Foreclosure Spike Due To Natural Economic Forces, Not "Risky Lending?"

NYT has a sobering counterpoint to the recent gangbanging of the subprime mortgage market in the press and in Washington. It’s main points:

• historically, new types of mortgages decried as risky and harmful to consumers
• less than 15% of risky borrowers are delinquent on payments
• less than that have foreclosed
• traditional cause of foreclosures prevail: job loss, divorce, major medical expenses
• foreclosures highest in economic stagnation areas, not housing bubble pop

Austan Goolsbee writes, “…someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.” (emphasis added)

One thing the article misses: predatory brokers pushing these mortgage innovations to borrowers who truly should’ve never got them. Certain facts of the market don’t show up in National Bureau of Economic Research working papers. — BEN POPKEN

‘Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded [NYT]
(Photo: amyadoyzie)

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  1. alfonzotan says:

    Once again… isn’t there any place for personal responsibility here? The last time I bought a house, the realtor and bank were both quick to point out that I “qualified” for a much bigger loan. That’s their job, and I didn’t blame them for trying. It was *my* job and *my* responsibility to not buy more house than I could afford, which I didn’t. My life, my house, my money… and my responsibility to look after all three.

  2. tvh2k says:

    I think you’re missing the “ht” in your link.

  3. Sam Glover says:

    What if your broker isn’t honest with you about the loan you are getting? That’s pretty common in the subprime market.

    As a prime borrower, you are dealing with a whole set of borrowing realities that don’t exist in the subprime market. You can shop around for better loan terms; a subprime borrower cannot, because they have to pay just for the privilege of applying for one loan. You can choose different loan structure, and the broker will explain them to you; not so for the subprime borrower, who is typically presented an ARM or negative amortization mortgage with payments that look affordable up front, but balloon within a few months or years. Of course, these features are never explained, because the broker gets a big bonus for selling such a loan.

    If the playing field were level, personal responsibility might be a great argument for dismissing these reports. But the playing field ain’t level. At all.

  4. etinterrapax says:

    I also think that in some markets, there’s a significant gap between even the cost of affordable housing and what a buyer has to spend on a house. This is a problem in greater Boston right now. Not only is there a limited stock of existing housing, especially in good school districts, but new construction is too large for most people, to make up the cost of the land, and there are few average-sized new homes being built. That has to do with cost, but also communities’ reluctance to allow housing that would encourage families to move into town. Families are perceived as expensive and low-rent. Although I understand this perspective from an economic standpoint, I find it personally offensive and counterproductive in terms of building truly prosperous communities. Clearly people have also forgotten the fate of many large Gilded Age homes–torn down for subdivisions. I certainly don’t want 4500+ sf to heat and cool, and a view directly into my neighbor’s windows, and especially not at $1 mil or more. I know I’m not the only one.

  5. mac-phisto says:

    did anyone even read the article? it clearly states that current foreclosure data seems to suggest that subprime lending is not the cause of high foreclosure rates. “The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount.”

    @etinterrapax: i know what you mean. builders are opting to build larger homes b/c a market exists for them. realistically, not only is it cheaper to build one 4500 sq ft house than two 2000 sq ft houses, but that one house will sell for $750,000-$1 million vs. the two houses that will sell for $250,000-$350,000, netting them an extra $200,000+ in profit.

  6. mathew says:

    I’m with alfonzotan. There’s an element of truth in the story, in that my personal experience is that even if you’re a “prime” customer, mortgage lenders will still lend you far more than you can afford to repay.

    So the foreclosures aren’t just sub-prime borrowers, it’s the prime borrowers who borrowed what the banks would let them have, rather than what they could afford to repay.

    That said, sub-prime lending clearly hasn’t helped the situation.

  7. Sam Glover says:

    @mac-phisto: More accurately stated, the article states that subprime lending may not be the direct cause. But if, due to subprime lending practices, a family is less able to cope with job loss, divorce, and major medical expenses, then subprime lending remains a proximate cause just the same.

  8. thrillhouse says:

    @mac-phisto: It is an interesting read. I usually enjoy a good counterpoint article. His points are not totally unreasonable, but what Mr. Goolsbee fails to explain is this recent collapse of scores of sub-prime lenders who are citing high foreclosure rates as the reason. One or two, and you could write it off to poor management or something. That is not the case.

    I would expect a professor of Econ or Finance to sharply defend ‘innovations’ in lending. Once again, not a bad argument, but something doesn’t add up here.

  9. Sam Glover says:

    @mac-phisto: Also, according to this report (PDF link) from the Center for Responsible Lending, subprime lending actually decreases homeownership. Who to believe? I guess it’s at least partly who you want to believe, but the body of evidence seems to contradict the NYT story.

  10. CumaeanSibyl says:

    places whose economies have stagnated… industrial Midwest states like Ohio, Michigan and Indiana

    Yeah, that’s about the size of it. Job losses are what’s really spurred the rise in foreclosures in Michigan, and it’s not just the collapse of the auto industry that’s doing it — in my area, it’s pharmaceutical companies fleeing for Canada.

    ARMs aren’t a good thing to have when your situation changes for the worse — if you lose your job and take a lower-paying one, you might be fine while the initial interest rate holds out, but once the payments start going up you’re probably in a lot of trouble. That doesn’t mean you were irresponsible or stupid to take the mortgage in the first place — you obviously didn’t include “getting laid off” in your five-year financial plan, but who the hell does?

    Predatory lending alone isn’t enough to explain what’s happening to homeowners in my state. I don’t doubt that they’ve made the problem a lot worse than it has to be — but there would still be a problem without them.

  11. pinkbunnyslippers says:

    @Sam Glover: so are you saying that “subprime” people are too stupid to read the fine print? To ask questions when they don’t understand something? To NOT sign something after they’ve done SIMPLE math (I make $1500 a month. Therefore a $1700 mortgage payment will not work for me)?

    I’m with alfonzotan here – there is a need for personal responsibility here and a lot of the people who end up foreclosing, IMHO, are looking for anyone else they can blame but themselves.

    You’re right – we don’t have a level playing field. But that shouldn’t be an excuse not to exercise personal responsibility and good judgment. Come on.

  12. myusury says:

    Great article… some of the comments above make me wonder if anyone read it.

    Sam, what are you talking about? Why in the world would any financial institution, government agency or even non-profit organization provide conventional rates and terms for someone (the subprime borrower) who has in the past proven themselves as a high risk borrower? Should every taxpayer and responsible borrower subsidize those borrowers that decide that filing for bankruptcy is a good way to get rid of debt?

    And subprime borrowers have no options? You mean, if they don’t take the loan they’re going to be walking the streets, homeless and pennyless? Just in the last month, we’ve heard of a dozen subprime lenders go up in smoke, so I’m sure that still leaves dozens that are still in business. Subprime borrowers aren’t allowed to shop for their rate and term? Or can subprime borrowers say NO to the offer(s)? Maybe saying “no” would be the best choice – maybe they can pay their credit cards off, improve their credit score and save a little for a downpayment so they can buy in a few years instead of today.

    So the broker or banker making the “big bonus” on selling risky mortgages is at fault? Of course, it couldn’t be Merrill Lynch, Morgan Stanley, Goldman Sachs, and all the other Wall Street firms that have been investing heavily in the subprime mortgage market over the last 10 years. Aren’t they the ones making the “big bonus”?

    I would guess that the author of the article, a professor at the University of Chicago, would have a little bit more knowledge of the problem than we do.

  13. I-gor says:

    One factor which no-one seems to consider is the effect that subprime borrowing has had on the overall market. Approximately 20% of mortgages by first time buyers were subprime loans. In a nutshell, that means mortgage lenders are allowing people to borrow far more than they should to pay for housing. As a result this inflates the cost of homes on the market, including people who are able to afford more traditional mortgages.

    I have a number of friends – who earn a very decent income – that have taken interest only loans. In the NYC area, where I live, it is almost impossible to buy a house for less than half a million dollars. As a result ordinary people are taking out interest only mortgages with the hope that either they’ll earn more money when the payment balloons or that they’ll be able to refinance. As the market slowed down, they’re starting to find themselves unable to refinance.

    The subprime market may not be the only force driving up foreclosures, but it sure isn’t helping any. As more subprime lenders go the way of the dodo, hopefully the market will become a little more affordable and people will not have to resort to these idiotic loans to finance their homes.

  14. dieman says:

    I’ll agree with a poster above, being a prime borrower means you can kick your bank into high gear when they try and get you into something substandard. I was *highly* surprised as how much leeway I had with the bank when I started balking at their initial terms! (30 year ARM, 5 year lock, etc — moved it to a 30 year fixed with a better rate than the ARM)

  15. Sam Glover says:

    @pinkbunnyslippers: Many are not shown the fine print. They are pushed into closing and told they have no choice but to sign what is in front of them or they will owe some exorbitant penalty concocted by the broker. Not knowing differently, and without time to consult an attorney even if they knew one, many feel they have no choice but to sign.

    Translators are “accidentally” not invited to closing, terms are changed at (or concealed until) the last minute, etc.

    Your comment about salary vs. payment makes sense, but not in the realm of ARMs. A 2-1 subprime ARM, for example, may have a $700/month payment for 24 months, then balloon to, say $1000+/month. Surprise! The variable features are rarely explained in a way a human can understand on ANY loan, and those papers are pushed past borrowers as fast as possible so they can’t read them even if they wanted to.

    Yes, there is a place for personal responsibility, but there is A LOT more going on here.

  16. Starfury says:

    Back in 1994 when I bought my place the realator asked how much we made and how much we had for a down payment. He punched some numbers on his calculator and told us exactly how much of a house we could afford. He didn’t bother trying to get us into something out of our range. We also knew what kind of payments we could afford and didn’t go over that amount.

  17. mac-phisto says:

    @Sam Glover: interesting read…thnx for the link. as always, the truth can be found somewhere in the middle ground.

    @thrillhouse: “…what Mr. Goolsbee fails to explain is this recent collapse of scores of sub-prime lenders who are citing high foreclosure rates as the reason.” it should be noted that this has started to affect subprime lenders more b/c most are short-term mortgage financers. most of these lending houses only have enough capital to finance a few hundred mortgages (or less) at a time. their expectation is to generate money from fees & interest & then cash in by selling the loan to a larger bank on the secondary market. well, the wrench in the cog is that larger banks have stopped buying OR they are paying less to buy notes (or both). a lending house looking at 15 of their 100 homes in foreclosure (assuming 15%) could easily fail as they have now lost precious capital to generate new loans & have also lost the income from those loans. if you have a small margin & plan on quick turnover…you’re screwed.

  18. Chairman-Meow says:

    Gee, maybe this article should have a tagline of “Bought and paid for by the US Banking Industry”

    I look around at all the local housing here in Massachusetts. All I ever see being built is Mc Mansions that I, with a damn good paying job AND a house, could not afford. Towns love these developements because the high property taxes bring in the bucks.

    I have no idea who can afford to buy one thought since they are sooooo expensive. These developments, in-turn drive the local real-estate up through the roof.

    Lets face it folks, The grossly artificial inlated prices of homes (and land) drove lenders to use less than ethical means to shoehorn people into homes they could not afford. What is causing even more problems is that the peak of borrowers has been reached and we are all heading downhill fast.

    I don’t think we’ve seen the end of this at all.

  19. Ass_Cobra says:

    Banging the drum on the evil subprime brokers seems a little more Populist than Consumerist. I mean part of the bargain is that to be a good consumer you must be an informed consumer.

    I agree with the point that subprime borrowers do not have the same opportunities for financing as borrowers with assets and good credit, but that’s life. For an individual with a poor credit history or minimal means it is doubly important to be vigilant and prudent when entering into the largest purchase of one’s life.

    Has anyone thought for just one second, that maybe just maybe, someone who can’t qualify for a conforming mortgage and can’t be bothered to understand their rights and obligations as a borrower should not be in the home ownership game? Perhaps it would be more wise to rent for a few years, repair/establish credit and really save something for a down payment.

    Home ownership is not a right, as much as we’ve been fed that line. It used to be that one had to work hard, save and wait to own a home. Over the last decade or so though it seems that all anyone can think about is buying a house, NOW. So my point is if more people were actually responsible and realistic about home ownership and waited until they were in a position to actually afford owning a home, sub-prime lenders would see their business sharply reduced.

    For the record, I have no sympathy for the sub-prime lenders getting torched because they cannot securitize their inventory. If you charge your customers 4-6% above prime mortgage rates, you should expect some delinquency and default and the concommitant effects on your business plan.

    Also, just for the record, the mortgage loan sellers into securitizations (mortages are pooled and then bonds are issued from said pool) are generally going to buy back any loan that goes delinquent in the first 12-18 months. The underestimation of the amount they’d have to buy back is what is causing all the problems at NewCentury, HSBC, et. al. so they are feeling the pain too.

  20. TPK says:

    Coming from the NYT, this makes perfect sense. Why fault immoral lending practices, when you can blame the poor economy instead? It’s always Bush’s fault!

  21. mac-phisto says:

    @Sam Glover: “Many are not shown the fine print.” & that’s what i call predatory lending. the lesson is: NEVER USE THE BANK’S ATTORNEY! bring your own. & you have to be prepared to walk away if the terms aren’t right.

    @Starfury: i think the standard today is 3x your income (if you gross $50,000, your top end is $150,000).

  22. mac-phisto says:

    @RowdyRoddyPiper: people love to blame the poor for everything. there’s a common misconception that subprime lending = low-income first-time homebuyer. many of these loans are going to existing homeowners. read the report in Sam Glover‘s post. there’s some other interesting ideas in there.

  23. formergr says:

    @CumaeanSibyl: You say, “That doesn’t mean you were irresponsible or stupid to take the mortgage in the first place — you obviously didn’t include “getting laid off” in your five-year financial plan, but who the hell does?”
    Shouldn’t you thought? I know I do. I try to keep enough in savings so that should I not be able to work (whether due to unforseen layoffs, injury, illness, etc) I can still pay my mortgage for at least three months without cutting back on other expenses.

    If your monthly payments are so high that you’re just squeeking by each month and haven’t planned for any unforeseen contingencies, then that’s somewhat irresponsible. Granted sometimes bad things happen in clumps, and you shouldn’t have to plan for all events, but some padding and preparation should be involved.

  24. mac-phisto says:

    @formergr: that’s great & all, but it’s still only 3 months. even if you put the house on the market when you got laid off, sick, whatever, chances are it will be there for >6 months (longer if the market is particularly slow in your area).

    my parents almost lost the house when my dad went into the hospital for cancer treatment. he was out of work for over a year & even with long-term disability, it’s not easy keeping up when daily medication is $100/pill & the insurance co. is dicking around trying not to pay.

    point is, even the most responsible ppl can end up in foreclosure.

  25. Ass_Cobra says:

    @mac-phisto:

    I’m not blaming the poor, I’m holding borrowers accountable for their financial decisions. There are plenty of people that are not poor who have terrible credit histories and can’t qualify for a prime loan. In fact, I may have a skewed definition of what is poor, but if home ownership is on your radar, you’re likely not poor.

    I’ve read the CRL report and I take issue with one of the data points they have, the re-fi vs. purchase split. They do not mention which type of mortgage is being refinanced, which is important. I doubt that borrowers are re-financing prime mortgages with sub prime. My guess (which I do not have the facts on and that CRL either doesn’t or hasn’t disclosed) is that a lot of sub-prime re-finance (if not the vast majority) went to re-fi other subprime loans.

    Assuming you have loans that are structured to start out affordable, and then balloon to unaffordable, wouldn’t it stand to reason that people would try and “reset the meter” so to speak by refinancing out into a better term loan? The borrower appears to win because his payments stay the same. The broker wins because he gets new fees which he can likely capitalize into the new loan amount and the lender wins because he gets a new loan that should pay for the forseeable future instead of having a default on his hands. The problems arise when the music stops and either housing prices drop, meaning fees etc. can’t get capitalized into the new loan amount or the lenders are unable to sell their loans and must tighten credit. The fact that they are happening simultaneously is just making a bad situation that much worse.

    I think the borrowers, brokers, lenders and purchasers of Mortgage backed securities are accountable in this mess. It takes four to tango, and just because you didn’t realize exactly what you’re getting into doesn’t absolve you from your role and responsibility.

  26. Sam Glover says:

    @RowdyRoddyPiper: “I doubt that borrowers are re-financing prime mortgages with sub prime.”

    At least 50% of the people I see in foreclosure are in this exact situation. It happens in a few different ways, but usually a broker who is a friend of a friend tells them they can help them get out of financial difficulty, set them up so their current property will be a rental, or some other garbage.

    But the broker drags their feet on showing the borrower the final paperwork, or brings paperwork to closing that is very different than what the borrower saw before. Assuming good faith, the borrower skims the paperwork at closing, and is screwed.

    Or if the broker drags their feet, the buyer basically gets stuck. They can’t afford the next payment on their house, so if they don’t close, they are going to get foreclosed. Scared (and usually full of horrible suggestions from the broker), they sign whatever is put in front of them, hoping to re-fi again in six months.

  27. Sam Glover says:

    To clarify, I’m not trying to place all the blame on any one party. Few of the borrowers I see acted like rational, intelligent people. Most placed too much trust in someone who probably had a fiduciary duty to them. Others assumed things were going normally when they weren’t. Most felt trapped, and like the broker was offering them the only way out (which was a feeling usually encouraged by the broker telling them exactly that).

    But in the end, the reason this is called “predatory lending” is because one party–brokers, lenders, et al.–with superior knowledge and bargaining power is taking advantage of the lack of knowledge, trust, and relative lack of bargaining power of borrowers.

  28. Little Mintz Sunshine says:

    As a former flipper now a happy renter, I still am astounded at the bad financial choices some people make. Particularly with such an important and possibly financially-ruining purchase. That said, are we looking at a bedroom with china hutches or a dining room with an unfortunate view of the crapper?

  29. pinkbunnyslippers says:

    @Sam Glover: I see what you’re saying – I’m going thru the process of buying a home right now and when I went to sign all my paperwork, I had a million questions. The realtor for the builder said “Wow, you actually read that contract?”. I haven’t even GOTTEN to closing yet!

    So his comment tells me that many people come in and don’t bother reading paperwork because hey – there’s a lot. But if you’re not willing to undertake a couple hours of reading and asking questions, maybe you’re ready to undertake the responsibility of a home.

    I agree with you – there is a lot more going on here, but Caveat Emptor!!!

    There’s a difference between people having information purposely withheld from them (which…isn’t that illegal?) and people just not wanting to wade through the mumbo jumbo. I can see your distinction. I guess I’m just too naive to assume people will ask questions and do everything in their power to not be “forced” to sign anything. Common sense, in my opinion. But you know what they say about common sense…

    Either way – this was a great read!

  30. zolielo says:

    Historically is not necessarily currently or forseabily.

  31. etinterrapax says:

    Re: people having information withheld from them. My husband is a real estate attorney whose firm has as clients a number of subprime mortgage companies (and prime, and prime that sell subprime products, etc). In Massachusetts, real estate closings must be witnessed by an attorney, so he represents these mortgage companies and goes to people’s homes to close their loans. But there’s a difference between actual representation and witnessing the closing. Many shadier lenders will send an attorney only to witness the signing as a notary public, not to effectively represent the mortgage company, and certainly not to represent the buyer/mortgagee. It’s cheaper and cuts down on closing costs, whoever is bearing them. Customers like this–so much is made of low or no closing costs–but it is probably not in their absolute best interest. If any questions come up about the terms of the loan, the attorney can’t answer them. He or she isn’t enjoined to handle anything that has to do with the sale of the loan. The customer has to call the broker, who will draw up new papers, fax them to the attorney’s office, and the attorney will come back. You should also know that if the attorney has to come back again, the firm will probably charge the mortgage company twice, and one way or another, the mortgage company will take it out of the customer.

    Currently, the witness-only practice is in litigation because there’s a question about whether this means that the mortgage companies are practicing law without a license. The ramification for customers if the suit is settled in the favor of the mortgage companies is that they’ll continue to offer low or no closing costs, but you’re losing out on the benefit of an attorney at closing who, while still representing the mortgage company, is actually engaged in representation. If it’s settled in the plaintiff’s favor, closing costs are going to rise but the level of service will probably be better. Needless to say, if you’re involved in this sort of transaction, you need to be very aware of both the terms of your loan and your timeframe for your right of rescission (the number of days you have to cancel without penalty, even if you’ve signed the papers). And don’t hassle the lawyer! He has no control over your terms or anything else about the process, especially if no one’s paying him to. A cut-rate broker is going to save money anywhere he can.

  32. mac-phisto says:

    @pinkbunnyslippers: “There’s a difference between people having information purposely withheld from them (which…isn’t that illegal?) and people just not wanting to wade through the mumbo jumbo.” real estate contract have loads of legalese in them that even pre-law students would have trouble with.

    i was lucky enough to have an excellent attorney represent me at closing & he took an extensive amount of time explaining everything (to the annoyance of the sellers’ attorney who was waiting in the wings). regardless, i was at the mercy of his explanation. now imagine that he was less ethical when he came to sections such as “acceleration clause” (more commonly called a “due-on-sale clause”). he took the time to explain that not only does “due-on-sale” mean due on sale, but it also means, “due on entry into any kind of contractual agreement”. that includes contracting a real estate agent to sell the property, accepting a deposit on the property, obtaining a home equity loan, or even refinancing before the clause sunsets. i didn’t know that & at least a dozen other legal terms.

    the “due-on-sale” seems to be tripping a lot of ppl up & more than one story that i’ve read indicates that it is being incorrectly explained at closing (or not explained at all). unfortunately, once those papers are signed, there’s not a whole lot you can do about it.

  33. JohnMc says:

    What NYT misses is that some of these new mortgage instruments that provide the low ball rates start and maintain a negative amortization of the principal. One has to nearly be a rocket scientist to pour thru the closing documents to recognize this. And sad to say most Americans are just not that financially savy.

    Some of the instruments also prevent a refi in the first 24months of the loan. So that $100k loan by the start of year 3 is probably up to $108k. If the buyer was thin on equity going in they have no equity for a refi. Then the balloon hits and they are toast. So it does not have to take a downturn in the market to be in real trouble with some of these subprimes.

  34. nuton2wheels says:

    I used to work as an account manager for a large mortgage company that specialized in subprime loans. Most of our customers were in a sad state of affairs. While the company originated loans, they primarily serviced portfolios that had been obtained from the secondary market. Although the company did not change the terms of the note, they did their best to glean profit from what they could change, such as late fees and payment fees.

    There were fees of around $10 to make a monthly mortgage payment over the phone by check or credit card. These fees consistently reamed customers who couldn’t make their payments before the late date specified on the note due to bi-weekly paychecks and a tight budget, etc. Payments could also be sent to a “lockbox” (a P.O. Box that was routed to a check clearinghouse (cashing) center). However, there was NO assurance that your payment would be received! You couldn’t just call in and ask us because even we didn’t know when the payment would post to the account. It might get lost in the mail or the clearinghouse, but it was of no concern to us. If we didn’t receive it, that was your problem.

    The worst thing about the aforementioned fees is that they vary from company to company. While you may have chosen where your loan originated, it may ultimately be sold to another mortgage servicing company at any time and any number of times during its functional lifespan. Sometimes this occurs before your signature has dried, and there’s nothing you can do about it.

    I also dealt with some disturbing trends:

    1.) Some ARM loans with interest rates as high as 15%
    2.) The highest fixed rate interest I dealt with was 19%
    3.) Almost all the ARM and Payment Option Arm (POA) loans I dealt with had prepayment penalties (PPP) of at least 2 years to make sure customers were locked in for a potentially nasty roller coaster ride
    4.) Prime borrowers who had refinanced from a 5 or 6% fixed rate mortgage to POA (at the incorrect suggestion of an unscrupulous mortgage broker) with the promise that they would have a permanent fixed interest rate of 4% or so. The rude awakening came when the customer realized their supposedly permanent 4% interest rate was temporary and had only lasted for the first month, after which it became the minimum monthly payment and caused them to negatively amortize (i.e. their unpaid principal balance had been increasing rather than decreasing despite them making the ultra-low payments their broker had assured them about)
    5.) A heavy saturation of Interest Only and POA loans for the over-inflated real estate market in California
    6.) The worst cases were what we called “timebombs” or ARM loans with a rapidly approaching rate change date and a customer whose credit history with us had not been very good, meaning their chance of refinancing to better terms was slim to none, meaning that they would not be able to continue making monthly payments and would ultimately have to give up the house.
    7.) Don’t even ask about the convoluted terms that come with a Home Equity Line of credit (HELOC).
    8.) Most were completely unaware of the terms they had agreed to in their note regarding interest rate change dates, prepayment penalties, and late dates.

    While the rosy perception of subprime loans are indeed that they allow a potential homeowner to live beyond their present economic boundaries, their actual implementation is quite sinister. Nothing about them is conducive to the homeowner making a financial recovery. From a lack of education and thus, an understanding about financial responsibility (not trying to stereotype or be condescending, but the former reinforces the latter), the social stigma (i.e. the treatment and terms they are faced with when attempting to procure a mortgage, correct problems or make payments), and contractual terms (mortgage corporations acquire portfolios of subprime borrowers because they are profitable investments (higher risk means higher fees, like interest), not because they give a damn about helping anyone, regardless of what their P.R. campaigns might say). Ultimately, the “American Way” is to live beyond one’s means, and it’s a blessed rarity when the above obstacles are overcome.

    I am by no means a proponent of the United States becoming a nanny state, but I believe that borrower education combined with strict governmental restrictions against predatory lending tactics are essential to resolving the present real estate debacle. The mortgage industry has been making a killing, and I believe it’s time for them to pay their debt to society. If every potential first time homeowner were required to take a standardized 2 week long crash course about how mortgages work that described the variables involved in purchasing a home, coupled with the IMPORTANCE of reviewing contractual documents (all courtesy of the bank), potential borrowers would have a better idea of what they are getting into, and brokers would have a harder time making a dishonest dollar.

  35. movehoover says:

    There is nothing more important in America than economic potential. If I can work my way out of the poorhouse and into a better life for me and mine, then this is still America. I hate to say it, but subprime mortgages and loans keep that potential alive for a lot of people.

    Many payday/title loan customers return to that form of financing multiple times. Each time they pay a loan, they’re building their credit to one day get a better rate on a credit card and ultimately have references for a mortgage. If we let the government regulate the industry based on a few bad actors-they used to be called welshers- the government will strangle those avenues to advancement.

    Like any disease, money is both infectious and ever mutating. It is always evolving things like the subprime market, finding new ways to meet demand in its quest to reproduce. That is its nature and it should be let alone, for better or for worse.