Monday, June 29, 2015

Subprime Lending, Home Values, and the Reasons for Foreclosure

Are subprime mortgages really the reason for the foreclosure crisis? While this narrative has become the common one in America over the last five years, a recent study conducted by researchers at the University of Pennsylvania’s Wharton School of Business suggests that home values may be almost solely to blame. Indeed, Forbes Magazine reported on the study and emphasized, “The key variable driving all foreclosures wasn’t the type of loan, the amount of leverage, or the socioeconomic or ethnic status of the borrower, but whether a given house was underwater, or worth less than its mortgage.”
Prime Borrowers Losing Homes to Foreclosure
According to the recent study, in the early years of the housing crisis, “subprime borrowers were more likely to default.” However, in the past several years, “twice as many prime borrowers lost their homes as subprime, with correspondingly higher total dollar impact on the financial markets.” Why is this the case? The researchers emphasize that borrowers whose homes were worth less than the amount they owed on their mortgages were most likely to end up in foreclosure. In other words, being underwater on your loan, regardless of whether you had a subprime mortgage, was more likely to result in a foreclosure on your property.
Does this mean banks weren’t targeting low-income families with subprime loans? Not necessarily. However, it does mean that the reasons for a majority of foreclosures might not be what most of us believe. Fernando Ferreira and Joseph Gyourko, the  researchers who authored the study, “A New Look at the Foreclosure Crisis,” simply don’t believe the facts match up with the subprime premise behind the recent history of foreclosure in our country.
Nearly 50 Million Mortgages Can’t Be Wrong
The data gathered by Ferreira and Gyourko is immense, and it suggests that we should take notice of their findings. According to Forbes Magazine, the authors “pulled together a remarkable set of data to reach these conclusions, following the trajectory of 34 million first mortgages and 14 million second mortgages through the crisis.” They identified each of the borrowers, and they classified them according to the following:
  • Race
  • Income
  • Loan category
  • Initial loan-to-value ratio (LTV)
In addition to looking at initial LTVs, Ferreira and Gyourko also “calculated loan-to-value ratios over the period for each home, as well as the economic characteristics of the surrounding neighborhood, in order to isolate the variables that were most predictive of foreclosure.” We know that the study determined subprime loans weren’t the primary cause of foreclosure. But what else did the authors discover?
  • Race may not play as significant a factor in foreclosure as some researchers previously believed.
  • Timing is everything. Even with a prime loan, paying more for a house than it is currently worth can seriously impact your risk of foreclosure.
  • When people’s homes are worth less than what they owe, they are more likely to stop making mortgage payments.
The study suggests that its foreclosure-prevention solutions might be more complicated than most of us would hope. Do you have questions or concerns about foreclosure? Don’t hesitate to contact a dedicated Chicago foreclosure defense lawyer at the Emerson Law Firm. We’re here to help.
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