’t a matter of rich people losing wealth in the stock market or high wage earners getting laid off. People with modest incomes who didn’t lose their jobs were given debts they could never repay — loans in excess of $750,000 — and those Ponzi borrowers defaulted.

To characterize this as a problem of rich versus poor isn’t accurate either. These were middle-class borrowers pretending to be rich, aspiring to be rich, borrowing money to speculate in the can’t-lose real estate market. Many of the households given $750,000+ loans had combined family incomes of less than $100,000 thanks to the Option ARM, teaser rates, liar loans, and the general insanity of lending during the 00s.

The housing bubble was not a subprime problem: it was a middle-class prime borrower problem.


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