|HOUSING: Researchers say exotic loans not to blame for foreclosure crisis|
Sep 29, 2010 Eric Wolff North County Times
The housing crisis wasn't caused by much-maligned exotic loans so much as lending huge sums of money to unworthy borrowers, a report released Monday suggested.
The misdiagnosis of the housing bubble, whose implosion in 2007 knocked out the broader economy, drove Congress to overreact and ban useful tools, according to a report from the Corky McMillin Center for Real Estate at San Diego State University.
The study examined lending practices in 12 countries and found that many make extensive use of loans in which the borrower avoids paying down principal for a fixed period. With the exception of the United Kingdom, none of these countries had a foreclosure problem nearly as bad as what the United States has endured.
The U.S. has had a higher foreclosure rate than any of the other countries studied since 2007, and in 2009, 9 percent of all borrowers were behind on their home loans, the report said. In Canada, only 1 percent were nonperforming that year.
What set the U.S. and U.K. apart was the prevalence of subprime loans, which offered money to borrowers with bad credit, and the practice of lending money without verifying borrowers' incomes or assets, the report said.
But the crisis cannot be blamed on those borrowers, nor on mortgage brokers or real estate agents, according to a report from the Joint Center for Housing Studies of Harvard University, also released Monday.
Instead, authors Eric Belsky and Nela Richardson said that lenders made the mistake of opening up loans to people who had already proven themselves unable to pay.
Wall Street financiers then took these higher-risk loans and combined them into mortgage-backed securities, which in turn received high grades from ratings agencies. The system created a cycle that built on itself, even as regulators failed to apply the brakes to the system.
"Had the financial system itself contained the risk better ---- through effective self-policing or through stronger regulation ---- the performance of nonprime loans (and prime loans for that matter) might well have been much better," the report said.
In response to the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act this summer, a law that required far more stringent lending standards, and also outlawed many of the loans that became so common during the housing boom.
"What I see happening with the recent Dodd-Frank legislation, we've made it difficult to use features that are really quite useful," said Michael Lea, director of the SDSU center and author of the Corky McMillin report. "We’re throwing the baby out with the bath water."
Lea pointed to the use of negative amortization loans, in which borrowers can pay less than the full monthly interest on the loan, and add the difference to the principal, as a tool that could be of use. In the United Kingdom, some loans come with built-in "holidays" ---- periods in which borrowers can skip payments and have the missed payments added to the backs of their loans.
"The idea is to help people who have irregular income," Lea said. "Those are going to be very difficult after Dodd-Frank."
Call staff writer Eric Wolff at 17607405412
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