The true cause of the foreclosure crisis is up for debate. Did banks prey on
unwitting consumers, or did households "overreach" and borrow more than they
could afford? Economists at the University of Arkansas
recently completed a study to answer that very
question. The study, The Foreclosure Crisis: Did Wall Street Practice PredatoryLending or Did Households Overreach?, found the latter to be true. Although the researchers found some evidence of predatory lending, they
concluded that a more accurate explanation of the foreclosure crisis was
households who got in over their heads after borrowing more than they could
afford. However, the researchers were careful not to excuse Wall Street
banks, as 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 study. "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."Relying on massive datasets from private companies that compile information
about demographics, real-estate properties, and foreclosures, Yeager and
four other researchers created profiles of households who were in
foreclosure during the third quarter of 2008. The researchers used a
classification system to identify and examine the characteristics of these
households, which they separated into 21 life-stage groups, each with
specific demographic characteristics that tied them together. The researchers then developed two categories of groups based on formulas
for "excess foreclosure shares" and "relative default shares." The first
calculation determined, in absolute numbers, which groups accounted for the
most foreclosures. The second calculation showed which groups had the
highest likelihood of foreclosure. By far, the group with the greatest excess foreclosure percentage was "Cash
& Careers," the most affluent generation 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. In
addition, members of this group were classified as aggressive investors,
most of who lived in areas of rapid real estate appreciation, such as
California, Nevada, Arizona, and Florida. However, "Cash & Careers" ranked seventh on the list of groups most likely
to default. At the top of this list were four groups - "Mixed Singles," "Gen
X Singles," "Boomer Singles," and "Beginnings" - characterized by low income
and low net worth. Members of these four groups were most likely to be
victims of predatory lending, the report said. But except for "Boomer
Singles," these groups showed up at the bottom of the excess foreclosure
list."Although we did find evidence that low-income households had a higher
statistical likelihood of foreclosure, most households in foreclosure were
relatively affluent and well educated," Yeager said. "Also, these household
defaults were strongly clustered in southwestern and southeastern states,
which is consistent with the overreaching-consumer explanation of the
foreclosure crisis."Overall, the study found that most foreclosed households were not "duped"
into bad loans. Rather, they were caught up in a housing price bubble in
which both consumers and lenders were too aggressive. Yeager said the policy implication from these results is that strong
consumer protection laws, though necessary to prevent Wall Street banks from
offering high-risk loans to the most vulnerable, will not be sufficient to
prevent another financial crisis like the one the U.S. economy experienced
in 2007 and 2008. He said the only comprehensive solution may be to pop
housing bubbles, which is a much more complex task that would require the
Federal Reserve to recognize and limit asset price bubbles.
unwitting consumers, or did households "overreach" and borrow more than they
could afford? Economists at the University of Arkansas
recently completed a study to answer that very
question. The study, The Foreclosure Crisis: Did Wall Street Practice PredatoryLending or Did Households Overreach?, found the latter to be true. Although the researchers found some evidence of predatory lending, they
concluded that a more accurate explanation of the foreclosure crisis was
households who got in over their heads after borrowing more than they could
afford. However, the researchers were careful not to excuse Wall Street
banks, as 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 study. "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."Relying on massive datasets from private companies that compile information
about demographics, real-estate properties, and foreclosures, Yeager and
four other researchers created profiles of households who were in
foreclosure during the third quarter of 2008. The researchers used a
classification system to identify and examine the characteristics of these
households, which they separated into 21 life-stage groups, each with
specific demographic characteristics that tied them together. The researchers then developed two categories of groups based on formulas
for "excess foreclosure shares" and "relative default shares." The first
calculation determined, in absolute numbers, which groups accounted for the
most foreclosures. The second calculation showed which groups had the
highest likelihood of foreclosure. By far, the group with the greatest excess foreclosure percentage was "Cash
& Careers," the most affluent generation 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. In
addition, members of this group were classified as aggressive investors,
most of who lived in areas of rapid real estate appreciation, such as
California, Nevada, Arizona, and Florida. However, "Cash & Careers" ranked seventh on the list of groups most likely
to default. At the top of this list were four groups - "Mixed Singles," "Gen
X Singles," "Boomer Singles," and "Beginnings" - characterized by low income
and low net worth. Members of these four groups were most likely to be
victims of predatory lending, the report said. But except for "Boomer
Singles," these groups showed up at the bottom of the excess foreclosure
list."Although we did find evidence that low-income households had a higher
statistical likelihood of foreclosure, most households in foreclosure were
relatively affluent and well educated," Yeager said. "Also, these household
defaults were strongly clustered in southwestern and southeastern states,
which is consistent with the overreaching-consumer explanation of the
foreclosure crisis."Overall, the study found that most foreclosed households were not "duped"
into bad loans. Rather, they were caught up in a housing price bubble in
which both consumers and lenders were too aggressive. Yeager said the policy implication from these results is that strong
consumer protection laws, though necessary to prevent Wall Street banks from
offering high-risk loans to the most vulnerable, will not be sufficient to
prevent another financial crisis like the one the U.S. economy experienced
in 2007 and 2008. He said the only comprehensive solution may be to pop
housing bubbles, which is a much more complex task that would require the
Federal Reserve to recognize and limit asset price bubbles.
via Ping.fm
No comments:
Post a Comment