IN HINDSIGHT one of the worst things about America’s subprime housing bust is how predictable it was. Subprime borrowers were by definition people of limited means with poor credit histories. Yet economists who have looked at the pattern of payments on subprime mortgages point out that even when house prices topped out and then began to fall, not all subprime borrowers defaulted. Only a minority of borrowers abruptly ceased to make payments, as someone choosing to default would.
More typically, payments went from being regular to being erratic: borrowers fell behind, then became current again, only to fall behind once more. Those patterns are indicative of people trying, but struggling, to keep up with their payments. A trio of economists set out to find out what differentiated those borrowers who did not keep up with their payments from the rest. Their answer, according to a new working paper from the Federal Reserve Bank of Atlanta, is simple: numeracy.
That's right--math knowledge.
ABC did a feature story on a couple in Virgina that had a $300K mortgage. He was a handyman and she was a receptionist. Whoever wrote that loan assumed that five years down the road they would be making more money. That loan should never have been written.
ReplyDelete"Whoever wrote that loan assumed that five years down the road they would be making more money."
ReplyDeleteProbably not.
More likely is that whoever wrote the loan assumed that (a) they would be paid a commission for doing so, and (b) they would not be on the hook for the loss when/if the borrower defaulted.
-Mark Roulo
I find that this:
ReplyDeletehttp://www.youtube.com/watch?v=UC31Oudc5Bg&feature=related
video explains a lot. The mortgage stuff starts a bit less than 3 minutes in.
-Mark Roulo
But you forget that under Congressional pressure to produce loans to "underserved communities" the normal rules of lending didn't apply. Down the road, if you suspend the rules, bad things happen. And that is true whether you are a bank, Toyota or a dry cleaner cutting corners.
ReplyDelete"But you forget that under Congressional pressure to produce loans to "underserved communities" the normal rules of lending didn't apply."
ReplyDeleteThis was part of the problem, but not a huge part. Many banks managed to make amazingly stupid loans without any government coercion at all. Much of this was because of the incentives for the people making the loans ...
-Mark Roulo