Is there any breakdown on the unemployment figures? Who are losing jobs? Is it minimum wage workers, management?

Losing a well paying job right now is bad. Nobody is hiring. If you go one the roll, you could stay on the roll for a while, and being upside-down is all the more incentive to walk away.

The emergence of more subprime lending occurs, because when interest rates are very low investors are attracted to risk to increase their rate of return, and when there is an ongoing boom, they are relatively more confident in risky assets.

Thanks for spelling it out so clearly.

… and, hence, not upward adjustments in the interest rates owed on ARM mortgage loans, or any other of the alleged culprits …

I don't know the facts, but this conclusion doesn't follow from the premise or from any quoted facts. A "prime" loan can have a variable interest rate, and a mortgage with negative equity can also fit this description, so the fact that most foreclosures involve prime loans and negative equity is no evidence that rising mortgage payments aren't involved.

Regardless, if a mortgagee finds himself deep in negative equity, foreclosure is a perfectly reasonable option, and I don't have the slightest problem with it. Not extending inflationary credit is the creditor's responsibility. He's the professional manager of money he creates, not his borrowers. [No sexism intended, Methinks.]

If creditors inflate, they should suffer consequences. A borrower finding himself in negative equity when prices decline also suffers, but the creditor certainly should suffer consequences as well.

If we had free banking and privately issued currency, foreclosures of this kind would be the primary pressure on creditors not to inflate. Protecting creditors from default is what state banking is all about, and bank depositors are creditors.

I favor non-recourse mortgages for this reason. They're sensible and necessary in the free banking context. If a creditor extends a loan explicitly secured by particular assets, giving him access to other assets to recover the nominal credit extended is a recipe for inflation.

Well, during the course of time, she gradually changed her mind about moving back to California and decided to stay here.

After the 5 years was up, she blamed the bank for pushing this kind of loan on her.

I don't get it. If she had followed through with her plan to move back to California, it was exactly the right loan for her. She's the one who changed her mind.

Oh well. She refinanced to a fixed rate but still blames the bank for making her have to do that.

Whatever.

Rate of home sales and the amount of equity in the home determines if the home goes into foreclosure, refinanced or is sold. If an income loss event happens, homeowners start defaulting and the first choices of the borrower and the lender are for a home sale or a mortgage refinance. With negative equity and a low home sales rate, homeowners have little option but to walk away from their homes and the homes are foreclosed.

Negative equity is not the cause of the need for a homeowner to cease paying the mortgage. Negative equity limits the options that a homeowner has that cannot afford to continue paying the mortgage. Positive equity allows a sale, or refinance, and payment of debt and cash in the pocket of the homeowner. Negative equity results in foreclosure because the homeowner cannot sell or refinance the home, payoff the debt and put cash in their pockets. A significant number of these homeowners walk away from their homes because they will lose them anyway.

Raising the minimum down payment to 20 percent would not have stopped foreclosures in parts of the US, such as California, Florida, and Arizona, where home prices declined by 50 percent or more. In these areas, homeowners with large down payments who cannot afford their mortgage payments would still have negative equity and those that cannot afford to continue to pay would still walk away from their homes.

Furthermore, bigger down payments would just increase the transaction costs of owning a home. Buyers would resort to other means to make the down payment, such as borrowing from relatives, credit cards, etc. If people want something, they look for ways to get it.

The article author's analysis is based on data after home prices reached their peak and started to decline. Once home prices decline, negative equity will increase and foreclosures increase among those who cannot afford their mortgages. With the advent of the recession, unemployment and partial loss of wages increased further, precipitating an increase in foreclosures in negative equity homes.

Negative equity does not cause the need for a homeowner to get out from the mortgage, but it does limit the homeowner's options once the need arises.

Home price bubble causes are a chicken and egg problem. Did consumers' insatiable demand for housing (even if it were to speculate and flip) cause the bubble, and lax lending standards to compete with competition, or did lax lending standards cause the insatiable demand and the bubble.

In a capitalistic market, that suppliers (banks and homebuilders) will meet demand at profit maximizing prices is much more logical then consumer demand will meet supply and that oversupply of homes and mortgages caused a price bubble.

http://www.ritholtz.com/blog/2009/07/zero-down-is-a-foreclosure-factor-duh/

I'd bet that if you dig deep enough, it's more than just the loss of value of the home that's influencing the foreclosure rates – the loss of income to support a mortgage of any kind is likely a factor as well….

Green shoots die rapidly when your income's dried up to nothing in the economic drought we're experiencing these days (outside of Wall Street, that is.)

Certainly it is true that in areas of extreme depreciation of home prices, default rates would rise even if higher down payment requirements had been in effect. But – those default rates would not have risen as much, because of two effects of higher down payments.

First, with a higher down payment, the owner would have more equity, or at least less negative equity. That means that more of these houses could be sold or refinanced instead of foreclosed.

Second, with a higher down payment, the monthly payments would be less. That means that more of the owners could afford to continue to make monthly payments, even in a down turn.

Your conclusions also seemed flawed. Your assertion that insatiable consumer demand caused the bubble ignores the fact that demand is always insatiable – people always want to own their homes. For decades lenders resisted the temptation to lend money without a substantial down payment. What changed in recent years is that the lenders made very high asset-to-value loans, a change which fueled the residential real estate bubble.

Explanations for economic changes that rely on "greed" or the ordinary workings of the market in matching demand with supply normally are inadequate, because they fail to account for the fact that greed and the market have been in place for a long, long, time. Why were there lax lending standards in 2000 but not in 1990, 1950, or 1900? In all those eras consumers wanted houses.

Martin – by your logic, unsecured loans should be banned as inflationary, right?

I don't know about Martin, but I don't think that is necessary. lenders should be allowed to suffer the consequences when the creditor defaults.

Martin – by your logic, unsecured loans should be banned as inflationary, right?

No. A home mortgage is not just another loan. A home of some sort on some terms is a necessity for practically everyone. Even renters often occupy homes mortgaged by someone else. Home mortgages are the largest and longest term credit that a financial system commonly extends to people.

Mortgage credit is an essential element of monetary policy for this reason, in a way that other personal credit is not. Conflating this particular credit with all credit is not useful. Subjecting home mortgage lending to a particular standard is not unreasonable.

If you borrow ten grand on a credit card to buy a boat, unsecured, I have no problem with a creditor seeking liens on other assets to recover the credit extended, but even in this scenario, I oppose states subsidizing the cost of recovery, and I want bankruptcy available on reasonable and customary terms.

The volume of unsecured, personal credit is much smaller than the volume of mortgage credit, but creditors could in principle overextend unsecured credit to an inflationary degree. The best remedy for this ill is liberal bankruptcy protection. Creditors should understand that overextending credit will cost them, that Uncle Sam won't bail them out either by direct subsidy or by squeezing every possible dime out of their debtors at taxpayer's expense.

Martin Brock: Can you post a link to some source that explains privately issued currency? Thx.

George Selgin seems to be the respected authority around here, so I'd start with the 11/17/08 podcast of EconTalk and the interview with Selgin that Don linked here in May. Here's an interesting article on private currency in the developing world by Selgin and White at EconLib.

Avoid identifying private money with a commodity like gold, because this misconception is very common, and you'll encounter it a lot if you explore this subject. Even under a gold standard, gold is not money. It is the standard of value, relative to which the value of other things is measured, but it is not money.

Banknotes under a gold standard are not limited, in a one-to-one ratio, to gold on deposit at a bank. These notes represent the value of everything securing bank credit, from houses to the labor of borrowers, not only the value of gold on deposit.

When a banker extends credit against the purchase of a house worth a hundred ounces of gold, he doesn't literally lend a thousand ounces of gold. Rather, he equates the market value the house with this quantity of gold. He assumes that he could, if necessary, obtain this quantity of gold for the house.

A free banker need not possess this quantity of gold to extend credit on this house, any more than the home's builder must possess this quantity of gold to extend the same credit in a "rent-to-own" fashion.

What consequences? Does the lender throw up its hands and get nothing? Does it get to sue the borrower and seize the borrower's assets? What?

That depends on whether the lender has any recourse on the terms of the loan. If the loan is a non-recourse variety, lender can throw up his hands, or throw up, commit suicide; other than the right to take back any collateral, lender will no other way to recover the whole or part of the loan.