Comments on: What’s Behind Foreclosures?

By: K Ackermann

K Ackermann — Tue, 30 Nov 1999 07:00:00 +0000

I've been reading that prime is getting hammered too.

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.

By: indiana jim

indiana jim — Tue, 30 Nov 1999 07:00:00 +0000

Leibowitz stopped well short of root causes according to the Austrian theory which points not only to the extensions of loans of various and sundry unsecured forms, but also to the gasoline poured on the fire by the Fed loaning money into existence. Leibowitz should read Roger Garrison's book Time and Money and should listen to Steve Horwitz's recorded remarks a FEE if he want to explore these aspects.

By: Lee Kelly

Lee Kelly — Tue, 30 Nov 1999 07:00:00 +0000

The Austrian story of the business cycle claims that credit expansion by a central bank enables people to get loans who otherwise would never have qualified, and not just that a new class of subprime loans will become available to risky borrowers. The mistakes induced by a central bank's credit expansion create mistakes across all classes of loans.

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.

By: indiana jim

indiana jim — Tue, 30 Nov 1999 07:00:00 +0000

Lee Kelly,

Thanks for spelling it out so clearly.

By: Martin Brock

Martin Brock — Tue, 30 Nov 1999 07:00:00 +0000

... 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.