While it is not an insurance topic, and not of primary concern to insurance agents, the sub-prime lending issue has gotten more than its share of press – most of it negative – and is worth a mention here. Sub-prime lenders have been portrayed as evil, preying on the poorest segment of society by providing overpriced loans that should not have been made. As usual with media hype, particularly the national media with an agenda, nothing is a simple as it seems.
An article in the New York Times provides some much needed perspective (see here). The article points out what most have not reported:
The vast majority of … subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.
The article discusses sub-prime lending in the context of innovation in the mortgage market.
Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.
The article cites a study (see here) titled: Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market. The study concludes that [mortgage market] innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.
the mortgage market has become more perfect…Someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house
the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had
The traditional causes of foreclosure…were job loss, divorce and major medical expenses
historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people
The moral of the story:
When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
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