I believe sub-prime lending is good. I think the Governor supports sub-prime lending. How about you?
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The only difference between subprime lending and predatory lending is whether house prices are rising or falling. It is always predatory lending, it just doesn't get called that until people are unable to sell their homes at a profit.
People should not make financial decisions based on "dreams." The usual metrics of who to give loans to are based on how likely the people are to pay them back. People who can't get a regular loan generally can't afford the house. Giving them a subprime loan drives up prices artificially (which makes houses less affordable for everybody) and creates a high risk of foreclosure. In the end, the bank typically loses money, the borrower loses the house, and everybody else was forced to overpay for housing the whole time. Why encourage a situation where everybody loses?
Owning a house is often a bad decision financially. The ownership costs are normally higher then the appreciation rate, the interest and taxes are generally not much lower than renting, and you have to sell the house to move. People with low incomes should not be encouraged to take on the added cost and risk of owning a house, particularly in the modern economy where people change jobs relatively often, especially if they are taking low income jobs.
Predatory lending seeks to take advantage of the ignorance or gullibility of borrowers.
Sub-prime lending is lending to borrowers who have less than ideal credit.
Please do not conflate these two concepts as the simpleton press is want to do.
Buyers make their decision based on the desire to improve their standard of living. The vast majority of sub-prime borrowers will not default on their loans. While many are behind in their payments, most are paying on time. Sub-prime mortgages represent a small fraction of the overall housing market. Foreclosures in this subset can hardly be cause for a crash in the housing market.
"Owning a house is often a bad decision financially." This statement flies in the face of reality. The opposite of this statement more likely represents the sentiment of us homeowners. Perhaps instead of "often", the words "occasionally" or "rarely" are more to the point. Home ownership is not an investment, it is an improvement in quality of life, something to always be encouraged.
Owning a house is often a bad decision financially. This is different from determining whether it is a good or bad decision. People with low incomes should be dioscouraged from making decisions that are bad financially, because they probably can't manage the consequences. Someone who doesn't qualify for a regular loan probably shouldn't buy a house. If their credit score is bad, it probably means that they either don't have a steady income or they aren't responsible enough to maintain a house. If their income is determined to be too low, the bank probably knows more than the homebuyer about affordability.
Buying a home does not automatically improve one's standard of living. The main advantages of owning a home are:
The main advantages of renting are:
The things which affect quality of life most are the freedom to remodel and own pets, the freedom to move/not move when you want to, and having someone else maintain your home. If you find a good apartment/house to rent, you don't need to remodel and you can have pets. A good landlord will be interested in letting you stay if you aren't causing trouble. So there is no reason to automatically assume that owning will lead to a higher quality of life. Having a bad landlord will reduce your quality of life, but there are enough good landlords that you can find somewhere desirable to live while renting and Massachusetts makes it difficult for people to be bad landlords.
The only reliable way to make money in real estate is with good timing. Unless you want to buy houses that are falling apart and fix them up. A home is somewhere you live. Whether you rent or own is a personal decision, and the government shouldn't be encouraging people to decide in either direction. The government should be making sure that people are making well-informed decisions and that companies aren't providing bad options for people to make bad decisions with.
I disagree with your suggestion that real estate carrying costs exceed appreciation. I believe that decades of experience prove otherwise, period dips included. I had a client who bought a house in 1960 for $15K; the house is now worth nearly a million dollars, even after the 80s dip and the recent dip. The way to make money in real estate is to hold it over time.
In addition, you forgot that ownership confers a huge tax advantage to the owner-- and renting a corresponding huge tax disadvantage to the renter, and that owner-occupiers tend to keep their property nicer, and thus neighborhoods better- than do inherently transient renters.
Lastly, sub-prime lending is often a means to establish better credit in order to qualify for an ordinary market loan. A sub-prime loan gets you in the door, and after a few years of timely payments, the owner can qualify for a market loan. In other words, sub-prime lending, wisely used, is a ticket for the poor into the middle class. I see no reason for an patronizing assumption that someone is unwise and stupid just because they are poor.
and still lives in it is the kind of person who should buy--one who isn't going anywhere. Presumably he has had steady employment during that time (perhaps he is retired now). For those just starting out in today's economy, when job security is a thing of the past, it's a different story. Incidentally, I wonder what the loans were like in 1960 when that guy bought...I'm guessing "subprime" wasn't available then.
...In addition, you forgot that ownership confers a huge tax advantage to the owner
Since marginal federal income tax rates have been dramatically decreased--and since there has been a lot of diddling of deductions for high income people--the income tax benefits from the mortgage interest and property taxes has been dramatically reduced.
Of course the benefit decreases as tax rates fall
I'm pretty sure that, hype aside, for actual people, rather than theoretical people, the AMT requires something more than the mortgage interest deduction before it bites. Another big deduction is required: very large charitable donations, big NOLS carried forward, big medical expenses or something.
For most people, it is a pretty good advantage.
Agreed that owning might not be agood option for those who know they are transients. But, if you know you will one day move, but have lived in the same place for 5+ years, you probably aren't transient.
The main advantages of renting are:
if something breaks, your landlord is responsible for fixing it
Of course, that presumes that the landlord will actually fix it--to the renters satisfaction. If you're a renter, you just might be able to legally withhold rental payments if the landlord doesn't "fix it" to your satisfaction, but not necessarily. And, if you try to withhold such rental payments, that might put you on a list of "bitchy tenants," which leads to...
you can move whenever your lease ends
Well, you can, but would you really want to move every year or two? I guess that that might be adventuresome for the youths among us (it was for me), but as you get older, packing up and moving all of the possessions that you had acquired over the past years gets to be a bit of a drag. When we moved in 1983 to our current house, we had 30 boxes of books and magazines to transport. We currently have books and magazines that are easily twice that, if not three times (I have copies of Gourmet Magazine and Bon Apetit from 1977 through about 2002), and we dread the day when we are going to finally take our plunge and move to our abode in Munich and give up on the USofA.
Regarding the above, if you're on a list of bitchy tenants, you might find it much harder to find a landlord who will be willing to rent to you. Those lists are known to exist.
renter's insurance is often cheaper than homeowner's insurance (for covering personal property)
Renter's insurance is often cheaper than homeowners' insurance if the renter is stupid enough to try to insure only his personal property in his apartment. If, for example, the renter were to cause a fire that engulfed an entire complex, he would be responsible for the damage to the entire complex, not just his own abode. I haven't seen a case in which a renter had been held liable for damage done to apartments other than his own in such a conflagration, but it isn't beyond the realm of possibility that he would be.
You are correct. I am wont to do, however I have not the ability to edit my comment that I now want to do. In addition, I apologize for the large image. I tend to forget about you backwoods types that have crank-powered modems. ;)
I have acquired a fancy new laptop that has a big screen and can handle those big citified images. Please keep those squares and arrows coming. Brings back fond memories of my days as a computer programmer (remember those punch cards and paper tapes and plastic templates used to draw flowcharts?)!
If I took your comment at face value, I'd think that lenders and borrowers are all a bunch of losers. How can that be?
You aver that "Owning a house is often a bad decision financially." How often? What has been the American experience, on average, over the past umpty-ump years?
I doubt that you can support that, or such statements as "ownership costs are normally higher then the appreciation rate..."
I'm quite offended at your notion that "low income people" should not be allowed to dream or make their own decisions. Who do you propose should be making decisions for these poor blighted souls?
The rule of thumb the realtors use in Central Mass is the price of a house doubles every 10 years. It's probably been faster than that in Greater Boston. Great investment.
Sub-prime is not bad for everyone. It is good for most. People who made mistakes in their personal finances are given a chance to make of for those but are charge a higher rate. The higher rate is generally the cost of the added insurance due to the extra risk with some additional profit (the whole risk vs. reward aspect).
This was the case in my life, I made mistakes with defaults on student loans, late payments on credit cards and car payments, etc. When my wife and I went to buy a house a couple of years ago (4 I think) we were sub-prime borrowers. We are both professionals and made a good amount of money (over $100K combined at that time) but were a bad credit risk because of my credit history. We got a loan at 7.5% while the going rate was around 5%. We made our payments on time for two years and then were able to refinance as prime borrowers.
This becomes a problem when mortgage companies try and trick people into buying houses they can't afford with gimmicks like interest only loans.
..."Prime rate" is a term of art (or at least it used to be) in the lending business.
I believe you mean to ask is whether below-market-rate secured loans is good or bad. As far as I can tell, the problem with below-market-rate secured loans is that they are backed up by mortgage insurance, which insures the mortgage against default by the mortgagee, which, actually, adds to the mortgage payment. It allows the mortgagee to afford a higher mortgage.
The implication of the "higher mortgage" aspect is not only does it allow a mortgagee to afford a higher mortgage--and thereby pay more for a house--but it also allows a seller to sell his house at a higher price than he might have been able to otherwise. In other words, the seller benefits from below-market-rate secured loans. The mortgage broker obviously benefits, since it spurs transactions. The only people who might not benefit are the buyers--but that downside is speculative. But that's why they will continue.
In this context, "sub prime" doesn't relate to "prime rate".
Sub prime refers to loans to folks who don't otherwise qualify for conventional loan. Rates are usually higher and the forclosure risk presumed to be greater.
...I'd refer to them as "higher risk loans" rather than "sub-prime, but that's just me.
The rest of my comment stands. The seller benefits and so does the mortgage broker from high-risk loans. The only possible chump is the buyer.
also have the most to gain. Repaired credit, the equity of the house, etc.
And you are ignoring the damages to others, include mortgage brokers, lending institutes, banks, etc. when someone goes into foreclosure. Very few actually benefit from foreclosures.
...there is positive equity in the house, there's not much of a problem. The problem arises when either the owners can't afford to pay the mortgage or choose not two. The current owners may choose not to pay the mortgage either because they can't afford it or because there is negative "equity" in the property*.
*The "negative 'equity'" issue was a major one in the housing bubble in the late 1980s. I don't know how apocryphal this was, but there were reports of people whose houses were worth less than their mortgages basically walking away and leaving the keys in the door for the foreclosers.
Were far more aggressive then than they have been thus far, even in the face of the softening market. Much of the problem then was the huge supply caused by banks dumping properties on the market after foreclosure. It was a "death spiral." The softening market caused defaults which precipitated foreclosures which soften the market more. The spiral killed big banks. They're more careful this time, so far, at least.
...You're exactly correct. And the mortgage lenders shot themselves in their respective feet by being so aggressive about foreclosing, when they really didn't have to, and putting the properties on the market, leading to a depressing of the value of the values of the properties (too much supply chasing not enough demand, as economists might put it).
One might suggest that it screwed the borrowers, but it screwed the lender/foreclosers, too. Maybe the latter learned from that experience, but I doubt it. People--and mortgage lenders are people--usually fail to learn from their predescessors failures.
The problem isn't the nominal interest rate. After all, current sub-prime rates are way better than standard mortgage rates not too long ago.
The problem is
(a) exotic mortgages that allow the borrower to get more now on the backs of much higher bills later. Balloons, ARMs, etc. I'm not saying that these types of loans aren't appropriate for some buyers, because they certainly are. However, if the only way you can swing a mortgage on the property you're interested in is with an ARM, balloon, or interest only -- it's probably a really bad decision.
(b) loans where the monthly bills on the home (mortgage, PMI, taxes, utilities) are too big a percentage of monthly income, which allows the homeowner very little time to recover from an income hiccup and still make payments on time.
Where does government legislation come in? I don't think it should be in eliminating sub-prime lending per se, but I would like to see legislation limiting just how precarious a home loan is permitted to be, because it's not just the bank and the homeowner who lose out when there's a default/bankruptcy -- there are lots of ripples that negatively affect everyone. A similar idea is to raise the minimum payment (percentage) on credit cards. Yes, you can frame it as a nanny state making decisions for private entities. However, you can also frame it as legislation preventing powerful financial institutions from raking the poor over the coals and shaking out every last nickel.
...the fact is that "balloons" would make sense for people who don't plan to stay in their current mortgaged residence more than "x" years, where "x+current" is the year in which the balloon would kick in. And, if a balloon mortgage allows the mortgagee to get into a house at a rate that is below non-balloon mortgages, what's the problem with the mortgagee?
Same with adjustable rate mortgages, providing the adjustment doen't kick in until year "x+current."
The point is that the various "horribles" that you might believe you are describing aren't necessarily "horrible" for everyone.
I specifically wrote
I'm not saying that these types of loans aren't appropriate for some buyers, because they certainly are.
The problem is that if a balloon is the only way you'll be able to buy the property, you don't have much slack in earnings. This means it'll likely be really hard to pad your liquidable assets, so when your plan to move out in x turns into x+2, you can afford the balloon payments, if only for a year or three. If, however, you can get these loans comfortably, then you're much more likely to have the free cash necessary to withstand the balloon/adjustment when the time comes. This is why sub-prime plus exotic is so problematic -- if you can only get sub-prime, the odds are much higher that you don't have the necessary buffer in your savings or cash flow to weather any changes to your income streams or your plans on length of ownership of the property.
You're an insightful poster, but you have a knack of not reading all of my posts, and then re-hashing an "exception" that I had just raised.
I understand that "the various "horribles" that you might believe you are describing aren't necessarily "horrible" for everyone," which is precisely why I wrote the statement that I again quoted above.
Preliminarily, I have to admit to finding the use of "sub-prime" here annoying, largely because "prime rate" is a specific term of art. Please forgive me if I revert to non-euphemistic terminology for what you are really referring to: "high-risk." The risk to the lender may be elevated for a number of reasons, including possibly, relatively low income relative to the amount of the mortgage, but also, possibly, relatively low down-payment relative to the amount of the mortgage. It is the latter for which mortgage insurance has typically been provided. The down-payment was intended to serve as something of an increased guarantee/likelihood that the loan would be re-paid because the mortgagor (the borrower) would have some significant interest in repaying the loan, lest he lose a significant portion of the value of of his down-payment.
I'm not sure what you are referring to as "sub-prime plus exotic" so I'll just let that ride.
Just to let you know, I do not necessarily respond to the particulars of either a post or a comment. I respond when a post or comment sparks a thought. Don't take what I have to say necessarily personally.
I'll cut to the chase, and this is my point. It strikes me as being highly unlikely that a financial institution would want to become the owner by foreclosure of a number of houses for which it had provided mortgage loans and for which the owners are unable to pay them back. What interest would a financial institution have in doing such a thing? They'll become, maybe, a real estate developer in a probable checkerboard of foreclosed (vs. non-foreclosed) properties. So, what is the financial institution's incentive in doing what has been described as "predatory lending" to people who they suspect are not in a position to repay? (NB: My contracts professor in 1971 famously said that "you can't get blood out of a turnip. What blood would you suspect the financial institution would be expecting to collect from people who cannot re-pay their mortgages?) If the lending company drives the debtor into penury via a bad credit rating, which more and more often denies the debtor access to employment, the lending company isn't going to be repaid anyway. So what is the interest--financial or otherwise--in the financial institution in putting people into high-risk loans that the institution has reason to believe cannot be repaid?
I'll cut off one potential explanation before you might mention it: foreclosure for commercial development. The Supreme Court's Kelo decision basically said that local governments can, by eminent domain, take possession of any property in the town for any purpose, including commercial development. They would not need foreclosures by financial institutions to do so.
community of an individual default.
Why do you think anyone wants to deprive someone of getting into debt he cannot afford if he can get out of the market before the piper needs to be paid?
No one cares that someone plays and wins.
However others, do not want the cost shifted to me if you fail to win.
Trying to time the housing market is an activity that some play but people play with not track record of winning.
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