Mark Winston Griffith
Sub-Prime Mortgages Come Home to Roost
In a race to avoid being the last thick-headed and irresponsible set of mortgage industry investors standing, private Wall Street firms and the quasi-governmental buyer of mortgage loans, Freddie Mac, have come in a dead heat. One article in the New York Times on Wednesday described how the stock market had tanked, partly in response to weak home sales, record breaking foreclosure rates and the imploding sub-prime mortgage industry. The other discussed how Freddie Mac would impose higher standards for buying sub prime mortgages.
"During the housing boom that ended in 2005," the Times reported, "money was poured with abandon into exotic home loans that let people buy homes with little down or without verifying their incomes. Now, lenders, financiers and buyers of mortgages are pulling back...The move comes as default rates are rising, smaller lenders are starting to fail and investors are shunning bonds backed by mortgages."
Duh! Where have they been? For more years now advocates have been denouncing sub-prime loans and "exotic" mortgages - adjustable rate loans, "no doc" loans, interest only loans, etc. - as often abusive and predatory, and a leading contributor to mortgage defaults and financial instability among working and middle class people. Meanwhile sub-prime lenders have been losing profits, downsizing and going out of business because their loan porfolios are crumbling under the poor or non existent underwriting criteria.
And an article in the Wall Street Journal yesterday reported how while prime borrowers seem to be paying back their loans, those who fall somewhere between "prime" and "sub-prime" are also defaulting at higher rates on their mortgages.
Almost as troubling and predictable as the rapid collapse of Bush's "Ownership Society" culture, which pushed homeownership at any price, literally (See my Op-Ed making this argument here), is the extent to which the press conflates sub-prime loans with bad credit risk borrowers. Research has already shown that people of color are receiving higher priced loans, period, even after credit scores are taken into account.
After a while it becomes absurdist, yet convenient, self-fulfilling prophecy. Make double-digit, interest only, loans to the people who can least afford them - or loans in which the rate suddenly shoots up, or loans in which the borrowers' income is not verified - and then sit back and marvel at how these borrowers are falling behind on their payments. It's like selling cars with faulty brakes to housewives and then announcing that women are bad drivers when they get into accidents.
The question remains: When will law makers and regulators finally step in and clean up the sub-prime market?