WSJ Online: The United States of Subprime

From today’s front page:

Subprime mortgages were initially aimed at lower-income consumers with spotty credit. But the data contradict the conventional wisdom that subprime borrowers are overwhelmingly low-income residents of inner cities. Although the concentration of high-rate loans is higher in poorer communities, the numbers show that high-rate lending also rose sharply in middle-class and wealthier communities…

The data also show that some of the worst excesses of the subprime binge continued well into 2006, suggesting that the pain could last through next year and beyond, especially if housing prices remain sluggish. Some borrowers may not run into trouble for years.

“We had an aggressive home-mortgage industry trying to get people into homes they couldn’t afford at a time when home prices were very high. It turned out to be a house of cards,” says Karl Case, an economics professor at Wellesley College. “We’re in the early stages of the cleanup.”…

The data suggest that financial suffering is likely to persist in many parts of the U.S. where subprime lending had surged. Many loans at risk of going bad have not yet done so. As much as $600 billion of adjustable-rate subprime loans, for example, are due to adjust to higher rates by the end of 2008, which means that more and more borrowers are likely to fall behind.

Handy Interactive map.

P.S. Notice how the WSJ’s analysis conflates the income of the borrowers with the income level of the communities. But all kinds of evidence, including my own (limited) analysis of recent sheriff’s deeds, indicates that fifty percent or more of the homes now being foreclosed in Cleveland are owned by investors, not residents. Many have a history of prior foreclosure; i.e. they’ve been bought cheap by speculators at or after sheriff’s sale, then resold as rentals with another round of inflated appraisals and subprime financing, only to go into default within a couple of years — the initial “investors” having pocketed the cash and moved on.

There’s no reason to think that this vicious brand of entrepreneurism has ended or even slowed in Cleveland in recent months. Take a look here, or here (see page 2), or here. (That last link is run by two individuals recently indicted for mortgage fraud by the county prosecutor.) Or just check out the “Get Rich In Real Estate” infomercials next time you’re up at 2 am.

Proposals to address predatory subprime lending as a consumer protection problem — including Governor Strickland’s proposed “compact” — unfortunately ignore this very big component of the phenomenon that continues to devour communities from Hough to Maple Heights. Indeed, simply labelling the problem “predatory lending” obscures the the fact that Countrywide, Argent, Wells Fargo et al aren’t just victimizing unfortunate or ignorant homebuyers, who may or may not share the blame. They’re also financing a whole separate industry of predatory real estate speculators, who will continue the process of equity stripping, abandonment and neighborhood destruction even if every owner/occupant facing foreclosure gets a new deal.

(Cross-posted from Cleveland Diary)

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