Some Subprime Mortgage Facts
As Mrs. Angus and I dig our way out of ice sheets and downed trees, I recommend this Boston Fed working paper written by a couple of PhD students from Boston Univ.
The abstract: This paper provides the first rigorous assessment of the homeownership experiences of subprime borrowers. We consider homeowners who used subprime mortgages to buy their homes, and estimate how often these borrowers end up in foreclosure. In order to evaluate these issues, we analyze homeownership experiences in Massachusetts over the 1989–2007 period using a competing risks, proportional hazard framework. We present two main findings. First, homeownerships that begin with a subprime purchase mortgage end up in foreclosure almost 20 percent of the time, or more than 6 times as often as experiences that begin with prime purchase mortgages. Second, house price appreciation plays a dominant role in generating foreclosures. In fact, we attribute most of the dramatic rise in Massachusetts foreclosures during 2006 and 2007 to the decline in house prices that began in the summer of 2005.
So yes subprime mortgages for home purchase do end up in foreclosure "too often" and it's price declines, not interest rate increases, that are the key driver of foreclosures. Not only is the Paulson plan weird, it's pretty much misdirected and likely useless.
Labels: economic policy