The Mortgage Crisis

1
The Mortgage Crisis

• Todd J. Zywicki
• Professor of Law
• George Mason University

2
The Housing Boom

• Low Interest Rates
• Fannie Freddie
• Weakened Underwriting Standards
• Speculation

3
Housing was Cheap
4
Homeownership Rose
5
Minorities Benefited
6
Young Benefited
7
Housing Bust Foreclosures
8
Theories of Foreclosure

• Local Macroeconomic Problems
• Payment Shock and ARMs
• Negative Equity and the Put Option

9
Macroeconomic Problems

• Michigan, Ohio, Indiana
• Post-Natural Disasters
• Historically foreclosures rise a bit in recessions

10
Monetary Policy
11
Rise In ARMs
12
ARMs Follow Spread
13
Subprime ARM Resets
14
Prime ARM Resets
15
Are ARMs the Problem?

• Consumers Respond to Interest Rate spread
  Problem was monetary policy, not necessarily ARMs
  per se
• 2Q2008 increase in prime ARM foreclosure starts
  gt increase in all subprime starts
• Home buyers self-select for ARMs Risk aversion
• Consumers with ARMs benefited a lot between
  2000-2004
• Very Common in Rest of World

16
Real Home Prices
17
Factors Affecting Option Value

• Speculator v. Non-Speculator Continuum
• State Antideficiency/Nonrecourse Law
• California
• Arizona
• Downpayment, Piggyback Loans, Skin in the Game

18
Foreclosure Hotspots

• Michigan, Ohio, Indiana
• California, Florida, Arizona, Nevada (1Q2008)
• Calif 109,000, Fla 77,000
• Texas, Mich, Ohio Next 3 with 20,000-24,000 each
• 43 states below national average of 6.32
  foreclosure start rate
• 20 states had drops in foreclosures between
  4Q2007 and 1Q2008
• Prime ARM
• 62 of all prime ARM foreclosures started
• 84 of increase in prime ARM foreclosures started
• Subprime ARM
• 49 of subprime ARM foreclosures
• 93 of increase in subprime ARM foreclosures
• Prime FRM foreclosures
• 29 of prime FRM foreclosures
• 60 of increase
• Subprime FRM
• 25 of subprime FRM
• 53 of increase

19
Foreclosure Hotspots

• 2Q2008 v. 1Q2008
• Majority of states stayed constant
• Texas, Mass., Maryland improved
• 42 states below national average
• Cla, Fla 58 of prime foreclosure starts
• 78 of increase in prime foreclosure starts
• Foreclosure starts on prime ARM
• 2.47 Cal
• 3.20 Fla
• National Average 1.06
• Foreclosure start rates subprime ARM Cal Fla
  gt9, double national median rate

20
What Next?

• Not Just One Cause
• Not Just One Solution
• Some Solutions May be Counterproductive E.g.,
  Foreclosure Moratorium
• What About Speculators?
• Not Just a Prime v. Subprime Problem

21
Resources

• The Law and Economics of Subprime Lending,
  http//papers.ssrn.com/sol3/papers.cfm?abstract_id
  1106907
• Todd Zywicki, Consumer Bankruptcy and Consumer
  Credit in the 21st Century (Yale University
  Press, Forthcoming 2009)