Subprime Mortgage Myths

Yuliya Demyanyk, a senior research economist at the Cleveland Fed, has done a fascinating job debunking some of the bigger memes floating around main stream media outlets about the Subprime Mortgage Market. Her Economic Commentary piece here distills the more germane information found in the research published here. Her bottom line is that it was not so much the meltdown of the subprime market with its components of interest rate resets, declining underwriting standards, and declining home values that contributed to the systemic problems creating the big financial meltdown. She argues that it was the interplay between that market and the securitization process, lending and housing booms, and leveraging

One of the biggest myths surrounding the subprime market is that subprime mortgages are given solely to borrowers with impaired right-wingcredit. Demyank and her fellow reseacher Van Hemmert found that many folks actually wound up in certain subprime loans not because of their credit history (which was not impaired) but the fact that certain loans were only available in the subprime market because that was the type of loan demanded by the securitization market.

But mortgages could also be labeled subprime if they were originated by a lender specializing in high-cost loans—although not all high-cost loans are subprime. Also, unusual types of mortgages generally not available in the prime market, such as “2/28 hybrids,” which switch to an adjustable interest rate after only two years of a fixed rate, would be labeled subprime even if they were given to borrowers with credit scores that were sufficiently high to qualify for prime mortgage loans. This is very good for a credit repair company with money-back guarantee because they get clients that are above prime for subprime rates.

The process of securitizing a loan could also affect its subprime designation. Many subprime mortgages were securitized and sold on the secondary market. Securitizers rank ordered pools of mortgages from the most to the least risky at the time of securitization, basing the ranking on a combination of several risk factors, such as credit score, loan-to-value and debt-to-income ratios, etc. The most risky pools would become a part of a subprime security. All the loans in that security would be labeled subprime, regardless of the borrowers’ credit score.

Mortgage originators may have directed some folks to these loans based on the characteristics of the loan, not necessarily the characteristics of the buyer.

A second myth debunked by the research is the idea that subprime mortgages were used to promote home ownership. By slicing and dicing the lending data base, the two researchers found some interesting numbers as they relate to overall homeownership statistics.

The availability of subprime mortgages in the United States did not facilitate increased homeownership. Between 2000 and 2006, approximately one million borrowers took subprime mortgages to finance the purchase of their first home. These subprime loans did contribute to an increased level of homeownership in the country—at the time of mortgage origination. Unfortunately, many homebuyers with subprime loans defaulted within a couple of years of origination. The number of such defaults outweighs the number of first-time homebuyers with subprime mortgages.

Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership.

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I read the news today, OH BOY!

If I was in need of a mini-vacation then I have to tell you that reading the latest Vanity Fair was not going to do it for me.  There were three articles that brought me down to earth with a thud!  One was the account by Christopher Hitchens who voluntarily underwent water boarding and concluded that it really is torture.  I think the most valuable quote I got from the article was bolded and oversized and said  “If waterboarding does not constitute torture, then there is no such thing as torture.”

Hitchens was one of the biggest drummers in the drumbeat to the Iraq War. This article is about four pages and has some very close up and big pictures showing the manner in which George Bush has defined the “American Way’ to the world.  You can also find a video of his experiences on youtube.  It is not for the faint of heart and I’ll let you google it.

The second article was a dissection of Hillary’s campaign.  This was a depressing walk down the first six months of  the year.  My favorite part of the article was this bit:

“The air began to go out of Barack Obama’s balloon on the night of March 13, when ABC News ran clips from inflammatory sermons by the pastor from an Afro-centric church in Chicago, in which Reverend Jeremiah Wright twisted “God Bless America’ into “God Damn America.”  Then on April 11, less than two weeks before the Pennsylvania vote, Penn read comments on the Huffington Post from a closed door speech Obama had given at a San Francisco fund-raiser.  He seized on Obama’s characterization of small-town, working class Pennsylvania voters as “bitter’ because of economic distress and disposed to cling to “guns or religion.”

This was the turning point that came a little too late for Hillary but still is turning on Barrack Obama.  Of course, after we were told that this was NOT the Jermiah Wright Obama knew, he moved on.  After the FISA vote today, I’m sure there are a lot of folks saying this is not the Obama they thought THEY knew.  Obama has now decided that granting Telecom companies immunity for conspiring to spy on American citizens is acceptable. Perhaps this version is not the IMMUNITY GRANT he once knew and swore he’d filibuster.  He voted for it. Hillary stood by her convictions and voted against it.

This came after a week of selling-out on so many issues so noticeably that we caught a rare morsel of the frustration of black activists on primetime with Jesse Jackson’s poignant but crude remark.  He wanted to “cut off Obama’s nuts” for “talking down to black people on morality” without mentioning the bigger issues of many young black men who grow up in neighborhoods filled with violence, horrid schools, and Mt. Everest-level unemployment rates. I’m pretty sure NARAL felt that way too when Obama implied that women will seek unnecessary third term abortions just because they feel a little ‘blue’.  However, nice ladies talk about removing men’s private parts away from live microphones

The final article was about the Bear Sterns bailout.  This was again pertinent since we’re now talking about multi-million dollar bailouts of Freddie Mac and Fannie Mae.  Ben Bernanke has been on the stump for expanded regulatory powers of the Fed in the mortgage and mortgage derivatives markets.  Afterall, if they’re stuck with these nonperforming assets on the tax payer’s books, they might as well have the ability to stop these demons of greed before they strike again. This while more foreclosures are imminent and the illustrious Secretary of the Treasury says there’s no way to bail out the poor unfortunates stuck into risky mortgage vehicles because banks really wanted some high points.  This is going to be no solace to anyone shortly.  Even if you are making your mortgage payment, it only takes a few neighbors not paying to put your home’s equity on a downward spiral.  I don’t know about you, but I’ve heard NADA, zilch, ZIP, NOTHING about this big problem from either of the presidential candidates.  Probably because Obama’s finance committee and big donors are mostly the folks that created this problem and well, let’s face it, I’ve never met a Republican willing to go mano-y-mano with the American Banker’s Association.

All of this after I woke up to the news that Iran had just successfully tested a new long range missile capable of hitting Israel AND carrying a nuclear warhead.  Of course, the Russians and Chinese, those folks whose sudden turn to capitalism has made them friends of Dubya, had something to do with this.  As far as I can tell, once a totalitarian regime, ALWAYS a totalitarian regime. But you know, it’s more important that George gets to wave from the stands of the Olympic Opening ceremonies rather than stand for anything like, NOT throwing folks in prison for disagreeing with the government.  OH, right, I forgot, that’s what could happen with the FISA thing and Obama voted for it and McCain just didn’t think it significant enough to show up and do anything about.  Plus, Obama is just looking forward to getting elected so he can have a kumbayah moment with these guys. Yeah, that’s going to work real well.  Perhaps he can send Jesse and Jeremiah over there to soften them up a bit.

So, this is the best our democracy offers us–two men who have no compass to point out what is right or wrong.

Two men who will say and do anything to be president while the newspapers are filled with situations outlining serious problems that need solutions.  Next time I feel like a good summer read, I think I’ll find a good comic book.   Maybe I’ll look for some thing from Japan with one of those Ninja warriors that takes on all the injustices of the world and lives by the samauri code.  Maybe we can find one that will fight for truth, justice and the American way.