Origins of the Current Financial Crisis
In which Barry Ritholtz encounters the unreliable Stan Liebowitz saying very strange and very false things about the mortgage market:
Zero Down Is a Foreclosure Factor: There is a kind of weird OpEd in today’s WSJ by Stan Liebowitz. The professor makes the incredible discovery that zero down payments, 100% LTV financings tend to slide in great numbers into foreclosure.... This is analysis by gross over-simplification. Not quite reductio ad absurdum, but close. Unfortunately, it leads to conclusions that are at best only partially correct. And that conclusion? The problem has been Prime, not sub-prime loans....
Here is where things get weird: I can’t verify many of [Liebowitz's] data points. They don’t square with the data I review via RealtyTrac or Mortgage Bankers Association or Bloomberg. (I assume the professor meant we had 4.3m foreclosures since Q3 2006, not during). As to prime versus sub-prime, it appears the Mortgage Bankers Association, data dispute the professor’s. Jay Brinkmann, chief economist for the MBA, noted in May 2009 that in 2008, prime, fixed-rate loans were only 19% of foreclosure starts nationwide, while Subprime adjustable-rate mortgages were 39%. More recently, the two levels have come together: prime loans are up to 29% of foreclosure starts while subprime adjustables came down to 27%.
But reporting only in percentages can be misleading. As Floyd Norris noted in August of 2008, “There are far more prime mortgages than subprime, of course, and subprime loans are much more likely to get into trouble. But this does show how the foreclosure problem is spreading.” Agreed. But the claim that during this crisis it has been Prime and not Subprime is simply unsubstantiated by the timeline or data. Subprime went bad first, then Alt-A, and then prime followed it later. Sub-prime and Alt-A went bad due to poor lending standards; Prime went bad in part due to job losses and as the economy got worse...
