Unconventional Mortgages and Loans

In this utterly confusing article, Keith Corbett commented on the subprime mortgage and loan crisis and the possibly causes. He attempts to separate the “myths” from the “facts,” claiming that most people erroneously believe that

-Irresponsible people caused the subprime mess

- Subprime loans increased home ownership

- People bought too much house

He claims that the realities are: (1) there are multiple reasons for the subprime mortgage crisis, (2) loan marketers were too aggressive and (3) the riskiest loans went to the most vulnerable borrowers.

The reason I say this article is confusing is because Mr. Corbett claims to dispel the “myths” with his “facts,” when really they are not mutually exclusive. In fact, they are entirely related. Let’s break down his logic, shall we?

(1) There are multiple reasons for the subprime loan crisis.

- Well, no kidding. In fact, if you look at the “myths,” there are a few of them. Hence, multiple reasons. What exactly did he disprove here?

(2) Loans were marketed too aggressively. Well, that is perhaps true. But loans will always be marketed aggressively when the market is favorable, because lenders make money from lending (all things being equal), and brokers make money from closing loans. The fact that lenders may have also been irresponsible does not mean that the borrowers were not also irresponsible, or that they did not buy too much house. Perhaps it is more accurate to say that the borrowers were ignorant rather than irresponsible, but such is life (read further down for action that California is taking against loan officers who are a little too aggressive).

(3) He says finally that the riskiest loans went to the most vulnerable borrowers. What exactly does that mean? In a financial sense, “vulnerable” can only mean borrowers who were in a shaky financial situation, with either bad credit or low income compared to the loan they took out. Thus, this correlates with both lenders and borrowers being irresponsible, borrowers buying too much house for their current income.

So really all these reasons are related, and no myths were dispelled whatsoever. As for the second “myth,” Corbett claims that subprime mortgages actually decrease homeownership, which would seem to be extremely counterintuitive, while offering no evidence. Perhaps he is correct, perhaps he isn’t; but making a blanket statement without any evidence is not very persuasive.

Regardless of the reasons, the subprime lending crisis is very real. Some claim it is just the result of normal market fluctuations, which may be partially true, although not entirely. The federal government and the various state governments have been scrambling to avert complete disaster for the last few months now.

In the latest attempt at homeowner relief from the subprime mortgage crisis, California seems to have taken the most aggressive action against unscrupulous lenders. The legislation promises to eliminate many of the bonuses which are given to mortgage brokers upon closing loans, in order to deter them from lending to those who might not be making the best financial decision (i.e. “risky borrowers”).

In fact, this legislation rails against many of the reasons we spoke about above as to why there was a subprime loan crisis in the first place. Loose underwriting standards and credit bureaus looking the other way with loans that should not have been given in the first place. It also brings up an important point, indicated that putting too much of the blame on borrowers, rather than aggressive lenders, is misplaced. Supporters of the legislation claim that even sophisticated borrowers are unable to understand all the terms and ramifications of a loan. Perhaps we need more information that is considered mandatory to disclose, such as with car dealerships, in order to avert another subprime mortgage crisis?