Monday, March 12, 2007

The media and the crisis of subprime loans

Dave at Garfield Ridge has a good piece on how the media is treating the contracting credit market and stagnant real estate prices. I started typing this in his comments, but it was getting kind of long, so I just decided to post it here.

I've seen a few of these media reports myself and have found them to be pretty uninformed and typically demagogic.

Here's MPR's example of a victim of mortgage companies.
Ripplinger now owes $187,000 on the house he paid $25,000 for in the 1970's. Ripplinger says the same broker handled his last two refinances which were done within months of each other last year.
I've been a loan officer for almost seven years, now. I've done scores of sub prime loans for purchases, often to 100% LTV (no money down). The major reason for this is that if someone comes to me and asks for a loan to buy a house, I look for the best option available to them. It's not my job to talk them out of buying a house because taking a loan on an ARM (most sub prime loans are ARMs). My job is to usually find them the lowest payment available. By law I have to disclose the rates, the date that it goes adjustable, and the margin the rate will be at when it goes adjustable.

I have no way of knowing what the index will be at on that future date. One thing I am guilty of, I guess, is telling people that when the loan goes adjustable in 2, 3, or 5 years that we'll refinance them into a better loan if they've improved their credit.

This is where the problems have come in. With stagnant property values, their LTV hasn't improved much if at all in the intervening years, and often if they were in a sub prime loan in the first place it's unlikely that their credit improved in the meantime. Someone who had sub prime credit before, is more than likely going to have similar sub prime credit.

I echo Dave's contempt of the idea of having the government "fix" this problem. This IS the market. If lenders make credit too easily available to less than perfect credit borrowers and price the interest rates too low on those loans, they are going to get a lot of people defaulting and won't have made enough to make up the difference. The result of this is that lenders have to price their loans higher or tighten up their lending guidelines if they hope to stay in business. This means fewer people can buy houses. The irony is that the people complaining about this the loudest are the same people who a few years ago were complaining that it was too hard for the underprivileged to get loans to buy houses.

*** Updated ***

I love when I'm validated by people much smarter than myself. From Econlog:

My guess is that the typical defaulter today is not some prudent individual who happened to buy a home that strains his paycheck. Instead, my guess is that the typical defaulter is somebody who is poor at managing spending and credit. Of course, either defaulter is going to appear to be "over his head."
Also at Outside the Beltway:

So, here are my questions:

  • Who are the people taking out subprime loans?
  • What kinds of houses are they buying with them?