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Thursday, February 01, 2007

Robert Reich: Problems from Sub-Prime Loans

Is it better to have had a house and lost than to never have had a house at all?:

Home Wreckers, by Robert B. Reich, The American Prospect: Last year, more than a million families lost their homes to bank foreclosures -- a 42 percent jump over 2005... That's still a small percentage of homeowners. But it marks a huge increase in foreclosures -- especially among recipients of what are known as sub-prime loans. These are borrowers with weak credit ratings. They're mostly poor and minority, or young first-time home buyers. All have stretched their budgets to the limits to afford a home. Unfortunately, we're likely to see even more of them lose their homes this year.

A few years ago, banks were awash in money. They were eager to give mortgages to almost anybody who applied. And investors were all too happy to get high yields from mortgage-backed securities. The result was an explosion of sub-prime lending -- along with all sorts of gimmicks making it easy to meet the payments...

Now it's time to pay the piper and the piper's raising rates and calling in the loans. ... The economy is perking up, and adjustable-rates are increasing. ... Some families won't be able to afford the additional payments. ... According to a report issued last month ..., one in five sub-prime loans made in the past two years will end in foreclosure. That's about 2.2 million borrowers who are likely to lose their homes.

Who knows where it will end? Only one thing is clear. Mortgage lenders and investors will come out okay. At worst, they'll have properties they can resell. But meanwhile, millions of families who thought they had found the American dream are ending up in a nightmare.

The anything-goes lending practices of the past few years has made many creditors and investors very rich. But it is taking a large toll on the poor and near-poor. The responsibility of bank regulators isn't just to maintain the solvency of the financial system. It’s also to help Americans buy homes -- and keep them.

I think the Fed could put some thought into whether its regulation of mortgage markets could have performed better, particularly if inevitable swings in the market set inexperienced buyers up for a near certain loss.

    Posted by on Thursday, February 1, 2007 at 02:25 AM in Economics, Housing | Permalink  TrackBack (0)  Comments (20)

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