Over at The Bellows, Ryan Avent is still trying to pull apart local variations in the subprime problem:
Calculated Risk notes that Georgia’s problem loan rate is higher than Florida’s, despite the fact that Atlanta’s home price trajectory looked downright anemic during the boom. What’s with that?
One reason might be that Georgia led the nation in Interest Only loans. Another might be that lenders are able to foreclose quicker in Georgia..
Ok, but why so many interest-only loans? Given the (relatively) low prices in the state you might expect that fewer buyers would need or choose the IO option. But then, there doesn’t appear to be much correlation between prices and IO percentages across the nation. Looking at some of the nation’s more expensive markets, you see that the Bay Area has a huge IO problem, while the New York area is on the low end of the scale. Weird. I’d love to see an explanation of the underlying forces here.
My guess at the primary reason behind the difference is that mortgage brokers are regulated at the state level. States with laxer regulations (or as conservatives would have it, better regulatory capture) got more low-quality loans. This dovetails with the fact that many of the most problematic loans hit trouble even before their teaser rates reset, meaning that there was never any realistic possibility that the borrower would repay the money.
Mortgage brokers? Don't you mean, maybe, loan officers (who actually write the terms of mortgages)? Maybe you mean the overall regulation of home lending practices, which also varies by state--that would make more sense to me. But state regulation doesn't vary all that much. Interest-only loans are still allowed in every state (last I checked).
Tell Ryan to look at the local immigrant communities. The WSJ had an article recently about how a legal Brazilian immigrant in the Bay Area was peddling mortgages in the local Brazilian immigrant community. One illegal immigrant never even made the first payment on her mortgage. She was later offered legal residency and immunity by the feds for testifying against the mortgage loan officer.
Wait a minute. You're saying state regulations were effective in limiting the problem loan rate? Did I accidentally click Ezra's blog instead of Megan's?
Taking an extended take on Fred's comment, I wonder, to what extent do the local demographics and cultural dynamics play into this problem?
I agree with Fred. Southern California has seen a lot of immigrants get hit with this.
I think you are barking up the wrong tree:
According to the Joint Center for Housing Studies of Harvard University, "Accounting for nearly two-thirds of household growth in 1995 to 2005, minorities contributed 49 percent of the 12.5 million rise in homeowners over the decade." . . . "Without the sudden expansion of subprime lending, most of these homeowners would have been denied access to credit."
Subprime growth from [$35 billion in 1994, $125 billion in 1997] $210 billion in 2001 to $625 billion in 2005 represented 20% of the dollar value of loans and 7% of originations of outstanding mortgages.
see Executive Summary, http://www.jchs.harvard.edu/publications/markets/son2006/index.htm
Further research:
"The Community Reinvestment Act of 1977 was supposed to prevent banks from taking deposits in one neighborhood and making loans in other neighborhoods. But since President Clinton took office, the federal government has largely ignored the law and instead relied on massive threats against banks to force them to loan more to favored groups. As former Assistant Treasury Secretary Paul Craig Roberts observed, 'The Justice Department is simply trying to establish by consent decree [also known in the Clinton administration as 'Alternative Dispute Resolution', or ADR] a system of racial quotas in lending regardless of credit risks." (Washington Times, page A16, by James Bovard, 01/19/99, no link available.)
From letter to the editors:
The Community Reinvestment Act has worked for homeowners and lenders
What James Bovard calls "shakedowns" in his outrageous attack on the Community Reinvestment Act ("Urban bank loan shakedowns targeted," Commentary, Jan. 19), is actually the flow of much needed credit to communities long denied by discrimination. The "payoff" dollars he refers to are mortgages for credit-worthy lower-income and minority first-time home buyers . . . (Washington Times, 01/25/99)
BOSTON, Oct. 13, 1999 (Reuters) - "The mortgage industry intends to pursue minorities with greater intensity as federal regulators turn up the heat to increase home ownership in underserved groups.
'We need to push into these underserved markets as much as we can,' said David Glenn, president and chief operating officer of Freddie Mac. Glenn made his remarks at the annual convention of the U.S. Mortgage Banker Association of America (MBA) this week.
Freddie Mac, like its sister agency Fannie Mae, is a government-chartered corporation that buys mortgages from banks and packages them into securities for investors.
In September, Freddie Mac launched a new lending program, based on research done in collaboration with five black colleges, to bring more African-Americans into the market.
The call for greater efforts to broaden minority home ownership comes at a time when interest rates are pinching mortgages. A record $1.5 trillion mortgages were granted in 1998 in a refinancing boom fueled by the lowest interest rates in nearly three decades.
The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories.
Fannie Mae recently reached an agreement with the U.S. Department of Housing and Urban Development to commit half its business to low-and moderate-income borrowers. That means half the mortgages bought by Fannie Mae would be from those income brackets. (Based on Reuters, via Builders On-Line 10/13/99, by Richard Leong)
I'm glad that influential people are taking this topic seriously. Still, the level of fraud is under-reported and an important cause of variation in local marker conditions.
Where the con was working good, they'll be much more foreclosures.
It's supposed to be very easy to foreclose in GA but much harder in NY. The ease of foreclosure may lenders / investors more willing to lend....
The Economist recently had an article on how the loosening up of mortgage standards resulted in (surprise!) loans that had a higher probability of default.
Duh, who would have thought it?
The Georgia colony was initially founded as a haven for debtors. Coincidence?