Calculated Risk (blog): Fed Paper on Reducing Foreclosures

1. Income multiples don't matter so much - what matters more is income volatility. People with highly volatile incomes are more likely to default. People with stable incomes don't default.
2. Banks prefer forcing repossession instead of debt forgiveness, even if it means selling the house at auction and not getting much for it. This deters people from defaulting and prevents moral hazard.
3. Negative equity predicts behaviour. When homeowners lose their jobs, if they have positive equity they sell; if they have negative equity they default.
"Loans on high income multiples were an enabler for speculation during the housing bubble, and this speculation pushed up house prices. The prevalence of loans on high income multiples was evidence of a bubble and a good predictor of a housing bust."