Being an engineer, I love to read about data based conclusions and how they should affect decisions. New Evidence on the Foreclosure Crisis by Stan Liebowitz in The Wall Street Journal has analyzed foreclosures form the second half of 2008 to better understand the causes and determine whether government intervention will help reduce foreclosures.
Based on his analysis of the 30 million mortgages, Mr. Liebowitz concludes that the main reason for foreclosure is negative equity (285,305). According to the article, only 12% of mortgages have negative equity, but they account for 47% of foreclosures. The second and third reasons for foreclosure were unemployment increase (183,447), and a sub-prime credit rating (148,697), respectively. Fourth on the list was a down payment of less than 3% (130,014), Interestingly, a reset of the mortgage to a higher interest rate (60.492) was the fifth highest reason and significantly less in occurrence than the top four.
Thus, the zero down payment purchases during the housing bubble, the subsequent housing market crash and the increase in unemployment during the recession are likely the main causes of rising foreclosures. Based on Mr. Liebowitz's analysis, it's likely the percentage of mortgages in foreclosure will continue to grow, until housing prices stop declining and unemployment stops increasing.
Unfortunately, Mr. Liebowitz notes, the current government programs of reducing mortgage interest rates and creating stimulus packages do not appear to be helping with either solution, as they are not reducing negative home equity nor reducing unemployment at this time.
For more on The Practice of Personal Finance, check back every Wednesday for a new segment.
This is not financial advice. Please consult a professional advisor.
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1 comment:
There is a related article in the Washington Post this week: http://www.washingtonpost.com/wp-dyn/content/article/2009/07/10/AR2009071002114.html?nav=rss_opinion/columns
It talks about how even though most people surveyed have moral qualms with intentionally defaulting, quite a large number said they would still do it anyway if the amount they were underwater got large enough. Not surprisingly, the larger the negative equity, the higher the percentage of people who said they would walk EVEN IF THEY COULD CONTINUE PAYING.
What's interesting to me is that these kinds of survey responses (and also the clear and strong correlation between negative equity and defaults) have been known for decades. Yet with each real estate downturn, the lenders all act "shocked" to learn about this phenomenon.
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