FICRY

Prime for Crisis

Writing for the Wall Street Journal, Stan Liebowitz reports that prime, and not subprime loans led to the mortgage crisis. Liebowitz, professor of economics and director of the Center for the Analysis of Property Rights and Innovation  at the University of Texas, Dallas, analyzed national databases containing millions of individual loans for his feature. He maintains that in the majority of cases, the most important factor leading to foreclosure is “negative equity,” where “the balance of the mortgage is greater than the value of the house.” He blames prime and not subprime, predatory loans, which deceive homeowners by luring them in with a low initial interest rates that eventually balloon out of control.

Having labeled the mortgage meltdown as a subprime crisis, the government’s relief effort has focused on lowering inflated interest rates. But, Liebowitz argues, this effort is misguided because the majority of foreclosed homes, over 51%, had prime loans. In fact, the rate of foreclosure of prime loans have skyrocketed 488%, since the start of the FICRY, as compared to the 200% increase for subprime foreclosures.

The government has spent almost $2 trillion on stabilizing the housing market by targeting predatory, subprime, loans and reducing mortgage rates. While this provides some relief for those tricked into paying above their means, it does not address the underlying causes of the housing crisis: prime loan payments that exceed the sinking value of the property. Moreover, Liebowitz maintains lowering interest rates will actually slow recovery by inducing refinancing rather than encouraging real estate purchases.

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