This WaPo story is long, but nonetheless incomplete.
Using court and land records, The Post analyzed 173 home purchases in Fairwood that wound up in foreclosure between 2006 and 2008.
In 43 of those home purchases, borrowers financed 100 percent of the cost of the home with loans that had high interest rates and reset periods within three years. The loans were of the type that Angelo Mozilo, the CEO of defunct subprime lending powerhouse Countrywide Financial, had called “toxic” because they offered such onerous terms. He warned his own company in internal e-mails that the loans were “the most dangerous product in existence.”
Nearly all the remaining loans The Post examined contained features associated with high default rates, such as low or no down payments, interest-only payment periods and higher rates than prime loans.
Only seven out of the 173 defaulters received the most favorable lending terms, known as conventional 30-year fixed interest rate loans. These “prime” loans are the least likely to fail, experts agree.
The neighborhood is described as primarily African-American, with a median income over $170,000.
Some questions that I have:
1. Why were so many loans made with zero down payment? If the median family income is that high, should there not have been higher down payments?
2. If the borrowers put nothing down to begin with, then foreclosure cost them nothing in terms of lost equity. Presumably, if they were affluent before, they are still affluent now. If not, why not?
3. Did anyone benefit from making these loans? The companies that ended up owning the mortgages took huge losses (taxpayers also may have been involved in some way, through bailouts). Companies that originated subprime loans but did not hold them (the “originate to distribute model”) picked up some small fees, but my guess is that they competed away a lot of profits by incurring marketing costs, and in any case enough of them went out of business that you can hardly envy their franchises.
4. When did borrowers start to fall behind on their payments? If it was within a year of buying the home, then you can be sure that even if the borrowers had gotten prime, thirty-year fixed rate loans they still would have defaulted.
Remember, it was the WaPo that said on January 1st that “narrative” is “out” and “facts” are “in.” Their story is instead all about narrative (the N-word, as I call it), and I think it could use more facts.
The Post series is getting hammered in the online comments, so much so that the paper didn’t even allow comments on the third article. This is the second time I can remember that they published something on troubled homeowners that, on the surface, appeared to be about how awful and unfair things were for the borrowers. However, the articles also provide enough detail to show that the borrowers made one or more really bad decisions. I’ve been asking myself whether this is a Straussian move by the Post reporters, and they are really criticizing the borrowers, but since that is not PC, they camouflage the point with the socially appropriate leftist talking points.
Arnold, you might want to be careful with the “N” word thing. When I first started reading this post, I thought you meant THE “N” word, which then led to more momentary confusion when the article was about African American households. I knew this was not in character for you, and I read on long enough to figure out that you are referring to “Narrative”. But, using that short hand might not end up reflecting well on you, even if it is only through misunderstanding.
Indeed, one can easily read this and say, The home “owners” got to live for quite a while in a nicer house than they could afford–or alternately lived in it without paying the normal, higher interest charges on a mortgage, so now chickens come home to roost, why are they complaining? If they’d been offered a standard mortgage, would they have been able to keep up with the payments? Not sure. Maybe they couldn’t even have gotten the house in the first place.
I second Kevin Erdmann: I think it’s a dangerous move to use “N-word” to mean narrative. I’m not overly PC, but I would avoid going there, personally.
Imagine a story about a regular guy who buys a Lamborghini, can’t make the payments, and loses it after a year. Would we feel bad for him? Hey, he got to drive a really fancy car for a year without paying (fully) for it.
But, if you’re making 170,000 a year, you should be able to make a decent down payment.
…unless you’re persuaded into buying more house than you can truly “afford” via creative loan financing. The article says that a house now worth ~$350k sold for ~$700k. Values dropped by 1/2? 1/3 of buyers who went into foreclosure were African immigrants?
I smell a rat. A mortgage broker rat, an appraiser rat, and a lender rat. All chewing on ignorant (or greedy) purchasers.
Not to excuse the purchasers, who got a place to live for a while with little cash invested.
Arnold,
How about this for confusion: http://nyti.ms/1DaZMrq
The private market assigns too high a price for these renters who want to own! How unfair…If only we could mandate easier credit to (the sacrosant) aspiring homeowners. Oh, wait, we can!
We’ve never seen this story before.
“Presumably, if they were affluent before, they are still affluent now. If not, why not?”
They bought at a low price, the price rose, they took out home equity loans, and then the price fell. Not the smartest thing in the world to do, but they are people after all.
There’s nothing in the story on this RE development to indicate that “they bought at a low price.” (Although, of course, it doesn’t give us any specific pricing to work with.)
According to WaPo, this was new construction and the subprime loans were taken out in 2006-2007. Would that have given the original purchasers enough time before the bottom fell out of the market, for the rising market to create enough equity for them to take out a second or LOC? And to be worth it to either pay closing costs or roll them into the second loan?
The other thing to consider is, being underwater on your home is only a problem if you want to sell it. If you’re going to continue to live there, it’s a loss (or eventual gain) that’s still unrealized. So who cares?
If they lost their job, that’s a different story altogether. They could have thought of themselves as affluent at the time of purchase….
Here’s a small study by the San Francisco Fed that suggests that one aspect of the mortgage meltdown resembled a classic affinity scam. The financial and real estate industries worked hard to get more diverse mortgage brokers, real estate agents, and the like, and they were particularly likely to be involved in getting trusting co-ethnics into deals that ended in foreclosure:
http://isteve.blogspot.com/2013/04/bankrupt-stockton-was-mortgage-meltdown.html
I guess Mozillos $400M and Fulds $500M doesn’t count.
Well, someone should have thought of claw backs before disaster. I bet I could have. I’m always amazed how little pros know about theit jobs probably because they are so well rewarded. The question remains, would they have made even more without the crisis?
Good questions. While it doesn’t fit the predominant narratives, it’s easy to see the home owners having taken advantage of the system to get free housing and then skip away when the bottom dropped out. Indeed, don’t they have an incentive to foreclose on purpose, if they really had zero equity in the houses?
I get the impression many people just don’t think about the basics of how a loan works. It doesn’t make sense for people to take out arbitrarily big loans, no matter their circumstances. There has to be *some* kind of pushback for people who take on more debt than they can manage. In the case of housing, that pushback is the foreclosure process.
I think “n-word” is cute, FWIW. I’ve started noticing it everywhere. People have these stories queued up and just ready to burst out into a monolog at the slightest provocation. Your doctor charges a copay to give you an x-ray? Well. It must be that the health care in this country is f-ed up. Gas prices are higher this week? Well. The oil companies are gouging us.