Maybe Subprime Loans Aren't Pure Evil
For the past few months, barely a day has gone by without some newspaper or politician (or blog!) trumpeting the evils of sub-prime mortgages. The case is simple: Predatory lenders foist a complicated new kind of mortgage on a poor, unsuspecting victim which leads to foreclosure two or three years later when the rate ratchets…
For the past few months, barely a day has gone by without some newspaper or politician (or blog!) trumpeting the evils of sub-prime mortgages. The case is simple: Predatory lenders foist a complicated new kind of mortgage on a poor, unsuspecting victim which leads to foreclosure two or three years later when the rate ratchets up. An article in today’s New York Times, however, provides an interesting counterpoint to the hysteria. The article cites a new study conducted by Kristopher Gerardi and Paul S. Willen of the Federal Reserve Bank of Boston and Harvey Rosen of Princeton called Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market which makes the case that the enormous creativity in the mortgage market since 1970 has, on balance, been very favorable. As Professor Rosen explains, just because one is poor doesn’t mean you won’t make rational use of more creative mortgage products:
Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.
Rosen also points out that clamping down on the newer mortgage products may end up hurting the very people everyone thinks they’re trying to protect.
‘Irresponsible’ Mortgages Have Opened Doors to Many [NY Times]
There is a huge difference between predatory lending and an educated consumer taking out an i/o loan.
NewStoner,
I have to disagree with you on the rent vs buy thing. If you count the value of your downpayment and properly factor in maintenance costs, then you are getting a 0 or negative return usually.
The problem here is some people insist on comparing Apples to Oranges. Thankfully, ‘WhatBubble’ @10:11 cleared up the confusion in regards to the difference between sub-prime loans & non-conventional loans.
But the arguement about Buying vs. Renting in New York is not black and white. There is the need to compare Apples to Apples.
If it costs you $3,000, all in, to rent the apartment of your choice in NYC, then have to compare that to what size mortgage is comparable, ALL IN, in NYC. A $650K Mortgage +ins. +taxes+maintenance -LESS your tax writeoff benifit will put you around that same $3,000.
So, in today’s low interest rate environment, you’ll be hard pressed to find an apartment that makes more sense to rent, than a comparable co-op,condo, or brownstone w/ tenants of the same size.
Subprime lending is more a risk to the issuing lender then it is to the borrower. Non-conventional loans, IMHO, are more a risk to the borrowers,becuase I feel those individuals are more likely to underestimate the shock of interest rate adjustments.
Josh and anon 10:13. You’re both right. unless you own your home free and clear then you rent. You either rent from a landlord or from the bank if you have a mortgage. Sometimes it is better to rent and put your excess savings in something that will offer a better return.
Subprime mortgages have higher interest rate potential, because they are issued to individuals with lower credit. While this standard on its face appears to be counter-intuitive, it does allow some individuals with poor credit an opportunity to buy. Is it for everyone, no? Some are not fiscally stable enough to manage such a financial situation. Nonetheless, I think the talk about restricting sub-prime mortgages, because it takes advantage of people who are of lower income and appears to cater towards certain races is rather condescending to the individuals who obtain these mortgages. first off, you assume that these inidviduals do not, and cannot, understand the potential risk. Now, there are many claims that sub-prime lenders did not provide full dis-closure and also purposely hid from the borrowers information regarding the risks of such a loan. This is wrong and illegal, no further legislature is necessary, every state in our nation recognizes a cause of action for fraud, fradulent inducement, and recission. Essentially, I believe the true lesson from this sub-prime mess is to make sound financial investments and esnure you are fully aware of the financial reprecusions of any agreement that you might sign. As mom always said “no one gives you something for nothing,” and “always read the fine print.” To those who were never allowed the opportunity to read the fine print, do not allow them to walk over you and fight for your rights.
I think we have gone a bit nuts as a society about the benefits of home ownership. I’ve both owned and rented and think that most of the time (especially if you don’t have a lot of money) renting is a lot cheaper. But people buy into this nonsense of “you’re throwing away your money if you rent…”
I bought my house with a subprime mortgage, because I had bad credit due to some bad business decisions. I was in the process of cleaning up my credit when the opportunity to buy at a great price came up. I had a 12% interest rate at a time when most people had around 6 or 7. The mortgage broker gave me good advice at the time. He said get the house, pay the higher interest for a year or so, don’t ever pay a mortgage payment late, fix your credit, and then refi. When I did so, my credit rating was better (not great, but better), I was able to refi, get a lower interest rate and take out enough equity to pay off the rest of my debt. My monthly payments stayed about the same as with the higher rate, but my credit was clean, I had my house, and my place is still worth twice as much as the refied price. Subprime loans can work for you if you take care, and are aware of the risks and how the game is played. The key is to use it to your advantage, and then get out.
This is not the same thing as preditory lending.
christ on a crutch, brownstoner. hey, next time, tell people who are complaining about the price of energy to read a press release from exxon.
I think the real crime is not in saddling the new purchasers with high risk, it is in putting this risk on refinancers who take too much money and then lose their homes. People who for years paid their mortgage and were ok, now find themselves strapped and in trouble. Too many advertisements enticing people to take the equity out of their homes and splurge on something right now.