1 / 18

The Mortgage Crisis Todd J. Zywicki George Mason University Foundation Professor of Law

The Mortgage Crisis Todd J. Zywicki George Mason University Foundation Professor of Law Senior Scholar, Mercatus Center. Homeownership Rose. Housing Bust: Foreclosures. Theories of Foreclosure. Distress: Local Macroeconomic Problems Payment Shock and ARMs

garth
Télécharger la présentation

The Mortgage Crisis Todd J. Zywicki George Mason University Foundation Professor of Law

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Mortgage Crisis Todd J. Zywicki George Mason University Foundation Professor of Law Senior Scholar, Mercatus Center

  2. Homeownership Rose

  3. Housing Bust: Foreclosures

  4. Theories of Foreclosure • Distress: • Local Macroeconomic Problems • Payment Shock and ARMs • Negative Equity and the “Put” Option • Distinguish those who want to keep their home but can’t from those who could but don’t want to

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

  6. Monetary Policy

  7. Impact of Low Interest Rates

  8. Rise In ARMs

  9. ARMs Follow Spread

  10. Subprime ARM Resets

  11. Prime ARM Resets

  12. Are ARMs the Problem? • Consumers Respond to Interest Rate spread: Problem was monetary policy, not necessarily ARMs per se • Home buyers self-select for ARMs: Risk aversion • Consumers with ARMs benefited a lot between 2000-2004 • Percentage of ARMs higher in past • Very Common in Rest of World

  13. The Option Model

  14. Factors Affecting Option Value • As value of option rises or cost of exercise falls, homeowners have stronger incentives to respond • Speculator v. Non-Speculator: Continuum (put and call option) • State Antideficiency/Nonrecourse Law • California, Arizona • Impact increases as expected wealth and income increases • Downpayment, “Piggyback Loans,” interest only, refi, “Skin in the Game” • Lenders underestimated both decline in home prices and propensity of new homeowners to default when prices fall

  15. What Happened? • Two Phases of Subprime Bust-out: • Phase 1, 2001-2004: Loans performed well even with unusual terms, but riskier terms offset • Phase 2, 2005-2007: (1) risk-layering was explosive, (2) low equity especially bad (interest-only, no down, cash-out refinancing, piggybacks, home equity loans) all of which rose in Phase 2 • Mistakes versus corruption: ex., lo\w-doc refi • Other factors may have exacerbated others probably not: • Probably Yes: Fannie/Freddie, tax code, rating agencies • Maybe: securitization, brokers • Probably No: hybrids, CRA • 3 Housing Markets: (1) Traditionally volatile, (2) steady growth, (3) late-boomers • Foreclosure problem now centered on late-boomers • Speculators and attitudes of new homeowners

  16. What Next? • Foreclosure Mitigation: Type I v. Type II Errors: • How many “unworthy” homeowners are we willing help? • If problem is negative equity, has negative externality leveled off? Just supply and demand? • If a function of state laws, why is that Washington’s problem? • Can we separate categories practically? Refi problem • Beware unintended consequences: Ex., prepayment penalties and cash-out refinance • Protect innovation: Boom and Bust Cycles • Reforms to incentives for housing overinvestment and speculation

  17. Cramdown and Bankruptcy • Cramdown: unintended consequences • Higher interest rates & costs • Contagion to other types of consumer credit • Helping “worthy” borrowers? Interest rates v. Principal • MBS and Worsen Credit Freeze

  18. Consumer Financial Products Safety Commission • Loans are not toasters • Loans generally are not “inherently dangerous” • U.S. standard mortgage an outlier • Examples: • Low-doc loans: refi versus purchase • Prepayment penalties: Cash-out refinance • Adjustable-rate mortgages

More Related