Since the beginning of the year, local and national newspapers have painted many compelling portraits of average Americans overwhelmed by the foreclosure crisis.
Last month, for instance, The Wall Street Journal told of two sisters whose families bought homes using subprime mortgages side-by-side in Los Banos, Calif., where they ultimately defaulted on their loans when their husbands lost their jobs as painters. Also, The San Antonio Express-News chronicled the story of a middle-income family whose woes began after the family's husband lost his job as manager of a local call center. The New York Times weighed in with the sad tale of Patricia Reyes, who lost her home of five years when she fell ill last year and lost her job.
Though these are recent stories, their type has been a staple for months now among newspapers. Last February, just as the foreclosure story was starting to gain traction, The Newark Star-Ledger chronicled the plight of Charmaine Perryman – who couldn't make payments on her subprime mortgage after she lost her job as a child-care provider.
That same month, as defaults were growing in Minnesota, The Minneapolis Star-Tribune told the story of Michael Kelley, a respiratory therapist whose credit fell apart in 2004 after a divorce that ultimately cost him his home, and Sarah Shannon, who got hit with a big bill for emergency dental work, then lost her job and eventually her home.
No one will ever accuse our media of a lack of compassion, but still, in reading over these stories and dozens of others like them, I can't help but notice how frequently they mischaracterize the foreclosure crisis in America. The central illustration in these articles and many others like them is of Americans overwhelmed by circumstances beyond their control, from job losses to health problems to personal crises like divorce that ultimately cost them their homes.
But that is not what this foreclosure crisis has been about up to this point. At any time, including the best of times, one can find homeowners struck by unanticipated personal reversals who lose their homes. That doesn't account for the foreclosure mess we've seen. In particular, job losses have not been at the root of this problem, even if they are central to so many media tales.
As Professor Stan J. Liebowitz at the University of Texas at Dallas points out in his study "Anatomy of a Train Wreck," the foreclosure problems began in mid-2006 when the nation's unemployment rate was holding steady at a mere 4.6 percent. What triggered the crisis were not layoffs but an end of the rise in home prices. By contrast, in the economic slowdown that began earlier in this decade, unemployment started rising in early 2001 and peaked at 6.3 percent in mid-2003 but resulted in only a modest uptick in foreclosures by today's standards.
There are many clues about what has actually been going on that don't make their way into the media's stories. One compelling piece of evidence is the sharp divergence in the performance of fixed-rate vs. adjustable-rate prime mortgages. As Dr. Liebowitz observes, what we are seeing is often characterized as a subprime crisis, but, in fact, it is an adjustable-rate mortgage problem. Starting in mid-2006, foreclosures jumped sharply for both prime and subprime ARMs, but not for fixed-rate mortgages of any kind, including subprime ones.
What's the difference? Well, ARMs draw a different kind of buyer, one who is often intent on selling or refinancing before rates re-set. We have some idea of the extent to which this kind of buyer drove sales at the height of the housing bubble. In 2005, according to data from the National Association of Realtors, speculative home purchases – that is, purchases of homes for investment purposes that the buyer didn't intend to live in – amounted to a whopping 28 percent of all deals, and 22 percent in 2006. "These numbers are large enough that if only a minority of speculators defaulted when housing prices stopped increasing, it could explain all or most of the increases in foreclosures started," writes Dr. Liebowitz.
The data suggest that speculation was rampant among average Joes and Janes and not something primarily that high-end buyers or "yuppie flippers" engaged in (as a hilarious Saturday Night Live skit recently suggested). Indeed, one thing that probably accounts for the large number of defaults in lower-income and moderate-income neighborhoods is that these buyers were most likely to engage in speculation, according to the data that Dr. Liebowitz has crunched. He found that speculative purchases during the current bubble were higher as a neighborhood's average income decreased. In neighborhoods where household income was about $40,000, or about one-fifth below U.S. median family income, speculative mortgages accounted for one-third of all loans, while in census tracts where average income was nearly double the nation's median, speculative loans accounted for well under 10 percent of all mortgages.
Although you will rarely find a straightforward and accurate accounting of this and other issues, if you read news descriptions of the foreclosure crisis carefully, you can find all sorts of hints about what's really going on. For instance, a number of stories point out that the foreclosure problem is persisting in part because so few people qualify for the federal government's bailout plan. Typically these stories quote frustrated mortgage counselors at local community groups who say they would like to help more homeowners.
But many buyers don't qualify precisely because they made speculative loans or were intent on flipping their homes, and they instead walked away from their mortgages at the first sign of home depreciation. These folks aren't current on loans that haven't even reset yet, and aren't about to tough it out on a loan even if they can negotiate a lower monthly payment, because it will take years for the value of some of these homes to get back to the original selling price. Why pay back a loan even at a lower rate courtesy of Uncle Sam if you can walk on it instead and suffer, at most, a hit to your credit score?
Indeed, even before some of these folks bailed on their mortgage payments, they were looking to bail on their mortgages contracts. In March 2007, The Miami Herald noted in one of the few realistic stories about how we got in this mess that buyers were flooding local real estate lawyers with requests to get out of contracts because home prices had hit the skids in Florida.
"The scary thing is, people who have flaked on me tell me they have like five other contracts in other buildings under construction," one real estate developer told the paper.
Added a local lawyer: "These are not people who have been wronged. These are flippers who wouldn't be saying anything if the market was going well."
As Dr. Liebowitz notes, markets where speculative buying went on aren't a small part of this problem, but a big chunk of it. Defaults in California and Florida alone have accounted for 42 percent of subprime ARM defaults nationwide in the second quarter of 2008.
Of course, rising unemployment may play a role in the next round of foreclosures, especially as the larger implications of this credit mess have spread throughout the economy and driven down the stock market, bankrupted financial institutions and cut people's equity in their homes. But that's speculation about the future of foreclosures, not a description of the immediate past.
Why, then, is the typical media narrative so at odds with the facts? Knowing the way reporters work, I'm guessing that in many of these stories, the press finds their examples by calling their local social service agency specializing in mortgage counseling, which promptly serves up a compelling example of someone subjected to sudden, Dickensian reversals of fortune in their lives. By contrast, finding your typical home speculator and flipper, the kind inspired by TV shows like Flip This House and by infomercials on how to make loads of money in real estate, isn't all that easy. Even if you can track someone like that down, he isn't about to expose himself willingly to the sharp glare of media scrutiny.
Besides, focusing on buyers who are bailing on their mortgages at the first sign of trouble dramatically changes the tone of a story, especially when you find that many of these people are not slick out-of-town investors or greedy yuppie flippers, but maybe just the folks next door. There are many types of people whom your local reporter and editor are pleased to characterize as greedy and irresponsible, but the working-class guy across the street or the retired couple down the block rashly playing the market are not among them.
When it comes to the roots of the crisis, to echo Jack Nicholson's character in A Few Good Men, I wonder if the media can handle the truth?
Steven Malanga is a senior fellow at the Manhattan Institute and an editor for RealClearMarkets, where this essay first appeared. His e-mail address is firstname.lastname@example.org.
Original Source: http://www.dallasnews.com/sharedcontent/dws/dn/opinion/points/stories/DN-malanga_30edi.State.Edition1.2b801fb.html