NationStates Jolt Archive


Who says subprime is dead?

Neu Leonstein
22-11-2008, 13:02
http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm
FHA-Backed Loans: The New Subprime

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more

As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

[...]

For mortgage lenders during the boom years, creating subprime mortgages by lending to people who shouldn't have gotten any money was a good business because they could sell the mortgages on. That allowed them to make a commission and carry very little risk for themselves. Because subprime loans would charge more interest, and financial engineers thought they could take the risk out of these loans, commissions were actually greater for subprime loans than for the good ones.

That's over now, but the brokers have found themselves a new business: using the FHA (http://en.wikipedia.org/wiki/Federal_Housing_Administration) to take the risk off their books and make sure there still are customers.

There are essentially two ways of thinking about this: you can think the brokers are evil for pawning this risk off to the government, or you can think that the FHA is essentially doing precisely what it was set up to do - with the risk to the taxpayer being the price FDR was ready to pay in the 30s, and politicians seeking to use the program to stop foreclosures and allow people to stay in their homes are ready to pay now.

So what do you reckon? When people talk about putting a bottom on the housing market by making finance available to new buyers and especially offer refinancing to people in strife now, there is obviously an element of risk involved - you're lending to people who are in a sorry financial state. Are you happy with the government taking this risk?
Rejistania
22-11-2008, 15:21
I am not happy about this. This is just spending taxpayers' money to gamble!
Hurdegaryp
22-11-2008, 15:29
I can't say I'm surprised. This kind of thing is actually pretty much par for the course.
Non Aligned States
22-11-2008, 15:34
Here we go again it seems.
Katganistan
22-11-2008, 15:37
I think Shakespeare was misquoted. It should have been, "The first thing we do, let's kill all the BANKERS."
Neu Leonstein
23-11-2008, 00:09
I am not happy about this. This is just spending taxpayers' money to gamble!
Yeah, but wasn't that always the intention of the FHA program? Back in the 30s, and again today, banks have no money to lend to people with the slightest blemish on their record. Hell, many basically don't lend to perfect borrowers right now. This leads to a continuing slump in the housing market because it both increases foreclosures (= more supply) and means potential buyers don't get finance (= less demand). To stop that, the FHA was created to take the risk from lenders and transfer it to the government, so that lending picks up and the market stabilises. When people talk about the New Deal, this is precisely the sort of thing that it is made up of.

So though the article is obviously written in such a way as to be critical of the lenders themselves - aren't they simply using the FHA system as it was meant to be used, the flaw of risk being transferred to the taxpayer included?

I think Shakespeare was misquoted. It should have been, "The first thing we do, let's kill all the BANKERS."
http://forums.jolt.co.uk/showpost.php?p=14231732&postcount=28

And besides, this is probably more the work of mortgage brokers than bankers.
Saerlandia
23-11-2008, 00:14
I want to be outraged, but I can't help but be impressed both at their initiative and their sheer gall in pulling off a stunt like this.
The Romulan Republic
23-11-2008, 00:22
:headbang::headbang::headbang:

I know little about economics, but if these people are taking us right back down the same path that lead to where we are now, what more is their to say?
Wilgrove
23-11-2008, 01:00
If idiots keep buying them....people will keep selling them.
Lunatic Goofballs
23-11-2008, 01:02
http://sounds.wavcentral.com/movies/austin/evil_angry.mp3
Quarkleflurg
23-11-2008, 01:13
another good example of why capitalism does not work.

were in the middle of a damn crisis of there making so they just start the same process over again under a new name.

how much more do we have to put up with before these inherently evil people are made to stop abusing there positions
Exilia and Colonies
23-11-2008, 01:14
another good example of why capitalism does not work.

were in the middle of a damn crisis of there making so they just start the same process over again under a new name.

how much more do we have to put up with before these inherently evil people are made to stop abusing there positions

Stop giving them free money would be a good start.
Saerlandia
23-11-2008, 01:15
another good example of why capitalism does not work.

I think you missed the bit where they were only able to do this due to state-supplied mortgage insurance.
Quarkleflurg
23-11-2008, 01:24
Stop giving them free money would be a good start.

I would agree with that, they made this economic bed and should be allowed to lie in it.


and no I didn't miss that bit about this problem being financed by the state, in my eyes the bankers have been given a lifeline and are squandering it by recreating the problem that got us into this mess, the state should never have allowed them to do that but is so attached to a free market principle that it wont control them.
Saerlandia
23-11-2008, 01:25
and no I didn't miss that bit about this problem being financed by the state, in my eyes the bankers have been given a lifeline and are squandering it by recreating the problem that got us into this mess, the state should never have allowed them to do that but is so attached to a free market principle that it wont control them.

True. But the state giving money to the banks isn't a free-market action, so pinning this latest trick on the free market, when it is only possible due to state intervention in the market, is wrong.
Quarkleflurg
23-11-2008, 01:42
True. But the state giving money to the banks isn't a free-market action, so pinning this latest trick on the free market, when it is only possible due to state intervention in the market, is wrong.

I appreciate that the action of giving money to the banks was a state one but the bankers themselves operate on the profiteering free market principle and the state effectively handed them a blank cheque without putting any forms of control on them.

the market needed freeing up with state money thanks to the bankers, lending is an essential part of the current market system so funds were needed to spark this off again but now the state is probably going to suffer because it gave them money without rules, if the state had underwritten the costs like it has but imposed greater control on who the bankers could make these loans too there wouldn't be a new problem developing
Neu Leonstein
23-11-2008, 01:53
the market needed freeing up with state money thanks to the bankers, lending is an essential part of the current market system so funds were needed to spark this off again but now the state is probably going to suffer because it gave them money without rules, if the state had underwritten the costs like it has but imposed greater control on who the bankers could make these loans too there wouldn't be a new problem developing
I don't think you realise why the FHA exists. It was created precisely to encourage mortgage brokers (not the same as "bankers", keep that in mind please) to make these loans to at-risk people.

Yes, the state is being loaded up with questionable, low-quality debt. But that's what it offers the FHA for, because it was felt that it was better for the state to absorb this risk than for there not to be any loans available. The entire philosophy of the New Deal was kinda about this idea - the state is big, rational and less vulnerable than private entities and should therefore jump into the breach.

That mortgage brokers and banks have found a way of making money while allowing the FHA to play its intended role is kinda irrelevant to whether or not you think the state, ie the taxpayer should be taking on this extra risk.
Non Aligned States
23-11-2008, 03:10
True. But the state giving money to the banks isn't a free-market action, so pinning this latest trick on the free market, when it is only possible due to state intervention in the market, is wrong.

Technically, you could say it is a free market action, because it's gotten to the point where the free market controls the state.
Shofercia
23-11-2008, 09:31
Great Post NL. See this is why I was AGAINST the bailout in the first place! BTW, if you guys actually read the bailout bill, you'll find over 100 billion, out of the 700 billion, spend as PORK! Does this make you want to:

A. Introduce someone to your little friend?
B. See above
Saerlandia
23-11-2008, 21:48
Technically, you could say it is a free market action, because it's gotten to the point where the free market controls the state.

No you couldn't. State intervention in the market makes it less free, no matter who is instigating that action. The market itself is incapable of controlling the state, being an emergent property of individual actions. You could, on the other hand, say that large businesses control the state, and to a significant degree you'd be right.