“Housing nightmare tarnishes the American dream,” says a report from Reuters.
Meanwhile, the Financial Times quotes Martin Eakes – chief economist at Self-Help, who estimates that 2.2 million Americans could lose their homes to foreclosure.
That’s the general narrative. But now for the plot twist.
What we will soon hear more about is the way that the pain of all this falls disproportionately on Blacks and Hispanics. These two groups already tend to be poorer than white people, which means they tend to suffer more from the slings and arrows that drop down to the bottom of the wealth pyramid. They die younger. They take fewer vacations. And they pay more for credit.
And the reason is obvious. A member the Federal Reserve Bank pays the prime rate for overnight funds, so there is little risk that the money won’t be paid back. But a janitor with an old truck and a new girlfriend is a credit risk, and lenders protect themselves by charging high rates of interest.
Mr. Eakes even tells us that this will become “the largest loss of African- American wealth in American history.”
Indeed, figures that came out last week showed that blacks are nearly four times as likely to get stuck with “high cost” home loans. More than half the loans made to black people in 2005 were subprime. And 80% of them were “exploding” ARMS – adjustable rate mortgages with much higher monthly payments after the initial teaser rate period expired.
Just ask a good lender in a bad neighborhood. He will charge as much as 50% or 100% on a one-month I.O.U. And if you don’t pay on time, he might double the interest… or smash your face
Subprime mortgage lenders typically enticed customers with low initial rates. But after adjustment, the rates often shot up to 10% or more. These were the ‘2 and 28’ mortgages, where the monthly payment was put up sharply after the first two years. This not only put the borrower in a squeeze, it practically guaranteed the lender more fees when the customer came back to refinance.
Still, there is a funny side to this story. For many decades, meddlers have been urging the credit industry to provide more loans and encourage home ownership among poor people. Now they’ve gotten what they wanted. In the last few years, after lenders figured out how to make a buck at it by laying the risk onto other investors, they complied. The poor got home ownership in spades. Bad credit? No problem. Low income? Who asked? No savings? Don’t worry about it.
But now that the industry has done as it was bid, do you think it will get any thanks? Not likely. Instead, the busybodies are likely to come around with a subpoena in their hands… if not a rope.
We have no doubt that a lot of people are going to whine and moan about it. Nor do we doubt that the fools in Congress will rush in with promises of mortgage abatement and other subsidies.
Corrections involve pain… and Americans hate pain. They count on their elected representatives to protect them from it. But not all pain is bad. Suffering the pain of a small correction now, for example, can help prevent the pain of a larger one, down the line.
But who will really suffer from the subprime crisis remains to be seen. People with neither money nor savings to begin with may complain when the houses they couldn’t afford are taken away from them. But they are wiser, and probably not really too much poorer. The real pain will be felt elsewhere… where the lesson will be that much more expensive.
Markets and Money