Arnold Kling  

Subprime Daily Briefing, Dec. 27

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A Contrarian Op-ed

Rob Asghar writes,


I blame the borrower...

Pricey and posh Orange County office complexes housed half of America's 20 leading subprime lenders. I occasionally asked mortgage executives what explained this coincidence. The question puzzled them. They lived in ocean-view Newport Beach homes. Why would they want to work anywhere else? The subprime industry chose to ignore economic and efficiency factors that had driven so many other businesses far from the costly California coast.

Another peculiarity was compensation. Top salespersons at companies such as New Century Mortgage Corporation often drew astronomical seven-figure salaries (and perks such as first-class trips to Spain and Germany). Capped teeth and breast implants trumped a work ethic for many who aspired to make it in subprime sales. Their counterparts in prime lending were lucky if they reached six figures.

...By and large, the lenders were no less irresponsible than the borrowers who aspired to live a bigger life than they could afford. But all of the strange creatures of subprime -- the overpaid loan officers, bloated budgets, lavish Las Vegas "planning meetings" and the like -- were nurtured by consumers who believed that incurring massive debt was the secret to becoming a rich landholder (or boat owner).


I blame Patri Friedman and Mike Moffatt. (Just kidding)

On a separate but related note, John M. Berry writes


As Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong, told an audience in Shanghai on Dec. 12, less than you might think.

The economic repercussions of the housing bust and mortgage woes are limited to a great extent because less than half of American families own a home with a mortgage, he said. Almost a third of all families rent their house or apartment, almost a fourth own and have no mortgage and the vast majority with a mortgage are current in their payments.

...Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3 percent -- own a home in foreclosure, he said.


(From Mark Thoma via Tyler.)

Consider also the political implications of this. How much sympathy are the renters, free-and-clear owners, and non-defaulting borrowers going to have for the subprime borrowers? I suspect that those trying to make hay out of this politically are going to wind up with something much less sweet-smelling in their pitchforks.


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COMMENTS (3 to date)
Chuck writes:

"the overpaid loan officers, bloated budgets, lavish Las Vegas "planning meetings" and the like -- were nurtured by consumers who believed that incurring massive debt was the secret to becoming a rich landholder (or boat owner)."

I assume that by excerpting this you are saying that in your view, in some ways, this is a valid argument?

I dispute this notion because one has to step back and ask who is the *professional* in this transaction, the borrower for a private home or the lender? Who has training in finance and is actually getting paid to safe guard the best interest of the stockholders/depositors whose money they are lending?

To put it another way, it is the least experienced and educated person in the whole arrangement who deserves the most blame?

Chuck,
I am planning to become a homeowner. I will appreciate if you could tell me what education/profession training I would need in order to avoid overpaying/speculating in the housing market, ensuring that I live within my means, and not taking unnecessary risk (such as signining up for the teaser rate mortgage without any downpayment).

Patri Friedman writes:

If people put their borrowed money into the stock market, instead of spending it, there wouldn't be a problem. The decline in the paper value of their house would be irrelevant, since they wouldn't need to sell it - they could just sell some stock to help pay the mortgage.

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