Why do Foreclosures and Declining Markets Correlate to Subprime Lending

The GSE declining markets policy will have the affect of tightening the supply of subprime mortgages. It will also probably lead to more foreclosures, though, as it will become harder to get out of your mortgage. Research indicates that foreclosures on subprime loans are most likely when property values are going down, because the expectation of property price appreciation was what made those loans logical in the first place.

The story that comes out of this tells a pretty stark tale. Among the zingers are that in some markets, as many as one in five loans will end up in foreclosure.

It would be a mistake to think that this is only a product of hundreds of thousands of American families all become less responsible. Yes, there is definitely a place to put some blame on people not paying their debts. Yet that is not where public policy should focus. With our bankruptcy bill, that concern is already addressed, anyway.

No, the simpler answer is that it reflects the problems with “financial innovations.” Where does the finger point, then? To the people who were supposed to be in charge of watching over that regulation – the regulators at the Federal Reserve.

~ by samsondoggie on April 24, 2008.