The Volokh Conspiracy - No Money Down Mortgages--A Predictable Problem:

On Friday, co-blogger Kenneth linked to this piece in the Wall Street Journal explaining that the main cause of the "foreclosure crisis" is no-money-down mortgages. The author of the piece and critics disagree on whether the problem was primarily in non-subprime mortgages, but everyone seems to agree that 100% loan to value loans were a major factor in the wave of foreclosures.

It's always easy to say something is predictable in hindsight, but I can say this was eminently predictable, because I predicted it (see below), though I linked the problem more to "nonrecourse" mortgages than likely was warranted, given that lenders rarely seemed inclined to go after debtor assets regardless. The wonder is that the geniuses in charge of risk management at various financial institutions, public and private, and the raters at the major rating agencies, didn't. Here's what I wrote in August 2005, just when the housing bubble was peaking:

Just read that 61% of all new California mortgages this year are interest only, no money down.... If prices drop significantly in the next couple of years, as they likely will (given that only 17% of Californians can now afford the median house), thousands of people are going to walk away from their loans and let the bank foreclose.... Sure, it will ruin their credit record, but how much is a good credit record worth? Probably not $120,000 (the negative equity on a $600K loan--median single family home price in California--if prices decline a modest 20%). Anyway, many of the loans are adjustable with "teaser" rates used to qualify the buyers, who understand that in two years they will have to refinance or sell, because they won't be able to afford the new payments. They are counting on interest rates being lower, or on being able to "flip" the house for more money, and using the proceeds to get "back in the game." And they are likely to lose their homes, and the mortgage[e]s are likely to lose a good chunk of the money they are lending.

	[David Bernstein, July 5, 2009 at 8:58pm] Trackbacks No Money Down Mortgages--A Predictable Problem: On Friday, co-blogger Kenneth linked to this piece in the Wall Street Journal explaining that the main cause of the "foreclosure crisis" is no-money-down mortgages. The author of the piece and critics disagree on whether the problem was primarily in non-subprime mortgages, but everyone seems to agree that 100% loan to value loans were a major factor in the wave of foreclosures. It's always easy to say something is predictable in hindsight, but I can say this was eminently predictable, because I predicted it (see below), though I linked the problem more to "nonrecourse" mortgages than likely was warranted, given that lenders rarely seemed inclined to go after debtor assets regardless. The wonder is that the geniuses in charge of risk management at various financial institutions, public and private, and the raters at the major rating agencies, didn't. Here's what I wrote in August 2005, just when the housing bubble was peaking: Just read that 61% of all new California mortgages this year are interest only, no money down.... If prices drop significantly in the next couple of years, as they likely will (given that only 17% of Californians can now afford the median house), thousands of people are going to walk away from their loans and let the bank foreclose.... Sure, it will ruin their credit record, but how much is a good credit record worth? Probably not $120,000 (the negative equity on a $600K loan--median single family home price in California--if prices decline a modest 20%). Anyway, many of the loans are adjustable with "teaser" rates used to qualify the buyers, who understand that in two years they will have to refinance or sell, because they won't be able to afford the new payments. They are counting on interest rates being lower, or on being able to "flip" the house for more money, and using the proceeds to get "back in the game." And they are likely to lose their homes, and the mortgage[e]s are likely to lose a good chunk of the money they are lending.