Read this article: subprime mortgages
My life is pretty solidly based in the researching the mortgage/housing crisis right now for my major research essay due in a few weeks. This is a fabulous article. Well-written, and very forthright about where the problems lie. If you have any vague interest or any opinions on the topic, I urge you to read this thoroughly. As to where this is leading my essay, that is still debatable. I found it refreshing, though, that someone was willing to be honest about the blame game.
Title:Subprime Homesick Blues.(The Talk of the Town)(Industry overview).
Author(s):James Surowiecki.
Source: The New Yorker 83.7 (April 9, 2007): p.26. (944 words) From General OneFile.
Document Type:Magazine/Journal
Full Text :COPYRIGHT 2007 All rights reserved. Reproduced by permission of The Condé Nast Publications Inc.
Not long ago, New Century Financial--a mortgage lender specializing in loans to the subprime, or high-credit-risk, market--dubbed itself "a new shade of blue chip." Today, with its stock price down more than ninety per cent in the past six months and the company close to bankruptcy, it looks more like a new shade of Enron. And it is not alone. In the past year, more than two dozen subprime lenders have shut their doors. The percentage of their borrowers who are delinquent (meaning that they've missed at least one payment) has doubled, and predictions of more than a million foreclosures have become commonplace. As concerns grow that the subprime crisis could spread to the rest of the housing market, pundits and politicians looking for a culprit have seized on New Century and its ilk, charging them with causing the crisis with their "predatory lending" practices, duping tens of millions of homeowners into borrowing more money than was good for them.
The backlash against the subprime lenders is understandable, since their business practices were often reckless and deceptive. Instead of responding to the slowdown in the housing market by cutting back their lending, they pressed their bets--last year, six hundred billion dollars' worth of subprime loans were issued. Many of the lenders hid their troubles from investors, even as their executives were dumping stock; between August and February, for instance, New Century insiders sold more than twenty-five million dollars' worth of shares. And there's plenty of evidence that some lenders relied on what the Federal Reserve has called "fraud" and "abuse" to push loans on unwitting borrowers.
For all that, "predatory lending" is a woefully inadequate explanation of the subprime turmoil. If subprime lending consisted only of lenders exploiting borrowers, after all, it would be hard to understand why so many lenders are going bankrupt. (Subprime lenders appear to have been predators in the sense that Wile E. Coyote was.) Focussing on lenders' greed misses a fundamental part of the subprime dynamic: the overambition and overconfidence of borrowers.
The boom in subprime lending made huge amounts of credit available to people who previously had a very hard time getting any credit at all. Borrowers were not passive recipients of this money--instead, many of them used the lax lending standards to make calculated, if ill-advised, gambles. In 2006, for instance, the percentage of borrowers who failed to make the first monthly payment on their mortgages tripled, while in the past two years the percentage of people who missed a payment in their first ninety days quadrupled. Most of these people did not suddenly run into financial trouble; they were betting that they would be able to buy the house and quickly sell it. Similarly, last year almost forty per cent of subprime borrowers were able to get "liar loans"--mortgages that borrowers can get simply by stating their income, which the lender does not verify. These loans were ideal for speculative gambles: you could buy far more house than your income justified, and, if you could flip it quickly, you could reap outsized profits. Flat-out fraud also proliferated: consider the mortgage taken out by one "M. Mouse."
While some subprime borrowers were gaming the system, many just fell victim to well-known decision-making flaws. "Consumer myopia" led them to focus too much on things like low teaser rates and initial monthly payments rather than on the total amount of debt they were assuming. Then, there was the common tendency to overvalue present gains at the expense of future costs--which helps explain the popularity of so-called 2/28 loans (which come with a low, fixed-interest rate for the first two years and a much higher, adjustable rate thereafter). People were willing to trade the uncertainty of what might happen in the long run for the benefit of owning a house in the short run.
Another thing that led subprime borrowers astray was their expectation that housing prices were bound to keep going up, and therefore the value of their house would always exceed the size of their debt. This was a mistake, but one that many Americans have made in response to the real appreciation in housing prices over the past decade--how else could one justify spending two and a half million for a two-bedroom apartment in New York? Given the government's subsidizing and promotion of homeownership, it's not surprising that borrowers leaped at the chance to buy a home even on onerous terms. The problem, of course, is that the cost of misplaced optimism is much higher for subprime borrowers.
The result of all this is that many subprime borrowers would have been better off if lenders had been more stringent and not granted them mortgages in the first place; that's why there have been countless calls for the government to ban or heavily regulate "exotic" subprime loans like the 2/28s. But what's often missed in the current uproar is that while a substantial minority of subprime borrowers are struggling, almost ninety per cent are making their monthly payments and living in the houses they bought. And even if delinquencies rise when the higher rates of the 2/28s kick in, on the whole the subprime boom appears to have created more winners than losers. (The rise in homeownership rates since the mid-nineties is due in part to subprime credit.) We do need more regulatory vigilance, but banning subprime loans will protect the interests of some at the expense of limiting credit for subprime borrowers in general. And while the absence of a ban means that some borrowers will keep making bad bets, that may be better than their never having had the chance to make any bet at all.
Source Citation:Surowiecki, James. "Subprime Homesick Blues.(The Talk of the Town)(Industry overview)." The New Yorker 83.7 (April 9, 2007): 26. General OneFile. Gale. Lewis Clark State College. 19 July 2008
.
Gale Document Number:A161768857
Title:Subprime Homesick Blues.(The Talk of the Town)(Industry overview).
Author(s):James Surowiecki.
Source: The New Yorker 83.7 (April 9, 2007): p.26. (944 words) From General OneFile.
Document Type:Magazine/Journal
Full Text :COPYRIGHT 2007 All rights reserved. Reproduced by permission of The Condé Nast Publications Inc.
Not long ago, New Century Financial--a mortgage lender specializing in loans to the subprime, or high-credit-risk, market--dubbed itself "a new shade of blue chip." Today, with its stock price down more than ninety per cent in the past six months and the company close to bankruptcy, it looks more like a new shade of Enron. And it is not alone. In the past year, more than two dozen subprime lenders have shut their doors. The percentage of their borrowers who are delinquent (meaning that they've missed at least one payment) has doubled, and predictions of more than a million foreclosures have become commonplace. As concerns grow that the subprime crisis could spread to the rest of the housing market, pundits and politicians looking for a culprit have seized on New Century and its ilk, charging them with causing the crisis with their "predatory lending" practices, duping tens of millions of homeowners into borrowing more money than was good for them.
The backlash against the subprime lenders is understandable, since their business practices were often reckless and deceptive. Instead of responding to the slowdown in the housing market by cutting back their lending, they pressed their bets--last year, six hundred billion dollars' worth of subprime loans were issued. Many of the lenders hid their troubles from investors, even as their executives were dumping stock; between August and February, for instance, New Century insiders sold more than twenty-five million dollars' worth of shares. And there's plenty of evidence that some lenders relied on what the Federal Reserve has called "fraud" and "abuse" to push loans on unwitting borrowers.
For all that, "predatory lending" is a woefully inadequate explanation of the subprime turmoil. If subprime lending consisted only of lenders exploiting borrowers, after all, it would be hard to understand why so many lenders are going bankrupt. (Subprime lenders appear to have been predators in the sense that Wile E. Coyote was.) Focussing on lenders' greed misses a fundamental part of the subprime dynamic: the overambition and overconfidence of borrowers.
The boom in subprime lending made huge amounts of credit available to people who previously had a very hard time getting any credit at all. Borrowers were not passive recipients of this money--instead, many of them used the lax lending standards to make calculated, if ill-advised, gambles. In 2006, for instance, the percentage of borrowers who failed to make the first monthly payment on their mortgages tripled, while in the past two years the percentage of people who missed a payment in their first ninety days quadrupled. Most of these people did not suddenly run into financial trouble; they were betting that they would be able to buy the house and quickly sell it. Similarly, last year almost forty per cent of subprime borrowers were able to get "liar loans"--mortgages that borrowers can get simply by stating their income, which the lender does not verify. These loans were ideal for speculative gambles: you could buy far more house than your income justified, and, if you could flip it quickly, you could reap outsized profits. Flat-out fraud also proliferated: consider the mortgage taken out by one "M. Mouse."
While some subprime borrowers were gaming the system, many just fell victim to well-known decision-making flaws. "Consumer myopia" led them to focus too much on things like low teaser rates and initial monthly payments rather than on the total amount of debt they were assuming. Then, there was the common tendency to overvalue present gains at the expense of future costs--which helps explain the popularity of so-called 2/28 loans (which come with a low, fixed-interest rate for the first two years and a much higher, adjustable rate thereafter). People were willing to trade the uncertainty of what might happen in the long run for the benefit of owning a house in the short run.
Another thing that led subprime borrowers astray was their expectation that housing prices were bound to keep going up, and therefore the value of their house would always exceed the size of their debt. This was a mistake, but one that many Americans have made in response to the real appreciation in housing prices over the past decade--how else could one justify spending two and a half million for a two-bedroom apartment in New York? Given the government's subsidizing and promotion of homeownership, it's not surprising that borrowers leaped at the chance to buy a home even on onerous terms. The problem, of course, is that the cost of misplaced optimism is much higher for subprime borrowers.
The result of all this is that many subprime borrowers would have been better off if lenders had been more stringent and not granted them mortgages in the first place; that's why there have been countless calls for the government to ban or heavily regulate "exotic" subprime loans like the 2/28s. But what's often missed in the current uproar is that while a substantial minority of subprime borrowers are struggling, almost ninety per cent are making their monthly payments and living in the houses they bought. And even if delinquencies rise when the higher rates of the 2/28s kick in, on the whole the subprime boom appears to have created more winners than losers. (The rise in homeownership rates since the mid-nineties is due in part to subprime credit.) We do need more regulatory vigilance, but banning subprime loans will protect the interests of some at the expense of limiting credit for subprime borrowers in general. And while the absence of a ban means that some borrowers will keep making bad bets, that may be better than their never having had the chance to make any bet at all.
Source Citation:Surowiecki, James. "Subprime Homesick Blues.(The Talk of the Town)(Industry overview)." The New Yorker 83.7 (April 9, 2007): 26. General OneFile. Gale. Lewis Clark State College. 19 July 2008
.
Gale Document Number:A161768857