Are you looking for one more thing to be incensed about? Well, here you go. The WSJ, citing a study done by a professor at Cal State Fullerton says that in Southern California borrowers who defaulted on their mortgages tended not to have bought at the top of the market but had refinanced their houses at least once.
Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.
The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.
Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.
“[W]hile house price declines were important in explaining the incidence of negative equity, its magnitude was more strongly influenced by increased debt usage,” writes Mr. LaCour-Little. “Hence, borrower behavior, rather than housing market forces, is the predominant factor affecting outcomes.”
So, the object of so much journalistic moralizing, the poor homeowner who was done in by unscrupulous agents, a misguided national interest rate policy and other assorted villains, turns out to be just as slick as all the rest. Instead of losing everything they have in fact extracted enormous sums of cash from their properties and left the bag for someone else to hold.
If the study is accurate and if its findings hold true across the country then one has to inquire as to why such enormous sums of money are being expended upon a class of people who have suffered no economic loss. Realistically, I’m posing a rhetorical question since the truth will not be known until long after the last loan modification has been done. It will be the stuff of congressional hearings and academic papers but the money will have long since vanished.
What we might learn from this is what I’ve been harping on for the last week or so. We are continually discovering that our notions about what caused the housing bubble and ensuing crisis are faulty. Congress and the administration need to slow down in their mad rush to put in place regulations to prevent a repetition of the problem until such time as there is better data showing exactly it is that we need to cure.
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