Subprime mortgages have a rather poor reputation, so the marketing campaign to bring them back concentrates on how they are good for blacks and Hispanics:
Are Subprime Mortgages Coming Back? SEPT. 9, 2014Remember when “Ozzie and Harriet” = “normal people”? Now it means an unrealistically high standard: married white people. And the U.S. is, proportionately speaking, running out of married white people. So the money men want to get back to hustling subprime junk to unmarried Hispanic high school dropouts.
By BINYAMIN APPELBAUM
… The federal government — seeking to formalize this new caution — has imposed a host of rules, starting with requiring banks to document that borrowers can repay the loans. “We’ve locked down mortgage lending to the point where it’s like we’re trying to avoid all defaults,” said William D. Dallas, the chairman of Skyline Home Loans, who has three decades of experience in the industry. “We’re back to using rules that were written for Ozzie and Harriet. And we’ve got to find a way to help normal people start buying homes again.”
It seems, in other words, as if it might be time for the revival of the subprime-lending industry. Long before these risky loans were blamed, in part, for helping usher in the financial crisis, subprime lending was embraced as a promising antidote to the excessive caution of mainstream lenders. After all, key mortgage rules were first written in the middle of the last century, and they still reflect old-fashioned economic assumptions. It’s still easiest to qualify for a mortgage if a household has one primary breadwinner who is paid a regular salary, has a history of repaying other loans and has enough money saved or inherited to make a significant down payment. Indeed, mainstream lenders have a long history of using race as a proxy for risk, like the refusal to lend in entire “redlined” neighborhoods.Funny how we keep hearing more and more about redlining the further into the past it recedes. After we get done paying Slavery Reparations, then we’ll hear about Redlining Reparations.
Last week, the attorney general’s office in New York filed suit against a Buffalo lender, Evans Bank, saying it redlined an area of east Buffalo that is home to more than 75 percent of the city’s African-Americans. (Evans Bank has denied this charge.) Similar lawsuits have recently been filed in Los Angeles and Providence, R.I. Goodman and her colleagues found that those excluded from credit in 2012 were disproportionately African-American and Hispanic households.Of course, those who defaulted on their mortgages in 2008-2009 were disproportionately African-American and Hispanic households. Here’s the big 2013 study by Bayer et al.
But, as far as I can tell, practically nobody knows that.
The subprime solution has always been relatively simple. Instead of offering fixed terms to anyone who meets “prime” standards, terms are tailored to borrowers. People who are judged less likely to repay loans are charged a proportionately higher interest rate. Before things got out of hand during the last decade, subprime lending offered opportunity for many people, including minorities and immigrants, whose economic lives, like the Sleimans’, did not conform to the mortgage industry’s traditional expectations.Hindsight is supposed to be 20-20, but looking back a decade, this NYT economics reporter is still convinced that the subprime lenders, most of whom went bankrupt in 2007-2008, charged too inflated a risk premium.
Most subprime borrowers continue to repay their debts and live in their houses. But even in the industry’s heyday, subprime lending had critics who argued that it deepens underlying economic inequalities between those with money and those who must borrow it. They would prefer to focus on improving economic opportunities or loosening restrictions on housing construction in desirable areas, like coastal cities, where prices are highest. And their arguments have certainly been buttressed by an industry that has a habit of behaving badly — overcharging customers who cannot easily tell the difference between a reasonable-risk premium and an inflated interest rate and persuading investors to pump money into those loans.
Binyamin Appelbaum is an economics reporter for The Times.The subprime calamity of 2007-08 was prepped by a lot of propaganda about how they were good for blacks and Hispanics then too. That was necessary because there had been an earlier and fortunately smaller subprime bust at the beginning of the 21st Century. But nobody can remember exploded diversity marketing campaigns of the past. Every tired argument is new and persuasive because crimestop — protective stupidity — keeps us from learning from the events we all read about in the newspapers.