U of A economists: Households Overreached, Led to Foreclosure Crisis

[sinkingfeeling]

http://newswire.uark.edu/article.aspx?id=14076

A new study by University of Arkansas economists suggests the latter. The researchers found that most households in foreclosure were relatively affluent and highly educated people, with few or no children, living in geographical areas that experienced extremely rapid real-estate appreciation – the housing bubble. Although they found some evidence of predatory lending, the authors concluded that a more accurate explanation of the foreclosure crisis was that consumers overreached and bought more housing than they could afford.

By far, the group with the greatest excess foreclosure percentage was “Cash & Careers,” the most affluent generation (Generation X) of adults born between the mid-1960s and early 1970s. Members of this group had high household incomes, high education levels, high home values and none to only a few children. Also, members of this group were classified as aggressive investors, most of who lived in areas – California, Nevada, Arizona and Florida – of rapid real-estate appreciation.

Overall, results showed that most foreclosed households were not “duped” into bad loans, Yeager said. Instead, they were caught up in a housing price bubble in which both consumers and lenders were too aggressive. This finding is critical because strong consumer protection laws alone will not prevent future price bubbles or financial crises.

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I think this article and the linked .pdf are accessible to all.

[T Wolf]

1. Nowhere in the discussion about this "crisis" is it mentioned that the very nature

of America - conspicuous consumption, gotta-have-it-all-NOW, money-uber-alles is THE PROBLEM.

Some of us do not live beyond our means, in constant pursuit of more than we could ever possibly need or use.

Some of us think of our house as a home, not merely as an investment.

There is blame enough to go around on the state of our economy. But until we change our basic orientation toward life and living, those who do prey on the greedy and gullible will always win. Their greed, coupled with their control of the rules, makes this inevitable.

[Turbineguy]

2. Irresponsible banks managed

irresponsible customers.

Sort of like STDs are spread because pimps find johns.

[ipaint]

3. Sam M. Walton College of Business

lol

co-author of study

Tim Yeager
Associate Professor
<b>Arkansas Bankers Association Chair</b>

In the face of all we know about the fraudsters on wall street and in the banks they still never quit catapulting the propaganda.

[TwilightGardener]

4. Interesting. I think there's some truth to it. The educated, higher-income

people were probably buying as much house (or as good a school district) as they could afford, not understanding that the prices were inflated. If everyone around you is paying $300,000 or more for a house, that starts to seem normal.

[KurtNYC]

5. 1) Duh! 2) blaming the victim

1. Of course it was that group that made up the majority of the loans and total dollars -- they were at the age to buy a house when this occurred. It certainly wasn't those in year 17 of a 30 year loan. Poor people don't buy houses, wealthy people don't get foreclosed, so who is left?

2. If a guy walks into a bar with car keys in his hand and asks to buy 12 shots of vodka, they had better not sell it to him because the laws making bartenders responsible are stronger and more straightforward than those for banks, apparently.

[sinkingfeeling]

6. Guess you didn't read the study.

[aikoaiko]

7. I don't know how you can make the claim that lendees over reached without...

...saying lenders overextended debt to lendees who were overreaching.

[depakid]

10. +1

Some "credit" also goes to the Fed for expansive monetary policy.

With higher interest rates, a lot of the people that the paper mentions would have thought twice about taking on that sort of debt.

[sinkingfeeling]

11. They did say that. First paragraph, page 2 of the study.

[aikoaiko]

19. I'm not sure they do .... because their alternative hypothesis is too narrow

The authors defined two hypotheses: Over-reaching home buyers and predatory lenders. Predatory lenders are defined narrowly as "...unscrupulous brokers and greedy Wall Street banks took advantage of the most vulnerable households. Targeted households did not understand the risks imbedded in complex mortgage products." That's really only a subgroup of lenders who acted improperly. There were plenty who either didn't care or didn't look to see if someone could afford the house.

Because the authors only focus on a subset of those improper lenders, they can say that predatory lending was not the major cause.

For every overeaching high-risk lendee, there was a overextending high-risk lender (with a few exceptions for outright fraud and unforeseeable events).

[sinkingfeeling]

20. From the article (first link above)...

The researchers were careful not to excuse Wall Street banks, however, because reckless lending enabled households to become dangerously leveraged.

“Our evidence does not disprove or excuse reckless subprime lending by the large Wall Street banks,” said Tim Yeager, associate professor in the Sam M. Walton College of Business and lead author of “The Foreclosure Crisis: Did Wall Street Practice Predatory Lending or Did Households Overreach?”

“We argue that there is plenty of blame to go around for the financial crisis. Both banks and consumers overreached. Banks extended too much credit to households, and households purchased more home than they could afford,” Yeager said.

[aikoaiko]

22. Yes, I read that part. That's not addressing my point.

They do not say that the blame is equal between overreaching buyers and overextending lenders, do they?

Ultimately, they lay more blame on overreaching buyers than predatory lenders because they set up the question so that only a subset of poor lending practices (predatory lending) are examined.

Saying there is plenty of fault to go around is not the same thing as saying lenders are as much to blame as buyers.

At least that is the way I read it.

[JDPriestly]

8. Remember all the hype about the "ownership society" and how wonderful

it all was?

And all the while, job-outsourcing was creeping into the American middle class.

Incomes did not rise as fast as the Generation X-ers were led to believe by all the hype about the "ownership society" and the low interest rates. People really believed that their earnings would increase enough to cover their expenses. That was no accident.

Remember Bush telling everyone to go shopping after 9/11? That was the message people were getting. Patriots shop. There was a lot of trickle-down stupidity.

[damntexdem]

9. Yeah, and the waters of the Gulf of Mexico are overreacting:

drawing up more oil than they can disperse.

[DefenseLawyer]

12. Lenders were no longer making money on interest

Traditionally a mortgage lender has a natural aversion to making bad loans. He stands to make his money on the interest payed on the lent money and obviously a default is a loss. Once the mortgages started being "bundled" and sold on the crazy derivative market, the lender couldn't care less. He just wanted your name on the dotted line so he could sell the note. That's how he made his money, whether the borrower ever paid a dime in interest. NINJA loans? hey no problem. Sure you can always say people should have more "self control" but that's a pretty tall order when a person looking for a $100,000 house is told by a lender that he "qualifies" for a $300,000 house. As the song says, the lure of easy money has got a very strong appeal.

[Lance_Boyle]

14. It does not take extraordinary 'self control' to live within one's means.

It only takes a lack of narcissism and greed. A person looking for a $100,000 house should have laughed in the face of a lender or realtor who wanted them to be looking at $300,000 houses. A bunch of greedy gits decided they "deserved" the bigger house with the pool and his/hers walk-in closets and granite everything. They then borrowed irresponsibly to make it happen. My tiny violin will need to be re-strung after playing for so many of them...

[DefenseLawyer]

16. Well I hope you get a gold star for being a superior human being

Playing your "tiny violin" while someone else suffers doesn't make you better than them, it makes you a douchebag. Congratulations.

[Lance_Boyle]

17. People tend to learn when they suffer from their mistakes

regardless of whether or not I point and laugh in the background.

People do not tend to learn when they are bailed out for their mistakes, regardless of whether or not I point out the stupidity of bailing them out.

[gratuitous]

18. Yep, there's plenty of fault to go around

And when lenders didn't much care whether the loans performed or not (except insofar as they did until they could be bundled and sold to someone else), it opened the door to a whole lot of mischief.

What I find interesting about the study is the blame apportioned to young, affluent buyers. This isn't surprising, once I thought about it. Buying your first (maybe second) home, a young person or a young couple isn't real experienced in the real estate market. The old advice was "buy as much home as you can," because housing prices always go up, sort of slowly, but up they go nevertheless, and you're making as little as you'll ever make right this very second. Your salary is going to go up, perhaps slowly, but that's okay. If you're just scraping by today with a monthly house payment of $2,100, you'll be in better and better position to make that payment as time goes by. And if housing prices rise faster than inflation, that's just gravy because you'll have an improved equity position for your home. If you buy at $300,000 in 2004 and the house appraises at $350,000 in 2006, you've "made" $50,000 without doing anything.

But two factors were working real hard against the neophyte homeowner: An overheated housing market that distorted home values, and a lurking recession waiting to pounce once that housing market bubble burst. Aiding and abetting the seductively dangerous atmosphere was a consumeristic society, popular culture ("Flip This House"), and not a little fear that if you didn't get in now, you might find yourself permanently priced out of the housing market. Yeah, it takes individual self control, but what does that mean when the information and the signals you're getting all say to plunge before you lose your chance forever?

[Lance_Boyle]

13. Surprise, surprise, surprise!

I guess DU will need to find a way to smear this researcher for speaking the truth. I, for one, am not the least bit surprised that the irresponsible borrowers take most of the blame. Been saying it here for years. It's not been a popular opinion to hold, but then the truth seldom is.

[sinkingfeeling]

15. I'm always amazed when a scientific study/paper is posted and nobody bothers to read it before

taking pot-shots. I think the whole study is very interesting. I liked their comparisons of California and Arkansas.

There's little discussion here about the method used or no counter argument about the conclusions. Just that it's 'business school' propaganda.

[Mari333]

21. I have seen this phenomenon in my own town

lots of gated communities, newly built megamansions on the lakefront, now with For Sale signs on them..tons of empty places..people buying their dream homes and overreaching..yes, Ive seen it.

I downsized BEFORE the crash. from a farmhouse to a little teeny cottage. Maybe I was psychic.
but I know what I can afford.