Monday, March 26, 2007

Subprime loans rattle a shaky state housing market (freep)

Like this is any kind of surprise. People with inconsistent income streams are having a tough time paying big mortgages priced at above-market interest rates. To me the saddest part about this is that approving people for mortgages they can't afford (especially because the lender and buyer are often not factoring in tangibles like property taxes and intangibles like maintenance into the monthly cost of the loan) is immoral. You are setting people up for failure, and you don't care because you are bundling and selling the loan. (Well, maybe you care a little now that your industry is imploding. I still don't think you would have done anything differently).

Good lenders retain possession of loans that originate with them, and it makes them far more responsible for the kind of loans they approve - i.e. people who can't pay it back are spared the heartache and financial ruin of losing their home, because they're not approved in the first place.* Sub-prime lenders make risky loans and sell them off, and the reward for the note-holder was higher interest rates for their risk. As long as these were a minority of loans made, the reward (higher interest) was worth the risk (borrower defaults). With sub-prime loans being such a high percentage of the market though, it has been obvious for a while that that default risk was becoming unacceptably high. I feel badly for these people. You could make the argument that people who took out loans like this were biting off way more than they could chew, and ultimately responsibility rests with the buyer, but they don't need anyone else to tell them that. They're learning the hard way. Responsible lending would have made it harder for people to get that far out on a limb.

*I'm not saying people should be denied the American Dream because they have low incomes. I'm saying that people should not be approved for a mortgage on a house that costs an enormous multiple of their earnings, assuming they do not have substantial equity from another source. It's a recipe for ruin.

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