August 3, 2005


Dark side of subprime loans: Mortgages for those with bad credit leap in popularity despite high foreclosure rate (Kimberly Blanton, August 3, 2005, Boston Globe)

Loans to homeowners with less-than-sterling credit are the fastest-growing segment of the mortgage market as lenders reach out to those unable to qualify for conventional mortgages.

So-called subprime loans have helped boost US homeownership to a record 69 percent of households. They are being tapped by borrowers in all income ranges, who struggle with poor credit ratings stemming from modest incomes or excessive credit card or other debts. In Massachusetts, subprime loans, fueled by refinancings, have grown from 1.6 percent of mortgages in 2000 to 12.3 percent today.

But the industry's growth has brought problems. Subprime lenders foreclose on properties much more frequently than do conventional lenders. About 3.5 percent of subprime mortgages and refinancing loans go into foreclosure, but a study by the University of North Carolina Kenan-Flagler Business School found that 20 percent of refinancings in 1998 through 2000 that were examined wound up in foreclosure. For conventional loans, the rate is 1.1 percent of mortgages and refinancings.

It takes a nearly superhuman effort to miss the broader point of this phenomenon.

Posted by Orrin Judd at August 3, 2005 10:37 AM

A shortage of capital because our savings rate is so low?

Posted by: Luciferous at August 3, 2005 11:08 AM

Subprime lenders foreclose on properties much more frequently than do conventional lenders.

How 'bout that sentance for missing the point of your own article? (Although, to be fair, I was sure that this point was going to be tied to a complaint about how the unfairness of charging higher mortgage rates for these loans.)

Posted by: David Cohen at August 3, 2005 11:11 AM

The economic left (esp. the anti-globalization crowd) will say this is the return of feudalism.

But something is wrong with people paying 14+% when the going 'market' rate is 5-6%, and has been dropping all this year, against all conventional wisdom. The article also doesn't mention interest-only loans, which are growing for people of all income levels.

Your comment is well taken.

Posted by: ratbert at August 3, 2005 11:13 AM

I dunno...when I graduated from college I had a terrible credit rating. In the years after that I worked hard to get myself out of the credit card debt I had built up and rebuild my credit score (my FICO as of this morning is 736, which is pretty danged good). Now Orrin wants me to whizz that down my leg just so I can back up his cockamamie theories about money and get a mortgage I have no hope of being able to service. "Just declare bankruptcy!" he grunts. Easy for some, not for me. I was raised to take responsibility for my actions (note I didn't blame the credit card companies for my college age indebtedness) and taking on absurd amounts of debt and then skating out from under by declaring bankruptcy seems to go against that. Hey OJ, you're always whining about your "million dollar debt" - why don't you take your own advice and default on it all? Maybe you can become a welfare cheat and make some more money off Uncle Sucker.

Posted by: Governor Breck at August 3, 2005 12:28 PM

"The glass is too big."

Posted by: Raoul Ortega at August 3, 2005 12:28 PM


Because it's affordable and we're honorable. Debt's no big deal.

Posted by: oj at August 3, 2005 1:04 PM

There are a lot of facts left out of the article. One thing I certainly would want to know is what the Loan-to-Value ratio on these loans is. One common way of ripping off the poor and the stupid is to give them a mortgage fully cognizant of the fact that they cannot pay it off. Then, you grab the house. This is called 'Lending to Foreclose.' In a rising real estate market, especially if you're dealing with a deed in trust state, the urge to do this must be irresistible.

Let's say you value someone's house at $200,000. You find out he has a mortgage in foreclosure and credit card debt out the wazoo. He owes, perhaps, $120,000. You lend him the money, charge him a high interest rate, say 15%, which is lower than his credit card rates, charge him 8-10 points, factor the points into the loan amount, and give him a one-year balloon based on a 30 year payout. When he can't make the payment, wham! When the balloon comes due and he can't get refinanced into a product he can handle because interest rates went up in the interim, wham!

Posted by: bart at August 3, 2005 1:44 PM

many people of modest circumstances are losing their houses due to excessive equity withdrawl. many other people of modest circumstances are being enticed into signing up for onerous loans to buy a house they won't be able to hang onto. when a bank seems "generous" it's usually a sign that they are about to gobble you up, kind of like a great white acting affectionate to a surfer.

Posted by: cjm at August 3, 2005 1:53 PM

There's too much savings built up--gotta lend it somewhere.

Posted by: oj at August 3, 2005 1:56 PM

"Lending to Foreclose."

It may happen sometimes somewhere, but it has got to be as rare as hen's teeth in sub-prime loans.

Lets see you make a loan on a house in a bad neighborhood to people with a poor credit rating. They default, and you take back the house. It will have been trashed and you run the risk of crackheads taking over or of having the place gutted for plumbing and wiring. Now you own a run down house in a bad neighborhood. How the devil are you going to make money on that?

Send bank officers out with hammers and saws to fix the places up for resale? I don't think so.

Posted by: Robert Schwartz at August 3, 2005 4:55 PM

If Bart was right, there would be a nice little business to be had stepping in right ahead of the foreclosure and buying the house for slightly more than the debt.

Posted by: David Cohen at August 3, 2005 5:21 PM

rs: a crack house in south central is worth more than a mansion in atlanta.

Posted by: cjm at August 3, 2005 5:39 PM

David, there is. Lots of people, myself included, have done just that.

Robert, people lend on equity. They look at LTV, not creditworthiness. If I get a property for $120,000 which I can put $20,000 into, and then I sell it for $200,000, I'm way ahead.

Posted by: bart at August 3, 2005 8:12 PM