The Home as ATM
By Arnold Kling
From Mark Thoma, who in turn saw it on Richard Green, a study by Michael Lacour-Little, Eric Rosenblatt, and Vincent Yao.
Here we use public record data to study Southern California borrowers facing foreclosure in late 2006 and 2007. We estimate property values at the time of the scheduled foreclosure sale with the automated valuation model of a major financial institution and then track actual sales prices for those properties that actually sold, either at auction or as later as REO. We find that virtually all of the borrowers had taken large amounts of equity out of the property through refinancing and/or junior lien borrowing with total cash extracted exceeding $300 million. As a result, losses to lenders exceed those of borrowers by a substantial margin, calling into question policies aimed at protecting borrowers.
Although I am second to no one in my opposition to policies aimed at protecting borrowers, I do not think I would cite this study, accurate as it may be. The problem is that Southern California in 2006 and 2007 is not at all representative of housing markets overall in 2008 and 2009. My guess is that in other regions we see less extravagant use of houses as ATM’s. More importantly, house price declines really kicked in in 2008 and earlier this year.