Subprime Mortgages

Gary Becker and Richard Posner discuss the subprime mortgage lending market over at The Becker-Posner Blog.

Becker’s contribution is titled Are Subprime Loans Useful? and his conclusion is, yes they are.

Posner’s comments in response to Becker’s interrogatory is simply titled Subprime Mortgage Loans, and he also concludes that subprime mortgages are useful.

I would agree with both of these gentlemens’ analysis, but add this comment in regards to the following as written by Becker.

Although many African American and other poor families became homeowners for the first time due to the development of the subprime loan market for housing, critics claim that many of these families were duped by misleading presentations of lenders into taking out short duration variable interest loans, loans with low down payments, or loans that were simply beyond their capacities to pay. No doubt overly eager or unscrupulous lenders did sometimes misrepresent the difficulty of making payments to borrowers with little experience in financing home ownership. However, intentional misleading presentations to families who were clearly unqualified to take on home ownership was not the norm but rather were exceptions.

The reason for my belief is not confidence in the morality of all lenders in the subprime market, but rather that delinquencies and especially defaults on these loans hurt lenders as well as borrowers.

Specifically I want to comment on this portion of the above quote.  "No doubt overly eager or unscrupulous lenders did sometimes misrepresent the difficulty of making payments to borrowers with little experience in financing home ownership. However, intentional misleading presentations to families who were clearly unqualified to take on home ownership was not the norm but rather were exceptions."

Having worked in the mortgage industry, mostly prime, but also a number of years subprime, for over 15 years, I can state that “overly eager” and “unscrupulous” subprime lenders are the norm, rather than the exception.  This statement is not to be interpreted as a lobbying call for government regulation, it is simply a fact of the industry.

A vast majority of the loan officers working in the subprime lending industry have about as much experience with mortgages as the first time homebuyers.  Meaning they have no experience.  The presentations, presented by rote, to potential mortgagees on subprime loans are all nice and shiny, full of hope, excitement, and the “fulfilment of the American dream” of homeownership.  Subprime loans are sold like cars are, it’s all about the monthly payment, not what the mortgage may, or may not, do in the future.

Subprime loans have a definite place in the economy, and can be hugely beneficial to not only first time homebuyers, but to individuals who are in a temporary financial pinch and have equity in their homes which can assist them in weathering the storm.  Caution must be exercised, though, when listening to the subprime pitch.

Posted by on 06/27 at 07:37 AM

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