You must make an analysis between loan and value in housing crisis

The important point in analyzing the housing crisis is the proportion between loan and value. Generally the sub-prime loans are held to be the prime culprits for having caused the crisis but a good number of pundits have juggled around with the numbers to come to a different conclusion. They contend that the high ratio between loan and value among the house owners has meant little cash has been deposited towards the purchase of the units.

Prices have been depreciated and laws enabling the house owners to get out of their dues made too easy. All these have contributed to the tumbling scenario. Professor Stanley Leibowitz of University of Texas-Dallas is forcefully arguing his point. He said 51% of all the foreclosed units during 2007 came from prime mortgages and the foreclosure rates on these swelled by a staggering 488%.

On the other hand, the foreclosure rates of sub-prime mortgages increased by 200%. More significantly is that his data collected for 2008 show that a mere 12% of the houses that had at that time negative equity (worth of house being less than the loan amount) were included in 47% of all the foreclosure activity. Thus the conclusion is that one should think how much clout the borrowers had in this game best forecasts if they are continuing in the game; it is not about whether the mortgage was sub-prime or not.

The findings and conclusions of Leibowitz have been echoed by another economist – Martin Feldstein. He had once been chairperson of the Council of Economic Advisers of Ronald Reagan. He thinks that the borrowers would be able to survive if their contribution had been more at the time of purchase. By this the scenario of negative scenario would have been avoided. It would be the best way of skirting foreclosures. He has recommended very strongly that recourse notes should be made federal by fiats from the Congress.

These are mortgage notes that allow the lender to chase the house owner even after a foreclosure if the unit is sold for less than the pending loan amount. At the moment 13 states including Arizona, California and Nevada have made recourse notes illegal. The ideas of Leibowitz and Feldstein are based on sound economic knowledge. These are however not politically appealing and somewhat unrealistic. Washington has been to a good extent successful in the job of federalizing and this has led to the formation of uniformity across the nation as regards regulation and supply of finance for real estate purposes.

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