Tail Wags Dog Says Levitin

Full article here on creditslips.org:

WSJ: The Tail Wags the Foreclosure Dog

posted by Adam Levitin

The Wall Street Journal’s economics blog had a poorly thought-through take on foreclosures. The main point of the piece was that the time from default to foreclosure has grown much, much longer. (Not noted is that the timeframe varies significantly by state).  The piece has scant analysis, but it’s conclusion is that longer times to foreclosure makes strategic default more attractive as in lengthens the time a home-owner can remain in the home and consume housing for free.  The blog concludes that therefore we need to speed up foreclosures. 

This really gets the strategic default problem backwards. It has the tail wagging the dog. The problem is that the homes are underwater, not that foreclosures are taking too long, and strategic default actually plays a very important role in market clearing on housing prices.

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