Believe It Or Not, They Have Found Another Way To Blame Poor People
University of Texas at Dallas economist Stan J. Liebowitz drops a huge bomb on conventional wisdom about the real estate bubble: This has not been a "subprime" mortgage crisis at all. In fact, subprime mortgages in some categories are still not defaulting at record-high levels.
Instead, by far the most important determinant of default -- and the common feature of nearly all defaults since 2006 -- is whether the mortgage has an adjustable interest rate:
The mortgage data do not suggest that subprime loans went bad first, followed by Alt-As and then prime loans. Instead, the data suggest that adjustable rate mortgages (ARMs) went bad first, with the rise occurring at about the same to for both prime and subprime ARMs. Foreclosure rates on fixed rate mortgages (FRMs), both prime and subprime, barely participated in the foreclosure outbreak, having much smaller and much later increases in foreclosures.
To understand why this is important, please consider how widespread the belief in the subprime crisis really is. The president believes it. The media believe it. I believed it, and if you want to play gotcha on me, here's your chance.
I can not speak to the quality of Liebowitz's data, which are drawn from the Mortgage Bankers Association's National Delinquency Survey. But the case he puts together is pretty damned interesting. And it makes intuitive sense: If you're flipping or buying a second home or betting on the come, you want to reduce your short-term exposure. And we already know that being underwater on a mortgage is the primary factor in the decision to default.
Back at the end of the Bush Administration (were we really so young back then? will we ever learn to laugh again?), there was a fad for a financial metaphor drawn from epidemiology: that the crisis began with subprime loans but could begin to "spread" to prime loans. In fact, however, prime default rates began spiking at the same time as or even slightly before subprime default rates. But while the role of ARMs was getting a lot of attention at the time, nobody defined it as the reset crisis or the recast crisis.
So for example, at the moment Federal Reserve Chairman Ben Bernanke was giving this May 2007 speech about the sub-prime crisis, there was already a year's worth of data showing that prime and sub-prime loan defaults were growing, in percentage terms, at almost exactly the same rate. (Sub-prime loans have higher ordinary default rates.)
Bernanke of course had a personal stake in deceiving the public in this way. He himself was carrying an adjustable-rate mortgage at the time, which he has subsequently managed to refi -- thus locking in an attractive rate before raising interest rates on the rest of us.
But why was everybody else so eager to believe it? Liebowitz suggests a possibility: "The subprime story provided an easy scapegoat: subprime lenders."
Even more convenient are the scapegoats who don't get any attention: subprime borrowers. Nobody would doubt that subprime borrowers, who are most likely to have low incomes and little financial experience, must be the leading edge of the default phenomenon.
Except that it seems to be untrue. A low-income, bad-credit borrower who is serious about owning a home is more likely to keep making payments in hard times than a higher-income, good-credit person who has arranged his purchase so as to have little or no equity in the house.
Major pieces of the conventional wisdom about the mortgage collapse continue to fall apart on inspection. We know, for example, that houses still sell when you cut the asking price, that unemployment is not a major factor in defaults, that modifying loans does not help bad borrowers. If Liebowitz is right about ARMs as the main cause of defaults, we will, as he says, "have very different economic explanations for the defaults and very different remedies." We'd also have a better understanding about why all efforts to treat the situation are just making the patient worse.
But there's a class element here too. The right hates poor people and the left loves them to death. But both agree that the poor must not be left to make their own decisions on financial matters. My friend John Hope Bryant says the difference between being broke and being poor is that being poor is a state of mind. Apparently it's a state of mind you can be in even if you're rich. The sad part is that once upon a time good New Deal liberals were leading the drive to get poor people the tools to help themselves:
