Professor Ross contributes to JPAM Point/Counterpoint on the Foreclosure Crisis

In the spring issue of the Journal of Policy Analysis and Management, Professor Ross takes issue with the conventional wisdom that the foreclosure crisis has been driven by weak underwriting standards and risky mortgage products in the subprime market.  Professor Ross argues that the primary cause of the foreclosure crisis was the significant erosion of housing equity among U.S. homeowners in the period leading up to the crisis, which exposed large numbers of homeowners to significant risk of negative equity from even small to moderate declines in housing prices.  For example, he notes that in early 2007 well before the financial crisis stuck foreclosure began to rise in all segments of the mortgage market, not just in the subprime sector.  The timing of this increase immediately follows declines in housing prices that began in the fourth quarter of 2006 and those foreclosures were overwhelming among households that had little equity in the home prior to those declines, regardless of their particular lender or mortgage product.  In light of this evidence, Professor Ross and his coauthors argue the most important policy response for preventing a future foreclosure crisis is to monitor and develop tools for managing aggregate homeowner leverage in the U.S. housing market.  This issue has been notably absent from the debate during and following the passage of the recent financial regulatory reform law. Professor Couch edits the Point/Counterpoint series.

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