Truthmatters
Diamond Member
- May 10, 2007
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- #41
NCRC COO Addresses Attendees at NAACP?s 99th Annual Convention
Origins of the Subprime Crisis and Need for Intervention
Many observers argue that the subprime market’s foreclosure crisis is a result of moderate-income minority borrowers getting into trouble by over-extending themselves to purchase a home. But when you hear those arguments, consider these words of the rap group Public Enemy, “Don’t believe the hype”!
First, most subprime loans originated for at the past decade were for refinancing homes. Second, according to the Center for Responsible Lending, less than 10 percent were for first time homeownership. These statistics together mean that much of the subprime market damage was due to mortgage refinancing schemes that took advantage of financially vulnerable families who already owned their own homes and had already accumulated equity in their properties. Subprime lenders targeted those consumers to structure financing deals that literally flipped the equity away from their owners. And, for first time homeowners, they simply were exploited to the limits of their financial vulnerability.
Much of the resistance from policy makers to assist homebuyers going to foreclosure is the concern about creating “moral hazard”. This idea implies that bailing people out of problems that resulted from bad or risky decisions may encourage them to make those bad decisions again.
Let’s examine the bad decisions made by millions of families caught up in this foreclosure crisis.
They made the bad decision to trust their broker to be honest and help them secure the best loan for their circumstances;
They made the bad decision to trust their lender would offer them a product that was affordable to them;
They made the bad decision to trust the appraised value of their home was legitimate;
They made the bad decision to trust the regulatory supervision of the financial institutions to protect their rights as consumers;
In short, borrowers in the subprime market made the bad decision to trust that they would be treated with the same respect and protections as is the norm for the overwhelming majority of Americans who enter into homeownership through the prime market.
A moral hazard? But not in the classical economic meaning.
Origins of the Subprime Crisis and Need for Intervention
Many observers argue that the subprime market’s foreclosure crisis is a result of moderate-income minority borrowers getting into trouble by over-extending themselves to purchase a home. But when you hear those arguments, consider these words of the rap group Public Enemy, “Don’t believe the hype”!
First, most subprime loans originated for at the past decade were for refinancing homes. Second, according to the Center for Responsible Lending, less than 10 percent were for first time homeownership. These statistics together mean that much of the subprime market damage was due to mortgage refinancing schemes that took advantage of financially vulnerable families who already owned their own homes and had already accumulated equity in their properties. Subprime lenders targeted those consumers to structure financing deals that literally flipped the equity away from their owners. And, for first time homeowners, they simply were exploited to the limits of their financial vulnerability.
Much of the resistance from policy makers to assist homebuyers going to foreclosure is the concern about creating “moral hazard”. This idea implies that bailing people out of problems that resulted from bad or risky decisions may encourage them to make those bad decisions again.
Let’s examine the bad decisions made by millions of families caught up in this foreclosure crisis.
They made the bad decision to trust their broker to be honest and help them secure the best loan for their circumstances;
They made the bad decision to trust their lender would offer them a product that was affordable to them;
They made the bad decision to trust the appraised value of their home was legitimate;
They made the bad decision to trust the regulatory supervision of the financial institutions to protect their rights as consumers;
In short, borrowers in the subprime market made the bad decision to trust that they would be treated with the same respect and protections as is the norm for the overwhelming majority of Americans who enter into homeownership through the prime market.
A moral hazard? But not in the classical economic meaning.
