Friday, March 18, 2005

Subprime Defaults Rise, Cracks Appear

We hear a lot about the efforts to make home loans available to low income borrowers. I have said before that in the current market the result is likely to be an over-valued home being sold to someone who can't afford it.

We can expect this story to be repeated often in the coming years. "American dream, Pennsylvania nightmare" in the Philadelphia Inquirer shows that even in a state with above average finances, the subprime programs are harming many communities.

"For high-rate subprime loans..11.94 percent foreclosed each year..Two of every five mortgages made in Philadelphia by high-interest "subprime" lenders in 1998 and 1999 had resulted in defaults and foreclosures by 2003."

The article points out the financial trickery being employed. "Traditionally, the fear of losses kept banks from lending to people with bad credit. Since big banks have cut back on mortgage loans..Wall Street investors have stepped in, there is less risk for loan originators and brokers, because loans are quickly sold to other investors." Separating lenders from default risk worked in the boom but will haunt us in the slowdown.


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