In the school of hard knocks, you graduate either through class participation or observation. However, some never seem to graduate.
In 2009 there was a rare moment of consensus between Main Street, Wall Street, K Street, and every street in between: over-leveraged individuals, companies, commercial banks, and investment banks create an unstable system, even if you really really think this time is different and this nifty model says so right here. On the mortgage side of the equation, the Boston Fed released a landmark study:
"The empirical evidence on the role of negative equity in causing foreclosures is overwhelming and incontrovertible. Household-level studies show that the foreclosure hazard for homeowners with positive equity is extremely small but rises rapidly as equity approaches and falls below zero. This estimated relationship holds both over time and across localities, as well as within localities and time-periods, suggesting that it cannot result from the effect of foreclosures on local-level house prices." (emphasis mine)
Two years later, mainstream opinion writers like Felix Salmon (among many others) were still pointing out that, "If you take one group of loans with a 20-25% down payment, and a second group of loans with a 15-20% downpayment, then the second group, on these numbers will have a delinquency rate 56% higher than the first."
But five years later... well, a lot can change in five years. And, if it cannot change, at least it can be forgotten. This past week the director of the Federal Housing Finance Agency (the US agency that regulates Fannie Mae and Freddie Mac) announced:
"As I said earlier, there are creditworthy borrowers in today’s market who have the income to afford monthly mortgage payments but do not have the money to make a large down payment and pay closing costs. Purchase guidelines that allow for 3 percent down payments will provide an opportunity for access to credit for some of these borrowers."
Yes, the majority are creditworthy borrowers, but a large interconnected and securitized financial system cannot be sustained if 20% of the borrowers default during the next downturn. Let us hope that this time truly is different.
In 2009 there was a rare moment of consensus between Main Street, Wall Street, K Street, and every street in between: over-leveraged individuals, companies, commercial banks, and investment banks create an unstable system, even if you really really think this time is different and this nifty model says so right here. On the mortgage side of the equation, the Boston Fed released a landmark study:
"The empirical evidence on the role of negative equity in causing foreclosures is overwhelming and incontrovertible. Household-level studies show that the foreclosure hazard for homeowners with positive equity is extremely small but rises rapidly as equity approaches and falls below zero. This estimated relationship holds both over time and across localities, as well as within localities and time-periods, suggesting that it cannot result from the effect of foreclosures on local-level house prices." (emphasis mine)
Two years later, mainstream opinion writers like Felix Salmon (among many others) were still pointing out that, "If you take one group of loans with a 20-25% down payment, and a second group of loans with a 15-20% downpayment, then the second group, on these numbers will have a delinquency rate 56% higher than the first."
But five years later... well, a lot can change in five years. And, if it cannot change, at least it can be forgotten. This past week the director of the Federal Housing Finance Agency (the US agency that regulates Fannie Mae and Freddie Mac) announced:
"As I said earlier, there are creditworthy borrowers in today’s market who have the income to afford monthly mortgage payments but do not have the money to make a large down payment and pay closing costs. Purchase guidelines that allow for 3 percent down payments will provide an opportunity for access to credit for some of these borrowers."
Yes, the majority are creditworthy borrowers, but a large interconnected and securitized financial system cannot be sustained if 20% of the borrowers default during the next downturn. Let us hope that this time truly is different.
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