Frankly, Zywicki's Got the Better Argument

While there are some sub-prime borrowers who qualified for a prime mortgage and got a subprime one instead, most subprime borrowers did not qualify for a prime loan.

On the subject of subprime lending, Wikipedia states:

"Generally, the credit profile keeping a borrower out of a prime loan may include one or more of the following:

Two or more loan payments paid past 30 days due in the last 12 months, or one or more loan payments paid past 90 days due the last 36 months;

Judgment, foreclosure, repossession, or non-payment of a loan in the past;

Bankruptcy in the last 7 years;

Relatively high default probability as evidenced by, for example, a credit score (FICO) of less than 620 (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood.

Accuracy of the credit line data obtained by the underwriter"

One cannot get around the cental fact that subprime borrowers are considered higher risk than prime borrowers and they are accordingly charged higher fees.

We have witnessed the perfect storm: rising interest rates, falling home prices and highly leveraged borrowers with very little wiggle room in their personal finances. Even the benevolent social policy makers who encouraged home ownership as a laudable social goal were part of the drive toward ensuring that these borrowers had access to credit.

It is always very easy to spot the misguided ways of others, however, you may also wish to consider the following questions:

1. Do you balance your checkbook?

2. Do you have a household budget?


3. Do you have a fund which can pay your bills for 2 months in case of an emergency?


4. Have you planned for your retirement?


5. Do you know your credit score?

None of us can afford to be complacent when it comes to personal finance.

Mr. Micawber, in Charles Dickens' David Copperfield, summed it up by saying:

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

John Dewey,,

As we used to say in the Navy, "are you bragging or complaining?" LOL, just teasing.

As a youngster Ilived 1/2 year in Coolidge, 3 years in Ajo, and 1 year in Holbrook. Loved Arizona, Especially Ajo.

Enjoy amigo.

vidyohs and hammer,

I'm vacationing in Arizona and only halfway reading my few regular blogs in between rounds of golf and desert hikes. I skimmed this post and comments too quickly to understand the discussion.

John Dewey

Rightfully or wrongfully, I saw this:

"To gain access to the best possible public school, you had to purchase the most expensive house you could afford."

as the essence of Franks presentation. In other words I believe he hung his hat on the theory that people "had" to buy more home than they could afford because of the ambition for their children's benefit that would come from thus being in a "better" school district.

My point was that I believe that, while that may have been a motivation for many people and what Frank thinks (feels) is valid, such thinking was/is flawed for the reasons I expressed.

Staying put in a decent home one is already ahead in (equity speaking) and putting additional funds into private schooling that is equal too and likely superior to any public schooling instead of going out on a financial limb with massive exposure would have been the wiser course for intelligent people.

My gut feeling is that those people that went in over their heads on intial finance of a home and then doubled that exposure via refinancing did so for purely personal and selfish reasons and not for the better schooling of their children; and, I suspect that they were aware in the back of their minds that they could always walk away and pass the debt to someone else. That's how I see America having been enculturated since 1963.

Warren-Tyagi don't talk about school taxes as far as I know. They are concerned with mortgage payments. The empirical question about who's defaulting is a good one.

Or, since the price of homes in a neighborhood is not directly tied to the school tax paid in those neighborhoods, which is further not directly tied to the quality of the schools, why should anyone assume that the number of people defaulting on homes is at all related to school quality?

Or, as Cassandra so cleverly points out, is there even any evidence that those defaulting are predominantly families with children?

I take Frank's point to be just one piece of the puzzle, not the entire explanation. Vidyohs's note about Texas is potentially fatal to the thesis. Could something in that state have offset the Warren-Tyagi effect?

Doesn't it stand to reason that if kids are assigned to schools by neighborhood, there will be an incentive to get into certain neighborhoods even if means overextending one's budget? If there is a correlation between the affluence of a neighborhood and the perceived quality of the schools (or students), the thesis seems prima facie valid and bears a closer look.

The argument assumes that only couples with children are involved in the subprime crisis. That's simply not the case.

School choice is only one factor among many. Far more influencial on purchasing decisions were interest rates at 50 year lows making more expensive homes more attainable and the number of financing options available through private companies as well as Fred & Fan.

John, the point of the article under discussion is that families over extended themselves in an attempt to get into a better school district. It does not make a point of whether or not the neighborhood is nicer.

vidyohs: "Much smarter to seek, or stay, in a house one can comfortably afford and put the money necessary to educate your children properly into private schooling instead of an expensive home in an expensive neighborhood just to get your kids into a public school that is probably not really competitive with a good private school to begin with."

I might agree if the only objective of such families is to maximize their children's educational quality. But is that the case?

Don't upper middle income suburban neighborhoods provide other benefits besides high quality public schools? In all cities where I've lived, such suburbs were far safer, with much better public services, and a more positive environment for raising families than were lower middle class suburbs.

If your point is that a family should not incur financial risk just to move into an "elite" neighborhood, then I agree with you.

According to Dan Ariely, an economist at MIT, 25 years ago, double-digit savings rates were the norm. By 1994, the US savings rate had fallen to 5% and by 2006, the savings rate was -1%.

Part of the problem with the mortgage crisis has been that a small minority of homeowners has used their home like a piggy bank by refinancing their mortgage to take advantage of rising home prices and using the capital to live above their means. The entire housing crisis cannot be explained by reference to parents looking for a good schools. Even seniors were doing this. With Freddie & Fannie, borrowers had additional government options for financing.

When one can write off mortgage payments, leveraging looks like a good deal at interest rates at a 50 year low unless you suddenly find that the principle of the mortgage is higher than the value of the home and no one will re-finance your loan. For those who had no downpayment or who have drawn down the capital in their homes, they have nothing to lose by just walking away.

The school argument does not explain the variations in price downturns across different regions. Why has the housing market in Texas has been pretty much unscathed in contrast to Arizona, Florida, and California? Aren't there good schools in Texas too?

Ed Glaeser did an excellent study of regional prices and found that restrictive zoning/bylaws helped to crimp off supply thereby helping to pump up prices in centres like Boston.

Lots of factors have driven the problems in the housing market.

Sori Folks,

The subject was housing and so is the first presentation on the link below. The rest are worthwhile as well. I just had to do it.

http://www.chron.com/apps/comics/showComic.mpl?date=2008/4/23&name=Non_Sequitur_pan&week=1

As a practical matter I think Franks argument falls apart right here, when he says:

"To gain access to the best possible public school, you had to purchase the most expensive house you could afford."

That may or may not be true, but it is not the intelligent answer for intelligent parents.

Much smarter to seek, or stay, in a house one can comfortably afford and put the money necessary to educate your children properly into private schooling instead of an expensive home in an expensive neighborhood just to get your kids into a public school that is probably not really competitive with a good private school to begin with.

Franks presentation is based on flawed logic and Zywicki's rebuttal ignores the obvious.

The income-tax take went from 24 to 33 percent for the typical middle-class family. See his review at the link I posted above.

Also, the housing bubble didn't really take off until after the dot com bubble burst, in 2000. The years chosen likely game the data.

If Zywicki's point is so strong, why is he using apples (relative percentage of income spent on housing) and oranges (nominal change in tax payments) to make it? Why doesn't he provide the apples to apples comparison by citing how the relative percentage of income spent on taxes changes over the same time period?

More on this: Todd is right. According to Warren-Tyagi's statistics, the mortgage payment as a percentage of income has fallen for the typical middle-class family--by 1 percentage point. But presumably that's GROSS income. Since taxes have gone up, that means the mortgage may be a larger percentage of after-tax income. So Frank, Warren, and Tyagi are on to something, no? Stretching to get the best house possible in order to put one's kids into better schools could create overextended budgets and upward pressure on housing values. Without government mortgage insurance and other subsidies, these effects would have been moderated.

The issue isn't blame in my view. We're seeking an explanation of the housing bubble and related phenomena. This seems to be a piece of the puzzle.

Todd has the numbers in his review of Warren-Tyagi here.

Tax rate and the quality of a school district are not necessarily related. Out here in the Allentown PA area, many of the better school districts actually have much lower property tax rates than that of Allentown proper. The Allentown school district levies property taxes nearly twice of what it's "suburbs" charge, and has an abysmal system (so I am given to understand).

Todd Zywicki makes a good point. Still, could it be argued that one of the factors in the housing bubble was the demand for better housing stimulated by the desire to move to better school districts?

Let me clarify. Frank's article took the counterpoint to McCain's statement, "it is not the duty of government to bail out and reward those who act irresponsibly." I was referring to those who were in foreclosure -- despite any noble ambitions -- are by definition, deadbeats.

Even if you believe families are victims of "The Two-Income Trap," Nathan's point makes much more sense than a bail out. Separate housing from education or at least understand than it's impossible to make public education "free." Government subsidies will increase price and push those cost into unrelated areas.

Will great excesses like the housing bubble and technology stocks happen again? Of course, but I believe it is the responsibility of individuals to recognize poor value propositions and avoid them. It is not government regulation that should protect a lender or borrower from making bad decisions. In fact, it is typically government regulation and promises to protect consumers that help to fuel those excesses.

Why did creditors extend an unusually high volume of credit, to people who ultimately defaulted on the loans, to purchase assets that ultimately fell in price? Apparently, these assets rose so much in price largely because creditors were extending so much credit. Maybe, appearances deceive me, but that's the prevailing theory.

I don't really care who is a deadbeat and who isn't. It's irrelevant. People defaulting on mortgages in record numbers now are not victims. They occupied houses they couldn't afford for a while. Now, they must find houses they can afford. That's not a terrible curse.

The only issue worth discussing is the faulty credit policy apparently pursued by so many creditors at the same time. Why did it happen? What's the extent of it? Is it really limited to the mortgage market? I don't pretend to know the answers to these questions. I only know that talk of deadbeats and victims is political obfuscation confusing the issue.

Cato has another angle on the Frank article.

Yet another case of government failure mischaracterized by big government idealogues as a market failure.

Jason suggests that homeowners from 1973 to 2000 were "mostly undisciplined deadbeats." Really? The tiny percentage of all homeowners who defaulted in the past 18 months are the subject here?

Meanwhile, back on the point of Prof. Zywicki, the massive growth in taxes, and skyrocketing non-tax fees, that have risen over the same 20-30 year period are hampering growth in the US. We are swamped with 'little' fees that are not technically taxes (much like campuses that add fees so they can keep tuition low). And there has been property and sales tax increases in every township, town, city, and state in the country in one way or another.

People were mostly trading up to get bigger houses that they could fill with more possessions. (note: I'm libertarian-ish, but I still worry about rampant consumerism. We just aren't evolved to deal with modern nutritional/material abundance.)

That said, there are still plenty of market distortions caused by school district lines. In Los Angeles, cities like Beverly Hills, Santa Monica, Calabasas, Burbank, and Glendale broke away from the horrific LAUSD to form their own districts. In Los Angeles school districts have a huge influence on housing decisions.

In John Stossel's 20/20 special "Stupid in America" he talks about how in Belgium the governement is paid for by government, but in the form of vouchers. Each student can take their voucher to whatever school they like. Over time bad schools run out of students and shut down. Good schools get more students, more money, and more knowledge about what works. Sounds like some kind of self-organizing emergent price based system I've heard of somewhere…

I don't follow the logic in "Don't Blame All Borrowers." Does it matter what the motivations were of borrowers that grossly overextended themselves, failed to pay their mortgage payments and defaulted? If a mother lost all her money at a casino, should the government bail her out because she was trying to hit the jackpot for her kid's education? The author attempts to portray mostly undisciplined deadbeats as sympathetic in order to make a large-scale bailout more palatable.

" property taxes that are funding the schools that people are competing for "

Maybe, I am not sure. Parental involvement neighborhoods is where to be for a kid. Need more data to separate parental involvement from wealth.

But it is precisely the property taxes that are funding the schools that people are competing for (to use Frank's 'hedonic treadmill' rubric).