Report: Subprime Loans DECREASE Home Ownership Rates
The Center for Responsible Lending (CRL) released a report yesterday demonstrating that subprime lending decreases homeownership. Their study found that only 9% of subprime loans are extended to first-time buyers, while 15% of all subprime loans end in foreclosure. This finding undermines claims that, whatever its faults, subprime lending allows more Americans to own homes.
Mike Calhoun, the president of CRL, testified before the House Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit yesterday. His line of the day: "Homeownership has been thwarted rather than supported. There's a difference between increasing access to home loans and expanding home ownership."
Mr. Calhoun's proposed regulatory approaches:
- Finalize regulatory guidance that would hold depository institutions accountable for considering borrowers' ability to repay loans.
- Require the Federal Reserve Board to use its authority to strengthen protections on all subprime loans.
- Strengthen existing bankruptcy law to help homeowners that have already been harmed by abusive subprime loans.
- Hold all industry players accountable for their actions.
The issue is not subprime lending per se: there has always been and (let us hope) always will be subprime lending. The problem has been with the sorts of complex, risky loans being advanced to much of the subprime market. Back when subprime lenders simply made conventional loans with slightly higher interest rates to those with poor credit, we did not have anywhere near this problem.
March 29, 2007 9:09 AM | Reply | Permalink
Maybe you could answer this question for me?
Is their a correlation, between hot areas of growth, for example Vegas, Phoenix, etc. and where most of the subprime loans are located.
If so would this be a factor, to counter Bushes claim, that the Tax Cuts, were the stimulating source of our Economy? What impact on growth did these subprime practices have?
March 31, 2007 8:26 PM | Reply | Permalink
This appears to be a microcosm of what lending does to our economy. I believe this is evidence that lending for profit, with interest, doesn't help people at all. Though it might not be obvious, the ultimate consequence is too high of a price for the short term gain given to the borrower. Our problem is that we don't see the connection on a macro level.
Jim Anderson
The Truth About Credit
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April 2, 2007 7:44 AM | Reply | Permalink
The correlation is more complicated than that. Subprimes were most common in two sorts of areas: areas of high population (and economic) growth and areas of low or negative growth. In the former areas they seem to have served as a vehcicle for speculators and for homeowners seeking to tap surging home equity via risky Re-fis and HELOCs (perhaps to pay off credit card debt, student loans etc.). In the latter areas they were also used to tap home equity by people in difficult circumstances, and also by people with low incomes trying to buy houses (often at the urging of urban renewal agencies seeking to reverse blight in downscale neighborhoods). It's mostly the latter areas where the meltdown is concentrated. Miami, for example, has a large percentage of subprime loans, but a fairly modest default rate. Cleveland and Detroit on the other hand are leading the nation in their subprime foreclosures.
April 2, 2007 9:20 AM | Reply | Permalink
I dont think you can eliminate lending or avoid interest rates. They play an important role in the ecnnomy. But I do think that an unregulated lending is a problem
Another problem, I have noticed, is the prevalence of mortgage products without mandatory escrow accounts to account for taxes and insurance. Invariably, depending on the location, sub-prime borrowers dont have enough money for taxes and insurance and when the introductory rates cease and higher rates kick in - they end up getting caught in a catch 22. And that is if nothing else goes wrong!!!
April 4, 2007 11:04 PM | Reply | Permalink
From a pragmatic standpoint, you are probably correct that you cannot eliminate lending and interest rates today, but not because they play an important role in our economy. It is because we are addicted to debt.
The contribution interest makes to our economy is to drain the value of people's labor, and oppress the indebted by transferring their wealth to the banks. Lending should be an act of charity, not a for profit business. A study of economic history will show this to be true. (Our founding fathers recognized this - see "A Plea For The Constitution" by George Bancroft) There was intense debate in the forming of our Constitution about giving the Federal Government, or anyone, the power to create a fiat currency. It weakens the country. Anytime banks begin controlling the money supply, and use fractional reserves, the monetary systems deteriorates until it fails. This is because the banks siphon the value out of the economy when they do this, and the government participates by using the hidden taxation of inflation.
Lending and interest does nothing good for our economy, it destroys it.
Jim Anderson
The Truth About Credit
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April 5, 2007 1:50 PM | Reply | Permalink
Re: There was intense debate in the forming of our Constitution about giving the Federal Government, or anyone, the power to create a fiat currency.
Unless you abolish money entirely (good luck) someone is going to issue currency. That's been true since King Croesus minted his first drachma. And all in all I think it's better to have the Feds in charge of the money supply than to go back to the days when banks, cities and others printed their own script, which was often worth no more than the paper it was printed on.
April 5, 2007 2:01 PM | Reply | Permalink
No, silly. a Fiat Currency is different than one backed by value. A Fiat Currency is one that is based on the a government decree that it is money, regardless of its actual value. This allows the banks and the government to "print" more money any time they need it, and results in inflation. Read more about it here.
Here is a famous quote referring to this. "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs."—Thomas Jefferson
Jim Anderson
The Truth About Credit
Facebook ProfileApril 5, 2007 5:55 PM | Reply | Permalink
Look at it this way - if Org A were a charity and they loaned money to individual B who used it for agriculture - he had surplus grains which he sold for a good profit - he repays the loan to Org A. But he is getting a benefit greater than his effort because before he received the loan, his effort alone was not sufficient to get him a profit - on the other hand, with Org A lending money to individual B, perhaps individual C doesnt have a chance to put his labors and talent to productive use.
If on the other hand, you are suggesting that only charity organizations loan and collect interest for the use of the money - that would be feasible only under some sort of regulation and would seriously hamper productivity - how many organizations do you think would undertake such lending and what incentive does a person or an organization (filled with people) have to loan money! Again, lots of talents and resources would be wasted!
Lending is actually very good for the economy because of the efficient use of resources and talent. Without lending, there would be no nexus between capital, labor & productivity. This would put us way back in term of economy. On the other hand, fiat money kind of fits your arguments. But again, the problem is far more complex to attribute to fiat money alone.
April 6, 2007 12:33 PM | Reply | Permalink
Re: No, silly. a Fiat Currency is different than one backed by value.
Um, "value" is a myth. You won't find it in physics or chemistry text. There is no "valueon" particle or field the same way there are electrons and photons and so forth. "value" exists only by human fiat. Gold, for example, is really a rather worthless metal, apart from its aesthetic uses (which again are quite subjective and limited to humankind). A gold Krugerand and a paper $100 bill have value ONLY because we agree they do. There is no objective non-artibrary means of exchange in existence. "value" is all in our minds.
April 6, 2007 6:10 PM | Reply | Permalink
That is beside the point... Gold can be a control. It keeps us from printing unlimited amounts of money, which causes inflation. It doesn't have to be gold. The point is we have a system that allows the one who controls the money supply to transfer wealth to themselves. A gold standard helps control that.
Jim Anderson
The Truth About Credit
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April 8, 2007 9:19 AM | Reply | Permalink
I couldn't disagree more.
I came to this conclusion after looking at what is in the Bible. For example, Look at how Israel recovered from the Babylonian captivity, and how their sense of values in combination with their economic discipline eliminated poverty among them and built a strong but tiny nation.
Lending was not provided for business purposes. They didn't borrow to build a business. They lent to those who were poor and didn't expect to be repaid. Their value system though was such that the poor person would repay the loan if at all possible. They lived within their means, and they stored up wealth for bad times, and they were generous with what they had. If they had to accept charity, they always paid it back. It was socially expected, but not required because it was a means of purchasing slaves. To unforgiving lenders of the day, they literally became slaves to repay loans. So Nehemiah realized the economic destructiveness of that and outlawed it. We don't have those values today. But, we could if we wanted to. We think our selfish ways are better.
Jim Anderson
The Truth About Credit
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April 8, 2007 9:28 AM | Reply | Permalink