No Down Payment Led to Large Foreclosure Home Numbers

Zero down payments on home purchases and not subprime lending led to large foreclosure home numbers in the U.S. since the last months of 2006, according to Stan Liebowitz, economics professor and head of the University of Texas’ Center for the Analysis of Property Rights and Innovation.

Liebowitz cited the finding by the Mortgage Bankers Association that 51 percent of all foreclosure home units had prime loans and not subprime loans as widely assumed. MBA also reported that the pace of foreclosure for prime loans increased by 488 percent, much higher than the pace of foreclosure for subprime loans, which is 200 percent.

According to MBA, the percentage data is based on mortgages that went into foreclosure since the last months of 2006 when mortgage defaults stepped up and put over 4.3 million houses into foreclosure home listings.

The other widely assumed cause of the foreclosure wave was lenders’ failure to screen borrowers. Liebowitz also argued against this assumption by citing his study of loan-level figures provided by McDash Analytics. He said that the data is the largest source of loan-level figures available as it covers over 30 million mortgages.

Liebowitz said he studied the equity positions of homeowners and compared the equity factor to other factors cited as foreclosure causes and found that negative equity was the major cause of foreclosures.

According to Liebowitz’s analysis of data in over 30 million mortgages in the last six months of 2008, a total of 285,305 of mortgages which went into foreclosure had negative equity. The next biggest factor was unemployment, which caused a total of 183,447 foreclosure home units.

Of houses owned by borrowers who made low down payments – less than 3 percent of loan value – a total of 130,014 went to foreclosure home listings.

The other large factor was low FICO score – 620 or lower – putting 148,697 homes into foreclosure listings.

Liebowitz also said that the adjustment of mortgage rates did not significantly increase foreclosure home listings because only 8 percent of mortgages which went into foreclosure increased by more than 4 percentage points.

Moreover, the economist said that the finding is significant especially for government officials crafting policies to solve the foreclosure problem.

Among his recommendations are the implementation of stricter underwriting standards and requirement for bigger down payments. He reiterated that borrowers with substantial down payments would have more motivation to prevent their homes from getting added to foreclosure home listings.

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