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July 3, 2009
Economics link roundup
In U.S. Shifts Strategy on Illicit Work by Immigrants, the NY Times reports that our immigration policy has improved from plain to evil to merely insane. It seems we've moved from treating undocumented workers as violent criminals to white collar ones or drug addicts. Thanks for small blessings I guess.
In New Evidence on the Foreclosure Crisis at the WSJ, Dr. Stan Liebowitz reports that the primary cause of home foreclosure was negative home equity, i.e. owing the bank more than your home is worth. He says that
...only 12% of homes had negative equity, they comprised 47% of all foreclosures
.... Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.
...To be sure, many other variables -- such as FICO scores (a measure of creditworthiness), income levels, unemployment rates and whether the house was purchased for speculation -- are related to foreclosures. But liar loans and loans with initial teaser rates had virtually no impact on foreclosures, in spite of the dubious nature of these financial instruments.
This makes sense to me from a single cause explanation. If you have positive equity in your home you will find a way to hold on to it. If you cannot borrow money to refinance you will scrimp and save to hold on to your valuable asset, even if you are a liar or have a ballooning loan. However, there maybe be a lot of overlap in these categories. I suspect that a substantial number of those foreclosed houses with negative equity were also liar loans or balloons.
That is:
P(Default | negative equity) < P(Default | negative equity and balloon/ARM mortgage)
P(Default | negative equity) < P(Default | negative equity and liar loan)
and of course
P(Default | negative equity and neither a liar loan nor a balloon/ARM mortgage) < P(Default | negative equity)
I'm also concerned about the use of this in inference. Many home fell much in value precisely because other people who lived in the area depended on liar loans and balloon/ARM mortgages. When that demand dried up with changes in the financing supply, prices fell, some people had negative equity, and they defaulted.
Posted by OneEyedMan at July 3, 2009 8:02 AM
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