Posted on 08/31/2007 5:17:18 PM PDT by T.L.Sink
Amid all the hand-wringing as housing markets collapse, mortgage foreclosures skyrocket, and financial markets panic, there is very little attantion being paid to the ecomomic and political decisions that led to this mess. The growth in risky "sub-prime" mortgage loans people could not really afford has been a key factor. But why were so many home buyers taking out so many risky loans and lenders arranging so much "creative" financing? Interest-only mortgages, where nothing is paid on the principal for the first few years, enable people to get started with lower mortgage payments at the outset. But it's only a matter of time before payments go up and unless their income has gone up, such borrowers can end up losing their homes. Risky mortgages were rare just a few years ago. But, by 2006, 31 percent of mortgages were of this "creative" or risky type. But why were housing prices going up so fast in the first place? A number of studies across the U.S. turned up the same conclusion: Government restrictions on building. A scrutiny of places where housing prices doubled, tripled, or even quadrupled within a decade shows that restrictions on building have been the key. Land use restrictions made the cost of land rise to the point where it greatly exceeded the cost of the homes built on the land. In short, government has been the principal factor preventing the "affordable housing" that politicians talk about so much. The Community Reinvestment Act lets politicians pressure lenders to lend to people they might not lend to otherwise - and the same politicians are quick to cry "exploitation" when the interest charged to high-risk borrowers reflects that risk. Politicians show no sign of changing. Why should they, when they have largely escaped blame for the disasters their policies fostered?
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Absolutely. We're seeing that in spades here in the Seattle area. I'm on the upside of it (except for property taxes) because I own a house on land. But the houses around here are all now being bought by "Microsoft millionaires" because hardly anyone else can afford them.
Though I agree with much of what Dr Sowell writes, the sub-prime was much more than loans for the purchase of homes beyond the borrower’s means.
Borrowers who found themselves with credit scores inadequate to qualify for Fannie/Freddie loans were helped by sub-prime Lenders. It isn’t only bad credit that has a negative impact on credit scores. Many potential borrowers had inadequate (no enough) credit - less than 3 tradelines and no mortgage history (renters) on their credit reports. Otherwise, many of these borrowers had perfect credit - never late on the limited credit they did have.
Other potential borrowers who were shut out of the housing markets because of Fannie/Freddie rules were those with credit derogs. due to past medical expenses, divorce, death of a spouse, etc. who did not have enough time to “reestablish” their credit for acceptable credit scores. Sub-prime Lenders realized that there was a need for financing for these borrowers and it was a perfectly good reason to loan to these borrowers.
There are always “market corrections” - foreclosures, short sales, etc. in the business cycle. Recovery is much sooner if the marketplace, without government intervention, os allowed to work.
Whoever wrote this knows nothing about real estate are the real estate market.
My home has doubled in value in the last four years. Happily, I paid cash for it. Since I plan to live here the rest of my days, though, it don’t really matter.
If someone is a high risk for credit then why doesn't that person just get a higher interest fixed rate loan.
Then after paying his mortgage on time for a few years, he can most likely refinance to a lower fixed rate.
Why do subprime loans also have to be interest only or even negatively amortized as most of them seem to have been?
I’m not talking about interest only or negative amortization loans. I’m talking about a 30 year amortized adjustable loan with the fixed period of 1 to 5 years, depending on how long it might take to reestablish credit, with a 1 or 2 year prepayment period for a lower interest rate at a LTV of 75% or less. Many borrowers have taken advantage of these loans rather than sell or lose their homes because they didn’t qualify for a Frannie/Freddie refinance.
Like every other pundit, Dr. Sowell, otherwise a very bright man, avoids or misses the politically incorrect fact that the subprime crisis is a result of the illegal alien hordes, equal in numbers to the state of Pennsylvania or Florida, who are the prime recipients of subprime mortgages that are going into foreclosure.
"high-risk borrowers?", "poor credit risks?", "least creditworthy borrowers?"
No, it's illegal aliens and the landlords who are exploiting illegal aliens. Until everybody wakes up to that fact the charade will continue. And you taxpaying suckers will soon be bailing out the illegals and then their bankers.
You make an excellent point that has been overlooked. Politicians in various ways have coerced lending institutions to make these loans to people who can’t afford to buy homes - or even maintain them. It’s basic economics that such higher risks entail higher interest rates. Then when the bubble bursts they start the finger-pointing and look for scapegoats.
If they would forget about “bailouts” and let the market correct itself - as it always does when government doesn’t introduce artificial regulations - the problem would be resolved naturally. But the problem is that politicians have to pretend that they “care” and are doing something to help. In the process they make a bad situation worse.
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