Sub-Prime Home Loan Lenders Take A Hit

[Luke T.]

More ripples in the real estate market that were completely expected. By me at least. :)

Some banks are starting to lose money on home loans they made.

Know your lender. If they are top-heavy with sub-prime loans, they are going to suffer.

A growing number of debt-ridden Americans defaulting on their mortgages have forced British banking giant HSBC Holdings to increase its provision for bad loans, a move which sent its shares 2.8% or $2.62 lower, to $89.60 in New York on Thursday morning.

Chief Executive Michael Geoghegan said that the bank's own analysis had found a "higher severity" of foreclosures and inidicated reserves for bad loans would rise to about $10.6 billion, 20% higher than the $8.8 billion predicted by analysts for fiscal 2006.

HSBC is a British bank. The world's third largest bank. What's a British bank have to do with US?

HSBC's $15.5 billion acquisition of Household International in 2003 was aimed at taking advantage of America's swelling housing market. Household specialized in subprime borrowers, those whose credit wasn't the best and so had to pay higher rates for mortgage loans than more creditworthy customers.

Rising short-term interest rates have since hit a number of Americans with adjustable-rate mortgages and accelerated the rate of delinquency, particularly among HSBC's more recent loans.

And some good news for bluess, who had (has?) a Countrywide loan like I did.

There seemed to be some spillover from HSBC's announcement in the domestic American market, however. Delta Financial (amex: DFC - news - people ), which specializes in sub-prime loans, saw its stock fall 3.1%, or 34 cents, to $10.66, while mortgage banker Countrywide Financial (nyse: CFC - news - people ) dropped 2.8%, or $1.24, to $43.50.

I had a three year ARM. But seeing that interest rates would have to go up sooner or later, I refinanced during the second year of that loan for a really low fixed rate.

But not everyone did that. And now that the adjustable rate is kicking in, they are seeing their mortgage payments rise, and they can't make it.

Some of the smarter American lenders out there:

An analyst at Dresdner Kleinwort said on Thursday that Royal Bank of Scotland Group (other-otc: RBSPY - news - people ), which, like HSBC, has a significant presence in the States through its units Citizens Bank and Charter One, would not face similar sorts of bad debt problems.

Much of RBS's loan book was sub-prime, which isn't an issue facing the bank's American subsidiaries, Dresdner Analyst Ian Gordon said. "RBS' consumer lending business in the U.S. is 100% prime and 99% secured, with more than two-thirds of the consumer loan book concentrated in its mortgage and home equity businesses," he added.

House Falls On HSBC
(http://www.forbes.com/markets/economy/2007/02/08/hsbc-mortgage-housing-markets-equity-cx_po_0208markets05.html)

[Luke T.]

And before you make the obvious Ditech joke:

Powers wants to make more loans to borrowers with less than stellar credit profiles. Such loans, dubbed subprime, account for 13 percent of Ditech's business, he said.

Powers said he wants to get that number closer to the industry average of 20 percent.

November 2006 (http://www.tmcnet.com/usubmit/2006/11/28/2117467.htm)

Doesn't sound like too bright a plan to me.

[Luke T.]

But economists worry that if the economy slows significantly in 2007, the number of poor and financially struggling households facing the potential loss of their homes could escalate sharply, adding to the troubles of the subprime industry.

As recently as 2000, there were just 719,000 such loans outstanding, about 2.4 percent of all mortgages, according to data from the Mortgage Bankers Association of America. By the end of June, though, subprime loans had reached 5.7 million, or 13.4 percent of the total. More than half are adjustable-rate mortgages, compared with just 18 percent for prime loans.

So the 20 percent "industry average" mentioned in my last post is actually a huge jump from the norm of the period before the boom (2.4 percent).


And this right here reminds me of Michael Milken, straight from his playbook:
Mortgage companies, banks and investors have been aggressively marketing and trading the loans because their higher interest rates make them far more profitable than prime loans, even after taking into account greater default rates.

In sheer numbers, roughly 350,000 subprime loans were seriously delinquent at the end of June, over six times the number at the end of 2000.

Hmm. Here's that Ditech guy again...
Its going to have a material impact, said Richard D. Powers, general manager of Ditech.com, the Internet-based lender that does about 13 percent of its business in subprime mortgages. There will be clusters and pools of borrowers that will be disproportionately affected.

New York Times (http://homefinance.nytimes.com/nyt/articlePrint/2006.12.06.subprime-loans-going-from-boon-to-housing-bane/)

[BPSCG]

Mortgage companies, banks and investors have been aggressively marketing and trading the loans because their higher interest rates make them far more profitable than prime loans, even after taking into account greater default rates.Well, isn't that at odds with the claim in the OP? Are subprime loans far more profitable than prime loans? If so, why are the lenders in trouble?

[Beerina]

Well, isn't that at odds with the claim in the OP? Are subprime loans far more profitable than prime loans? If so, why are the lenders in trouble?

All loans carry the risk the borrower will default, if not fully declare bankruptcy. The bank gets the house back to re-sell, but that's 1. a pain in the ass financially and usually not worth it 2. occurs more often in tough economic times, when it's tough to re-sell, making #1 even less likely to be remotely break even.

And "sub prime" i.e. "not the most reliable borrower" is supposed to offset their increased risk of default vs. by compensating with a higher interest rate. Of course, this higher rate makes the likelihood of default higher, too, so presumably that enters the calculation. But it sounds like in a very bad economy like this, they're starting to fall over the edge like the fraudulent lemmings.

In Michigan, some counties have as many as one in 21 homes in foreclosure. (http://www.freep.com/apps/pbcs.dll/article?AID=/20070125/NEWS05/701250332) Not just for sale, but being seized by the bank.

In the gubernatorial election last fall, we rejected electing a guy who runs a giant corporation that sends jobs overseas (and thus knows why Michigan sux as a place to run a business) in favor of retaining the present governor, who just lost 2800 more high tech jobs as Pfizer is leaving most of Michigan. Having lost $800 million on an HDL-raising drug that didn't pan out (take that, socialized medicine people) they had to cut costs somewhere, and the high taxation "Single Business Tax" state of Michigan wins!

[Luke T.]

Sub-prime borrowers were paying 10 percent interest, and that was during the good times. :eek:

Just for reference, guys like me with good credit were paying in the low to medium 5's in interest.

Now the sub-prime interest rate is around 12 percent. Hell, I'd have a tough time paying that.

[brodski]

Well, isn't that at odds with the claim in the OP? Are subprime loans far more profitable than prime loans? If so, why are the lenders in trouble?

"Sub prime" deals are high risk high profit investments for mortgage companies. When times are good they make a bomb, but when interest rates rise, and more and more "sub prime" borrowers start to default then the mortgage companies make losses, big losses.

[BPSCG]

"Sub prime" deals are high risk high profit investments for mortgage companies. When times are good they make a bomb, but when interest rates rise, and more and more "sub prime" borrowers start to default then the mortgage companies make losses, big losses.So that's the lender's problem, as far as I'm concerned, for not properly sizing up the default risk. They knew interest rates would go back up again; if they didn't, they shouldn't be in the lending business. And I guess the market is taking care of that problem right now, by making them go under for their bad business decisions.

I'm not sure I see why this is supposed to be a problem.

[steverino]

I admit I am a in a bit over my head on this thread, but isn't there a built in check and balance at work here? I mean, if you are willing to buy a house in a Detroit suburb where every other house has a for sale sign, and one in twenty is in forclosure, I would think either someone out there would be willing to offer you a lower interest mortgage, or, more likely, you will snatch the $200,000 house for $70,000, and, even at high rates, your monthly payment would be low because of the depressed selling price.

[brodski]

So that's the lender's problem, as far as I'm concerned, for not properly sizing up the default risk. They knew interest rates would go back up again; if they didn't, they shouldn't be in the lending business. And I guess the market is taking care of that problem right now, by making them go under for their bad business decisions.
I quite agree.


I'm not sure I see why this is supposed to be a problem.
lenders going out of business isn't a good thing for your economy, and a sudden restriction on credit as lenders become much more cautious would be very bad for your economy (in the short term at least, in the long term it may make it stronger, but it could be a painful transition).

[Luke T.]

So that's the lender's problem, as far as I'm concerned, for not properly sizing up the default risk. They knew interest rates would go back up again; if they didn't, they shouldn't be in the lending business. And I guess the market is taking care of that problem right now, by making them go under for their bad business decisions.

I'm not sure I see why this is supposed to be a problem.

It will have an effect on the housing market. Hopefully, a good effect for me. I'm in the market for a new house.

But it is never a good thing when banks go under.

It is having a very bad effect on the people who have sub-prime loans. And while it would be easy to say that is their problem, the fact is that the housing market was so insane that it made it extremely difficult for a large portion of the population to afford to be able to even buy a starter house.

[Solitaire]

So that's the lender's problem, as far as I'm concerned, for not properly sizing up the default risk. They knew interest rates would go back up again; if they didn't, they shouldn't be in the lending business. And I guess the market is taking care of that problem right now, by making them go under for their bad business decisions.

I'm not sure I see why this is supposed to be a problem.
Odd... Didn't congress pass a law making it illegal to default on a loan without first spending a bundle on credit councils? Hm.

[Mycroft]

I had a three year ARM. But seeing that interest rates would have to go up sooner or later, I refinanced during the second year of that loan for a really low fixed rate.

You probably made a greate decision in doing that, but it's also important to note that there is a world of difference between the kind of ARM that good credit borowers get and the ARMS done for sup-prime loans.

ARMs for borrowers with good credit are essentially designed to have rates comparable to the going fixed rate when they become adjustable. By contrast, sub-prime ARMs have very high margins that will force the rates to go into the teens when they become adjustable. The effect is in the sub-prime loan, the borrower is essentially forced to refinance the loan. They are designed as a short-term investment for the lender.

The problem is that for many of these loans when the fixed rate period expires the borrower still doesn't qualify for a better loan. Then the increased rate forces the monthly payment up beyond the borrowers capacity to pay, he is forced into default and then forclosure.

[Mycroft]

So that's the lender's problem, as far as I'm concerned, for not properly sizing up the default risk. They knew interest rates would go back up again; if they didn't, they shouldn't be in the lending business. And I guess the market is taking care of that problem right now, by making them go under for their bad business decisions.

I'm not sure I see why this is supposed to be a problem.

True, and the lenders are guilty of taking on a lot of risk in competing for ever larger shares of this market. At the same time, a lot of it is also a result of poor underwriting, where the flaws in higher risk loans are hidden. It's a complex issue.

[Luke T.]

You probably made a greate decision in doing that, but it's also important to note that there is a world of difference between the kind of ARM that good credit borowers get and the ARMS done for sup-prime loans.

Yeah. I was able to get a fixed rate of 5.75. When I told a neighbor that recently, he practically started crying. :)

ARMs for borrowers with good credit are essentially designed to have rates comparable to the going fixed rate when they become adjustable. By contrast, sub-prime ARMs have very high margins that will force the rates to go into the teens when they become adjustable. The effect is in the sub-prime loan, the borrower is essentially forced to refinance the loan. They are designed as a short-term investment for the lender.

The problem is that for many of these loans when the fixed rate period expires the borrower still doesn't qualify for a better loan. Then the increased rate forces the monthly payment up beyond the borrowers capacity to pay, he is forced into default and then forclosure.

Yip. And the situation is worsened by the fact that in the market of the last few years, they overpaid for their house.

[BPSCG]

a sudden restriction on credit as lenders become much more cautious would be very bad for your economy (in the short term at least, in the long term it may make it stronger, but it could be a painful transition).I don't see how lenders' being careful to make loans only to people they think could pay the loans back can be bad for the economy. I don't see how borrowers' defaulting on hundreds of thousands of dollars worth of loans can be good for the economy.

ARMs for borrowers with good credit are essentially designed to have rates comparable to the going fixed rate when they become adjustable. By contrast, sub-prime ARMs have very high margins that will force the rates to go into the teens when they become adjustable. The effect is in the sub-prime loan, the borrower is essentially forced to refinance the loan. They are designed as a short-term investment for the lender.

The problem is that for many of these loans when the fixed rate period expires the borrower still doesn't qualify for a better loan. Then the increased rate forces the monthly payment up beyond the borrowers capacity to pay, he is forced into default and then forclosure.It seems to me that it's crazy to get an ARM when you know interest rates are low. My thinking is that an ARM is going to be less than a fixed-rate loan; it's going to be the lowest interest rate out there. So the chances are excellent that your interest rate is going to go up sooner or later.

What are you going to do when they go up? If you switch to a fixed-rate loan, it'll be even more than the increasing ARM rate; your only hope is that you get a fixed rate that's below where your old ARM finally gets to. If you don't switch to a fixed-rate loan, then you're stuck with the increasing ARM rate. Either way, you're paying more money.

Seems to me if interest rates are low, it's a lot smarter to buy the best house you can afford with a fixed-rate loan. Then when interest rates go back up again, switch to an ARM when the ARM rate is about the same as the fixed rate you're paying.

And vice versa. If rates are high, get an ARM, then when the rates drop, switch to a fixed-rate when the fixed rate is about the same as the ARM rate you started out paying.

I haven't done the math on this, but it seems logical. Certainly makes more sense than buying the most house you can possibly afford on an ARM when rates are low; if you can barely afford the ARM when the rates are low, you're gonna lose the house someday unless your finances get a lot better.

Again, if the loan company can't make a good estimate of your credit-worthiness, then they shouldn't be in the business to begin with.

[brodski]

I don't see how lenders' being careful to make loans only to people they think could pay the loans back can be bad for the economy. In the long term that is true, but a sudden restriction of the money supply (which is what this will amount to) can cause short term economic problems, as consumer demand evaporates.

I don't see how borrowers' defaulting on hundreds of thousands of dollars worth of loans can be good for the economy. It isn't, the banks do need to restrict their sub prime loans, but just because it is necessary, doesn't mean that it will not be without consequences.

[BPSCG]

In the long term that is true, but a sudden restriction of the money supply (which is what this will amount to) can cause short term economic problems, as consumer demand evaporates.I don't see it that way. The amount of money available in the economy is still the same. The money market is simply getting rid of incompetent lenders who can't figure out who they shouldn't be loaning money to; that money will become available, and quickly, to the remaining lenders who do know who should get credit. Money always finds a way.

And the housing market is simply throwing out people who had no business trying to buy a house in the first place - and who wouldn't have, if there hadn't been incompetent lenders willing to take that risk.

[a_unique_person]

And before you make the obvious Ditech joke:


Damn, I was just about to make the obvious Ditech joke.














Who's Ditech?

[gtc]

Who's Ditech?

I can't believe you've never heard of Ditech.



<quickly looks up Ditech in Wikipedia>



Yeah, I don't get it either.

[Luke T.]

Ditech is an online home mortgage loan company in the US that spams the TV networks with very annoying ads. Their ads always end with "another loan lost to Ditech!"

[BPSCG]

Damn, I was just about to make the obvious Ditech joke.

I can't believe you've never heard of Ditech.
Ditech (http://ditech.com/). Their commercials are really really annoying. Involve a fat, smug banker guy who looks like Newman from Seinfeld, in the process of trying to financially rape prospective borrowers. They find out about Ditech by accident, leave him in the lurch, and the commercial always ends up with him wailing, "Lost another loan to Ditech!"

Their rates aren't particularly noteworthy. But their commercials are everywhere, annoying and obnoxious.

ETA: Damn you, Luke.

[Luke T.]

It seems to me that it's crazy to get an ARM when you know interest rates are low. My thinking is that an ARM is going to be less than a fixed-rate loan; it's going to be the lowest interest rate out there. So the chances are excellent that your interest rate is going to go up sooner or later.

Yep.

What are you going to do when they go up? If you switch to a fixed-rate loan, it'll be even more than the increasing ARM rate; your only hope is that you get a fixed rate that's below where your old ARM finally gets to. If you don't switch to a fixed-rate loan, then you're stuck with the increasing ARM rate. Either way, you're paying more money.

Seems that people don't think that far ahead. I didn't wait for the three years of the ARM to expire. I got a fixed rate before the ARM went up. Which makes me pretty smart. :)

I got the ARM initially because the rate was lower than the fixed rate. So I coasted on that for two years, then made the jump to the fixed rate while it was still low (5.75%), and before the three year period of the ARM expired.

Another wrinkle in this market, though, is that a lot of people bought houses for investment purposes and didn't intend to keep their houses long enough for the ARM rate to go up. They figured they would offload their investment at a substantial profit. It was like they thought the balloon would expand forever. I don't know. Some people did make a killing. I made a pretty good one myself that I am going to use to buy my next house. I will be able to put a huge down payment on it, get a bigger and better house, and get a reduced interest rate because of my big down payment, and end up with a mortgage payment equal to or less than my last one.

Just waiting for the dust to settle and for it to become more of a buyer's market. Renting for now.

I bought my house in 2001. I did not buy it for investment purposes. I planned on living there for many, many year. However, being laid off and then getting a job an hour away changed all that. But I commuted for three years while I waited for the seller's market to peak. I made the leap just moments before the market froze up. Between 2001 and when I sold my house last summer, the value of my house nearly doubled.

Now I am waiting for the guy who bought his house in 2001, or before, and is entering the market too late. He didn't overpay for his house, so he will be able to make a little money and still price his house below the newer houses bought in the last three years that are overpriced. And around here, the older houses are on much bigger pieces of property.

Also, houses that are just now being built will be priced less than houses built and bought in the last couple years.

[Mycroft]

I don't see how lenders' being careful to make loans only to people they think could pay the loans back can be bad for the economy. I don't see how borrowers' defaulting on hundreds of thousands of dollars worth of loans can be good for the economy.

It might be great in a few years for someone looking to pick up cheap foreclosed properties in some banks REO portfolio and turn them into money-making rentals.


It seems to me that it's crazy to get an ARM when you know interest rates are low. My thinking is that an ARM is going to be less than a fixed-rate loan; it's going to be the lowest interest rate out there. So the chances are excellent that your interest rate is going to go up sooner or later.

There was a few years where the people that had conforming ARMs that were in their adjustment period had rates that were even lower than could be had with new ARMs.

Seems to me if interest rates are low, it's a lot smarter to buy the best house you can afford with a fixed-rate loan. Then when interest rates go back up again, switch to an ARM when the ARM rate is about the same as the fixed rate you're paying.

You’re right, but from the point of view of a conservative fellow who plans to live in his home long-term and wants to maximize his savings in the safest way possible. People who make perfectly rational decisions that are different from yours would include people who don’t believe they will live in their homes more than a few years, or who see themselves as being upwardly mobile who will have larger incomes in a few years. Real life examples I’ve serviced would include executives of national companies who only expect to work in a region for several years before being transferred, or Doctors who expect much larger incomes after a certain phase of their training is completed.

Your reasoning is perfectly sound for most people, but some people will make their decisions on different criteria.

I haven't done the math on this, but it seems logical. Certainly makes more sense than buying the most house you can possibly afford on an ARM when rates are low; if you can barely afford the ARM when the rates are low, you're gonna lose the house someday unless your finances get a lot better.

In general the reasoning for getting an ARM is that you don’t expect to keep the loan long term.

Again, if the loan company can't make a good estimate of your credit-worthiness, then they shouldn't be in the business to begin with.

Feh. HSBC may get a belly-ache, but they will live.

[steverino]

...Involve a fat, smug banker guy who looks like Newman from Seinfeld, in the process of trying to financially rape prospective borrowers.

Go ahead and say it. He's a fat, shylock money-lending Jew.

[gtc]

Go ahead and say it. He's a fat, shylock money-lending Jew.

Newman was Jewish?

[pipelineaudio]

Hooooray!!!! I hope MANY people lose their rule-8's in this real estate speculation

I hope to find a place where houses are for living in, not a remote investment

[Jaggy Bunnet]

I haven't done the math on this, but it seems logical. Certainly makes more sense than buying the most house you can possibly afford on an ARM when rates are low; if you can barely afford the ARM when the rates are low, you're gonna lose the house someday unless your finances get a lot better.

Given that with a fixed rate you are effectively buying insurance against interest rate fluctuations, would you not expect that over the life of the loan a floating rate would be cheaper than a fixed?

In the same way that the amount you expect to pay in house insurance is more than you expect to claim in the long run (otherwise insurance companies would lose money and cease to exist), you would expect pay an extra amount of interest over the life of the loan for the security of no interest rate fluctuation. Of course in both cases these assume average loan run results which may not coincide with actual experience, but the logic appears to work.

On that basis you need to decide if the insurance cost is valuable enough to you. For both it may well be as the downside of your house burning down/being repossessed is catastrophic and worth paying to avoid, but this will depend on individual circumstances.

[BPSCG]

Given that with a fixed rate you are effectively buying insurance against interest rate fluctuations, would you not expect that over the life of the loan a floating rate would be cheaper than a fixed?It may well be. But the person who buys a house he can just barely afford, using an ARM, when rates are low, is going to find himself in trouble when they start to go up. He won't be able to afford the higher payments, and he'll likely find that if he tries to sell his house, the market isn't all that good any more, because as interest rates trend up (bad for him), house prices trend down (also bad for him). As Mycroft pointed out, ARMs are really best for people who don't expect to own a home very long - investors, rather than traditional buyers.

Meanwhile, yesterday on Capitol Hill (http://www.washingtonpost.com/wp-dyn/content/article/2007/02/07/AR2007020701489.html):
With home foreclosures surging, senators on Wednesday examined lending practices that especially hurt minorities and seniors and can heighten the risk of default.

Sen. Christopher Dodd, chairman of the Banking Committee, said the mortgage industry has to take greater responsibility and federal regulators may have to intervene.Oh, great...

The Rev. Jesse Jackson, testifying at the hearing, said Congress must pass "strong laws to protect the vulnerable" by curbing abusive home-loan practices.
Note the typo there. The story shouldn't have said, "The Rev. Jesse Jackson," but rather, "Noted banking expert Jesse Jackson..."

Wait a minute; aren't Dodd and Jackson and those guys the same ones who were complaining about lenders' "red-lining," i.e., refusing to make loans to people who lived in poor urban neighborhoods? Now they make loans that the borrowers can't pay back, and it's the lenders fault for engaging in "abusive home-loan practices"?

[brodski]

I don't see it that way. Well, this is economics we're talking about, as a discipline it's often only a black cat and a caldron away from witchcraft, so yes, opinions are going to differ.


The amount of money available in the economy is still the same.
Not if the monetarists are to be believed, according to monetarism extending credit actually creates money. Of course they have never really been able to measure how much "money" there is in an economy, but I think the idea has some merit.

The money market is simply getting rid of incompetent lenders who can't figure out who they shouldn't be loaning money to; that money will become available, and quickly, to the remaining lenders who do know who should get credit. Money always finds a way. Well yes, but if there aren't enough people who are deemed able to repay loans, then that money won't be used to create the same amount of credit, and thus won't fuel consumer demand in the same way.

And the housing market is simply throwing out people who had no business trying to buy a house in the first place - and who wouldn't have, if there hadn't been incompetent lenders willing to take that risk.

Quite, that doesn't mean that it won't have economic consequences. As people loose their homes,
three things happen
1)The newly homeless will become less well off
More importantly 2) the newly homeless will feel much less well off and
3) homeowners will start to worry about whether they are going soon be joining the hordes of the repossessed, and therefore become much more cautions with their money.
All three of these things mean that consumer demand will fall. As consumer demand falls the businesses which depend on consumer demand start to fail. As these business fail, they begin to lay off (or threaten to lay off) workers, which feeds back into the system, creating more uncertainty, less demand and a general economic downturn, until the system stabilises. Now, this may be part of a much needed "correction" in the housing market and the wider economy, but it's a painful process to go through.

[rikzilla]

A baited banker thus desponds,
From his own hand foresees his fall,
They have his soul, who have his bonds;
'Tis like the writing on the wall.

-Jonathan Swift

[Luke T.]

And the housing market is simply throwing out people who had no business trying to buy a house in the first place - and who wouldn't have, if there hadn't been incompetent lenders willing to take that risk.

This is where the minorities come in. As a class, minorities tend to be in the high risk credit category due to their occupation of the lower economic strata. And as I said above, when the housing market bubble was expanding, this made it difficult for people to even buy a starter home. It was putting houses out of reach of people not only in the lower economic strata, but really pushing it for people in the lower middle class, or young couples just starting out.

So saying these people had "no business trying to buy a house" is not exactly fair. If the market priced houses out of their reach, that isn't their fault.

So these people were faced with a tough choice. No house, or take a high interest loan to get a house. That's a pretty crappy proposition.

By saying they had no business trying to buy a house, you are telling them to stay in their little gangland hovels and STFU about the American Dream.

Me, I would not take such a high interest loan. But that's me.

For a while there, when I was laid off with a wife and two babies and a third one on the way, and my family was living on government cheese, it was looking pretty grim. That was three and a half years ago. I was looking at having to give up our house and take a giant step backward into an apartment. It was a real nail biter there for a while.

If I had not gotten a job shortly thereafter, we would have lost the house, and we would never have recovered. But since I got a job, we kept the house, and we were able to sell it at a substantial gain. And now we have a nice chunk of money to put down on our next house to offset the raise in the cost of houses.

It was just a matter of luck for me. One more month of being unemployed, and we'd still be living in a cramped apartment with no chance of owning a home.

[Luke T.]

"By saying they had no business trying to buy a house, you are telling them to stay in their little gangland hovels and STFU about the American Dream."

Geezus, I'm starting to sound like a goddam liberal.

[drkitten]

Wait a minute; aren't Dodd and Jackson and those guys the same ones who were complaining about lenders' "red-lining," i.e., refusing to make loans to people who lived in poor urban neighborhoods? Now they make loans that the borrowers can't pay back, and it's the lenders fault for engaging in "abusive home-loan practices"?

I'm surprised you don't see the difference between geographic-based and income-based discrimination.

One of the major problems with "red-lining" is that otherwise qualified borrowers were being refused loans on the basis that the area in which they lived was unacceptable.

In simplest terms, there's a difference between "poor people" and "people who live in poor urban neighborhoods."

[brodski]

Geezus, I'm starting to sound like a goddam liberal.

Join us..... ;)

[Mycroft]

So saying these people had "no business trying to buy a house" is not exactly fair. If the market priced houses out of their reach, that isn't their fault.


It's also important to remember that a substantial increase in forclosure rates only represents a small number of people. The vast majority of people manage to keep their homes even if they are high risk.

[BPSCG]

So these people were faced with a tough choice. No house, or take a high interest loan to get a house. That's a pretty crappy proposition.Or continue to live in an apartment? A lot of people do. It's not a sin.
By saying they had no business trying to buy a house, you are telling them to stay in their little gangland hovels and STFU about the American Dream.Let's keep the appeals to emotion out of it. If you can barely afford the payments on a house today, and you don't have any good reason to think your financial prospects are going to improve any time soon, but your mortgage payments may well increase substantially, no, you don't have any business buying that house. Are you trying to suggest that there is no middle ground between buying a house you can't afford and living in a gangland hovel?

[BPSCG]

I'm surprised you don't see the difference between geographic-based and income-based discrimination.

One of the major problems with "red-lining" is that otherwise qualified borrowers were being refused loans on the basis that the area in which they lived was unacceptable.

In simplest terms, there's a difference between "poor people" and "people who live in poor urban neighborhoods."No, I understand the difference. Red-lining is/was wrong; it treats individuals as simply members of a group, not as, well, individuals. Just because most people in a neighborhood aren't credit-worthy, it doesn't follow that therefore everyone in that neighborhood isn't credit-worthy. The American Dream, after all, is to start from humble beginnings, work hard, improve one's financial situation, and finally be able to buy one's own home. Red-lining short-circuits that process not because of who you are, but where you live.

What I'm getting at is that it appears the lending industry has swung in the other direction, lending money in previously red-lined neighborhoods, even to people they shouldn't be lending money to, and now they're getting beaten up for that, too.

Now, the lenders could make sure they lend only to people in poor neighborhoods who present no risk whatsoever, but if they did that, they'd be accused of red-lining again, because nobody presents a zero percent risk of default until he's paid off his mortgage.

Okay, how about making loans to everybody, credit-worthy or not? Well, do that and you go out of business in about three hours, because lending money to defaulters is not a good way to make money.

Okay, how about looking at a person's overall situation, deciding whether he's credit-worthy or not, and making loans based on that, regardless of what kind of neighborhood he lives in? Well, that's what was being demanded when the practice of red-lining was exposed, and that, as I understand it, is what has been done since then. And, predictably as the sunrise, some people default on their loans and lose their houses, which is something that happens in good neighborhoods and bad, in good times and bad; it happened to a neighbor of mine in a comfortable middle-class neighborhood I used to live in.

So why does this last situation require further government intervention?