Subprime Crisis Threatens Economy; Women and Minorities Hardest Hit
Anita Hill weighs in on the subprime crisis and how single women are its unsung victims. Yada yada yada. But one thing to keep in mind about these loans is that brokers get commissions on the extra spread they can wrangle out of their customers. So the more unsophisticated customers are no doubt often sitting ducks for these guys. And let's not forget that the broker's employer incurs no real risk with the loans he originates - they are quickly sold to third parties who then bundle them into investment securities to be sold in the financial markets. So the potential for abuse is very real, and so it would not be surprising to find real evidence of discriminatory lending practices given that the loan terms are often set by savvy brokers 'negotiating' with naive borrowers.
As I've asserted before, it makes no sense to charge people more for something because they are poor. There are cases where someone with limited credit might be a perfectly good risk for a subprime loan - a newly licensed surgeon, for example. But the normal market safeguards one would expect - that the lender would not care to risk losing his money - don't operate in this market, so legal restrictions are necessary. Of course then we'll have less overall lending to single women and minorities, and that's another whole mess.
Addendum: Why permit commissions on home mortgage loans at all? If someone is buying a house, they clearly need a mortgage, so there's no reason to go out and drum up business. If rates drop and cheaper loans are available, the borrower can figure that out on their own. Yes, some people are probably too dim or irresponsible to pursue a cheaper mortgage, but they are exactly the type of people who will fall victim to a rapacious mortgage broker. Loan decisions aren't that complex - you've got income, assets, job history, credit score, and property assessment. Any salaried clerk (or on-line process) can handle it. Eliminate commissions on mortgage loans, and you've eliminated these kinds of abuses - indeed, probably the bulk of the subprime mess. Very simple - and of course we'll never see it done. And again, we will have the perennial issue of asymmetrical racial lending patterns, which will not disappear under any rational system.
As I've asserted before, it makes no sense to charge people more for something because they are poor. There are cases where someone with limited credit might be a perfectly good risk for a subprime loan - a newly licensed surgeon, for example. But the normal market safeguards one would expect - that the lender would not care to risk losing his money - don't operate in this market, so legal restrictions are necessary. Of course then we'll have less overall lending to single women and minorities, and that's another whole mess.
Addendum: Why permit commissions on home mortgage loans at all? If someone is buying a house, they clearly need a mortgage, so there's no reason to go out and drum up business. If rates drop and cheaper loans are available, the borrower can figure that out on their own. Yes, some people are probably too dim or irresponsible to pursue a cheaper mortgage, but they are exactly the type of people who will fall victim to a rapacious mortgage broker. Loan decisions aren't that complex - you've got income, assets, job history, credit score, and property assessment. Any salaried clerk (or on-line process) can handle it. Eliminate commissions on mortgage loans, and you've eliminated these kinds of abuses - indeed, probably the bulk of the subprime mess. Very simple - and of course we'll never see it done. And again, we will have the perennial issue of asymmetrical racial lending patterns, which will not disappear under any rational system.
posted by ziel | 10/22/2007 10:42:00 PM
9 Comments:
Zeil,
This is unrelated, but the big KaliPORNia fire is being ruled an arson by authorities, http://www.cbsnews.com/stories/2007/10/24/national/main3401265.shtml.
My friend, do you begin to see why I fear terrorism in forms like this? I had brought this up before a while back on this blog, and people just "kinda shrugged". I did it on the defunct blog, Mean Mr. Muster of the very insightful Russell Wardlow, and got disdain from a neo-con blogger. But forrest fires are a way to make life very expensive for insurance companies, utilities (down or ruined power lines, water shortages if there is a drought along with the water to fight the fires, lost worktime, infrastructural damage and stress, and fear generated).
All it took was a few gallons of gasoline, a garden sprayer, and a match-----------------and voom, millions of bucks.
Terrorists could use this kinda thing over and over to hurt our economy. I kinda feel like Im the only one who sees this, but we will probably never catch who was responsible for this unless we just get lucky. I doubt it was terrorists, but this is something they 'could' do pretty easily. All they have to do is walk across a border with a few hundred bucks. Kinda frightening, no?
I have to respectfully disagree, because I don't think terrorists - Muslim terrorists particularly - are interested in this kind of thing. They want to punish us and they want the punishment to be frightening and obvious to all. Setting fires may cause huge financial losses, but it's way too removed from the act and the effects are too long term and spread out over time. In other words, way too subtle.
Otherwise, terrorists could simply claim to have been behind various calamities without having to actually do anything. For example, they could claim to have convinced congress to require a certain amount of lending in 'disadvantaged' neighborhoods, forcing lenders to send out teams of brokers with promises of hefty commissions if they could dig up some borrowers out of that sorry pool, thus leading to a major financial crisis threatening instability throughout the world.
But they don't, because their modus operandi is pretty clear at this point - big explosions, lots of deaths - it's the only way they operate.
Can one of the finance whizzes who frequent this site please explain to me how a mortgage, a risky subprime mortgage at that, can be "packaged" as an investment and then sold to another entity that lists it on their balance sheet as an "asset"? I mean, since when did debts become assets? And if thats so, would someone be interested in buying my credit card debt of several thousand dollars?
Perhaps your correct Zeil, you have a very good track record of being right. "They" dont think like we do.
But it has cost one Billion (with a "B") in four days thusfar. Thats real money. I hope Im very wrong, and it was just some punks who haven't grown up yet.
Interesting entries on your blog as always, M
Regarding loans as assets - if you loan your friend $100, that money is still yours, and so it's your asset, while it's his liability, and any interest he pays you is your income and his expense.
Now say your charging your friend $15 interest, but you don't want to bothered having to hassle him for the money. You could sell that loand to another friend (friend B) who has much better interpersonal skills for say $105. Now you've made a cool fin, while friend B still gets too make $10 which is a lot easier for him than for you. That $100 now belongs to friend B - it's his asset (as is the $10 - 'accrued interest'. Meanwhile, friend A still owes $115 - doesn't matter to him who he owes it to.
Now if friend A turns out to be a deadbeat - you made out anyway with the five bucks, while friend B may eventually have to 'write-off' the loan - admit he's never going to see the money - now it's no longer an asset - it's an expense, that lowers his income.
That's pretty much what's going on in the mortgage business.
As far as the fires, yes, probably some punks. But fires qualify as 'sabotage', not 'terrorism'. Sabotage is something real enemies do to each other during real wars, Like the U.S. and U.S.S.R. would do to each other during the cold war.
Thanks for the explanation of the investment value of mortgages.
But I'd still be about as willing to buy a mortgage backed security from Bear Sterns as I would the Brooklyn Bridge.
NPR had an interview with the FBI on who is setting fires and suspect No 1 are fireman, followed by people trying to collect on insurance on there homes. The nuts are rarely caught. Less than 5% of suspected arsons are prosecuted.
A mortgage can be packaged as an asset and sold becasue it is the promise of future interest payments- interest being the asset.
The credit score of the people paying the interst is a different story.
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