Economic outlook.

• Author: Maley, Frank
• Position: Housing prices - Interview of Jacob Vigdor - Interview

Foreclosures are on the rise in North Carolina--up 9.4% in 2007 and expected to increase as much as 20% this year. Government help for borrowers and lenders is OK, says one expert, but don't overdo it. After all, it's their own fault. Jacob Vigdor is associate professor of public-policy studies and economics at Duke University. He studied the subprime-mortgage market for the National Taxpayers Union, an Alexandria, Va.-based group that advocates limits on government taxing and spending.

How did we get into this mess?

In the past 10 years or so, an upward trend in housing prices led people to make questionable decisions. If you live in a world where housing prices only go up, then you should be willing to borrow all the money you can to buy a house with no money down, because you know you'll build equity anyway.

What about lenders?

In a world where housing prices only go up, you should be willing to lend money to all sorts of people, because in a worst-case scenario if they don't pay you back, you confiscate the house and sell it for a profit. It's a world where almost any loan looks like a good one. A year or so ago, the housing market started to soften. If you live in a world where housing prices are going down, then all those loans you made to lousy borrowers look terrible because now you confiscate their house when they stop making payments and you have a hard time selling it. And if you do sell it, you're not going to recoup the full cost of the loan you made.

What role did hybrid adjustable-rate mortgages play?

A large one. With those loans, the interest rate is set at a low level for the first two years, then readjusts to a market rate and can readjust at points down the line. They allowed people with low incomes and low savings for down payments to get into expensive houses. But a lot of them got into trouble when their payments reset to a higher level. They were going to bail themselves out by refinancing the loan before the interest rate reset, which sounded like a great idea when housing prices were going up.

What market factors contributed?

We often talk about lenders as if one entity makes the loan, then holds it in a portfolio. That's not how the market works. A loan originator signs the paperwork, then sells the loan to someone who packages it for sale to the secondary market. The actual debt is held by bond holders. The originator has the incentive to write as many loans as possible and not worry about quality, because by the...