Foreclosure Myths

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute. He has done some study on the foreclosure crisis. His conclusion is that there are lots of foreclosure myths out there -- the stories you hear on the news are not representative of the situation as a whole.

How many news stories have you seen of the family beset by a medical crisis or a job loss who, because of the impact on their income, is losing their home? Mr. Malanga says that while instances of this happen in any economy, this is not the typical scenario in our current situation. Professor Stan J. Liebowitz of the University of Texas at Dallas says this crisis began in mid-2006 when the unemployment rate was holding steady at a low 4.6 percent. Job loss can't be blamed. So what is the typical scenario?

It is that of the investor -- the buyer who purchased properties he never intended to live in. He got caught in the "flip this house" syndrome. Liebowitz says that the number of defaults on these deals is so large that they could explain all or most of the increases in foreclosures. Many of these speculators walked away from their mortgages at the first sign of falling home prices. In March 2007, The Miami Herald ran a story about how local real estate lawyers were besieged with speculators wanting to get out of their mortgage contracts because home prices had bottomed in Florida. One lawyer said, "These are not people who have been wronged. These are flippers who wouldn't be saying anything if the market was going well." Dr. Liebowitz says the flippers are a big chunk of the nationwide problem -- defaults in only two states, California and Florida, accounted for 42% of the subprime ARM defaults nationwide in the second quarter of 2008.

So why do we have the myth that most of the people suffering the foreclosure crisis are hardworking families just like yours who happened upon hard times? Malanga's theory is that the media call social service agencies when they want to do a foreclosure story, and they naturally are steered to those people who have sought help. The speculators aren't really willing to air their dirty laundry on TV or the front page. Besides, who would want to bail out a slick flipper who risked his money in the wrong place?

"Foreclosure Myths." The Dallas Morning News; November 30, 2008; p. 6P.