Monday, July 6, 2009

Roots of the Lending Crisis

Kenneth Anderson at Volokh Conspiracy links a WSJ op-ed by Stan Liebowitz on zero-money-down mortgages. Liebowitz writes...
What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house.
Anderson later updates his post with a response from Barry Ritholtz, who argues that while 100% LTV mortgages are a problem, subprime and alt-A mortgages are still the real culprit. He summarizes thus...
A more comprehensive 40,000 foot view would note that 100% LTV is a symptom of the larger problem of a) abdication of lending standards, caused by b) enormous demand for securitized loans, enabled by c) rating junk as AAA, in order to satisfy the demand for higher-yielding, non-junk paper, all of which traces its roots to d) Greenspan’s ultra low interest rates.

(via Insta, David Bernstein)