No Skin in the Game

There was a fascinating article last week in the Wall Street Journal about the root causes of many foreclosures. Written by Stan Liebowitz, a director in the managament school at the Univ. of Texas in Dallas, Mr. Liebowitz used data on 30 Million mortgages compiled by McDash Analytics. The bottom line of his analysis was that low equity, either due to low money down at mortgage inception, or loss of equity due to refinancing or the market changes, was the major contributor and cause of the foreclosure crisis, not sub-prime loans. One interesting data point was that 51% of all foreclosed homes had prime loans, not sub-prime, and that the foreclosure rate for prime loans grew by 488% in the second half of 2008 compared to 200% increase for sub-prime mortgages.
The most comon factors leading to foreclosure were: (in order of number of occurrences)
1) Negative Equity- 285,000 loans
2) Unemployment - 183,000 loans
3) Sub-prime Loan- 149,000 loans
4) Low Downpayment (< 3%)- 130,000 loans
5) Mortgage rate reset upward- 61,000 loans
Items #1 and #4 are the factors that were included in the "Low Equity" category.
I have been discussing low "skin in the game" for several months in this blog. It was refreshing to see some actual mortgage and foreclosure data that supported my beliefs.
Another interesting part of the article was Mr. Liebowitz' conclusion that the Obama plans to help homeowners by adjusting mortgage rates may not be a big help in keeping people from foreclosure. His data supports that conclusion. It's not a rate issue. The major factor that causes people to walk away from their mortgage is lack of equity and a feeling that the situation will not turn around.
Mr. Liebowitz also concludes that lower morgage rates usually lead to more re-finances, not more sales. I agree with the first part of this statement, but the recent rebound in entry level sales is directly tied to lower mortgage rates, tax incentives and pent-up demand. Mr. Liebowitz correctly states that while refinancing keeps money each month in people's pockets, it is home sales that directly impact house prices. Precisely what our market is showing us today! What we have now occurring in our entry segments is low mortgage rates driving sales which are depleting inventory leading to increased competition, more multiple offers and higher selling prices. So one can make a claim that lower rates do drive selling prices IF certain other factors are in play to help drive down inventory and make homes affordable. Given the pent-up demand at the middle and upper tiers that I am seeing in our market today, lower rates at these levels would drive sales and provide support for prices as inventory stabilizes at more traditional levels. We still desparately need mortgage rate relief at the upper tiers of the market.