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The Mortgage Crisis

The Mortgage Crisis. Todd J. Zywicki Professor of Law George Mason University. The Housing Boom. Low Interest Rates Fannie & Freddie Weakened Underwriting Standards Speculation. Housing was Cheap. Homeownership Rose. Minorities Benefited. Young Benefited. Housing Bust: Foreclosures.

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The Mortgage Crisis

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  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 > 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 >9%, 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)

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