An interesting paper from several economists including two from Fannie Mae studies the causes of foreclosures in Southern California over the last few years. The paper seeks to determine whether it was home value declines or excessive borrowing at the time of the purchase and in subsequent refis that cause foreclosures. This is the sort of question that's fascinating to economists and academics but doesn't matter much to the homeowner who finds himself out on the street. But it does have important policy implications and it's helpful for us to understand as we start to post mortem the housing crash of the last few years.
Their conclusion? Excessive borrowing is the culprit, more so than home value declines:
"While capital losses resulting from the house prices declines that began, in most cases, in 2006 contributed to incidence of negative equity, excessive borrowing was clearly an equally important contributory factor. In addition, while house price declines were important in explaining the incidence of negative equity, its magnitude was strongly influenced by increased debt usage. Hence, borrower behavior, rather than housing market forces, seems to be the predominant factor affecting outcomes."
Impact of Negative Equity on Foreclosures
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