The Real Problem with Subprime Mortgage Loans
Posted on April 21, 2007
Filed Under Mortgage Smarts, Personal Finances |
Subprime loans are high-priced, high-interest products designed for borrowers with damaged credit, or in some cases, no credit. In other words, mortgage lenders, with and without brokers help, have underwritten mortgages for people that in many instances should never have been “qualified” for those loans in the first place.
Lest anyone think this sounds harsh, let’s look at the numbers. We’re talking nearly 15% of adjustable rate subprime loans being delinquent already. A million more mortgages will reset to higher rates this year, and another 800,000 next year. These folks can hardly keep up with their payments now. What do you think is going to happen when those payments increase half again or even double in many cases?
Yeah, foreclosure city. It’s already happening big-time, driving down property values and costing everyone. Even those with good credit and conforming mortgages get hurt, especially if they’re trying to sell, and seeing home values in their neighborhood depressed by nearby foreclosures at fire-sale prices.
The thing I can’t understand is why anyone is so surprised at this. I mean what else did anyone expect? The answer to the question of “the problem with subprime mortgages” is that in far too many cases they are loans that should never have been made.
There’s nothing wrong with higher prices and higher interest rates on loans to folks with problem credit. That’s only fair for the lender accepting a higher risk. But many lenders got greedy and tried to create ways to provide mortgages for anyone that wanted one. And the products they came up with are just nuts.
There are “interest only” loans (I’ll never understand that one), uncapped ARM’s (a disaster waiting to happen), 40 year and now 50 year mortgages (for a population that moves every 7 years, how’s that for never getting ahead?), crazy balloons; ridiculous fees and penalties, and the list goes on. None of this is in the borrowers best interest and despite disclosure, most people just don’t get it.
Fact is, they’re never going to get it. For whatever reason, they either can’t understand, don’t want to, or don’t care. Although it’s abundantly clear that some people need to be protected from themselves, that just goes against the grain – folks should have the right to do dumb things – however, they don’t have the right to say “oh dear me” when things go south.
No the problem is ultimately with the lenders, and is not that they should be protecting people from themselves, but rather exercising prudent fiscal responsibility and refusing to write bad business. The simple answer is to raise the bar back to a reasonable level, which means that some people can’t get a mortgage. That’s just life – we don’t always get what we want.
But the solution to fixing the foolish deals already done is more complicated. The vast majority of mortgage loans get securitized and packaged into bond instruments traded on wall street, and trust rules can make it impossible to legally restructure the underlying loans.
Besides that, the appetite for these CMO’s (Collateralized Mortgage Obligations) in all their various forms is so great and so lucrative, that most of the big trading firms have their own underwriting arm that funnel mortgage backed securities to them. Feeding those underwriters and others are tons of brokers and lenders competing for this business. One of the reasons behind so many of the poorly structured mortgages is the competitive effect of squeezing yields and making other poor business decisions just to close more deals.
So there will be a lot more foreclosures. Many will lose homes. Lenders will go through bankruptcy or fail altogether. Investors will lose money and because our economy is so intertwined, there will be lots of people that end up suffering – many of them innocent.
Some are suggesting the federal government bail out the industry. That’s another dumb idea. First off, the feds are terrible at doing anything cost-efficiently, and second they would be doing it with taxpayer dollars. I for one am not inspired to help pay for the foolishness and greed of a whole lot of people and companies about to get burned.
Besides, bailing folks out means they learn nothing from the experience and are prone to repeat it, usually with even more disastrous consequences. No, the best course of action is to let the market sort itself out. Companies are always about profit and people generally look out for themselves – the marketplace is truly effective at balancing the two.
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The small guys like myself and the builders and developers and all the labors that come along with this industry are the ones being hurt the most. The Feds do need to help and help now. And make the Big Boys pay the bills before we end up like Russia being a poverty sticken USA
Yes Jake, we’re too dumb to do things for ourselves. We need Big Nanny Government to help us out. A chicken in every pot!
Are you totally unaware that that’s EXACTLY what Russia did to make themselves an economic basket case? The United States of America is an economic and military superpower with the title of the wealthiest nation on earth. Spit out the pacifier and be a man.