04.19.07
Subprime victims?
This op-ed piece in the Trenton Times by the founder of the “National Black Chamber of Commerce” suggests that those hoping to buy homes in the future are the ultimate victims, blaming the problem on “borrowers who knowingly took out mortgages with terms that were above their means”. He advises, “State and federal legislators and regulators must intervene on behalf of renters, savers and aspiring homeowners. Intervention in this case means enforcing the laws already on the books that are meant to prevent fraud and exploitative and predatory lending.”
Comment: Enforcing laws is good…
Another exceptionally unsympathetic take. On the investors who got burnt, “From Bloomberg News we learn the sad story of a small investor named Buck Meyer who lost $300,000 when American Business Financial Services tanks. The man has two children! He planned to use the amazingly high interest rates he earned on his American Business Financial Services bonds to pay the mortgage on his own new house in Chattanooga, Tennessee! How could they possibly fail to pay off?” As for the borrowers? “Moving is never pleasant or cheap, but that is the main cost to the subprime defaulter: He hands back the house, whose value has presumably plummeted, to the people who lent the money to buy it, and walks away. He rents. (Shrewdly!) In effect he bought a very cheap call option on the U.S. housing market.”
Comment: This seems to imply that a foreclosure sale ends all obligations of a borrower to repay the loan.
Not everybody blames the borrowers. In this article finance writer Jeff Brown opines, “Many borrowers use poor judgment in their eagerness to own a home or extract cash from it. But with its accounts of heavy promotion by lenders in less-affluent neighborhoods, the study makes it clear that borrowers are being lured into this trap with visions of easy money and low starting payments, and no clear disclosure of how those payments can rise. It’s easy to say, “Well, buyer beware.” But that’s a copout. It’s not realistic to expect people to understand the details of these complicated products.”
What exactly is predatory lending? Some “Predatory Lending Guidelines” from Fannie Mae can be found here, along with the outline of one plan to assist victimized homeowners.
Comment: That plan sounds like a good start, though I’m hoping the $2 million refers to administrative costs rather than the total funds available.
Another plan, sponsored by Washington Mutual, offers its current borrowers a chance to refinance at below-market rates. Perhaps more banks will follow suit?
Comment: They’ve pledged more than a couple million…
Pontifex said,
April 20, 2007 at 2:12 pm
I’m certainly not well enough in the know to talk substantively about the sub-prime ’scandal,’ nor will I hazard a guess as to your postings on the issue; I will, however, pose the concept of ‘counting the hits and not the misses.’ To paraphrase Bill Whittle:
Tens of thousands of people pursue mortgages of all varieties in this country every single day and no one says a word about it. And yet, when there is a default, that sticks in our minds, obviously, and the image of families hit and devastated sticks with people for weeks. They do not think about all the millions of loans that do not default. Nor do they think about the thousands of other losing transactions that occur with so much greater frequency.
Why?
Because we are recording only the hits – the crashes – and not recording the misses, namely, the safe landings. If you had to drive to work every day listening to radio announcements of every successful landing, you would be listening to a cacophony of flight numbers twenty-four hours a day. After a few years of this you might be able to get a glimmer of perspective on the safety of modern air travel.
Pontifex said,
April 20, 2007 at 2:24 pm
And you can see, my “cut and paste” method of paraphrasing leaves much to be desired. Mr. Whittle was talking about air travel and why some people are terrified of the idea, but I think the idea transfers pretty well.
That said, it’s easy enough for me to take such a far-removed position because I haven’t had to suffer a ‘crash,’ and so I can remain detached.
A mix of enforcing the laws and caveat emptor seems wise. We cannot assume that the government or some other agency will be there to help us, as their goals are often far different from our own. We cannot also assume that we have all the knowledge and thus can perceive any danger that lies ahead. A bit of both makes the most sense. And now I have to go.
Valentine said,
April 20, 2007 at 4:04 pm
Thanks for the comments! I agree that “counting the crashes” and forgetting the misses may be a factor in our perception. Nonetheless, I think there are other considerations:
1) The real estate market nationwide has been rising rapidly for a decade now. Foreclosures are VERY rare in a rising real estate market because the homeowner can always sell to cover the loan (and walk away with a tidy profit), or borrow against their home equity to patch over a temporary financial crisis. Even if there had been no changes in the mortgage market at all, we would be seeing an uptick in foreclosures as the result of the real estate cycle. Discount comments referring to “the highest rate of foreclosure since 2001″. That’s the equivalent of saying that 0.01 is higher than 0.00. You have to look at these numbers in a broader historical context, and THUS FAR the defaults remain modest. Hopefully appropriate action will keep these problems from worsening.
2) The Federal Reserve Board has moved short-term interest rates very aggressively in recent years. Adjustable rate mortgages tend to move in concert with the prime rate (admittedly set by banks, not by the FRB), which dipped below 5% from 11/01 through 11/04. The last time rates dipped this low was in 1972, and THAT was merely a three-month blip! Since adjustable rate mortgages are most attractive when short-term rates are low, you saw a disproportionate number written in recent years. And now? The prime rate has jumped 4% over a three year span, so we should EXPECT to feel some pain. In fact that’s more or less why the FRB raised interest rates in the first place. Create pain, tighten credit, so people stop spending and inflationary pressure eases.
3) The financial markets today are saturated with equity seeking outsized returns. That encourages asset bubbles and foolish investments. If lenders and investors had maintained their traditional standards, there wouldn’t be a problem. At least not yet.
In conclusion, I would prefer to see action (especially to assist working-class families) but not over-reaction. The lenders ought to be held accountable for their often shady practices, and encouraged to help people avoid default. And speculators who thought they would get rich quick by flipping real estate? They have nobody to blame but themselves.