In the last post we mentioned the Center For Public Integrity’s research into the top firms who caused the housing crisis. One of their graphs brings new questions to light.
When using the label “subprime” the typical stigma is one of a bad credit customer who couldn’t get a loan at the bank so they went to a lender who charged higher interest rates to make the loan. (insert loan shark jokes here…) The main issue this raises is this: while subprime lenders did make some bad loans, the graph used shows something different.
The graph shows that people were being allowed to buy more home on the same income they had in the past. Subprime lending did allow a higher debt level than prime lending had in the past, and this required customers to live on a much tighter budget than previous generations had.
Another and perhaps worse trend occuring in the market was the main stream introduction of ‘pick-a-payment’ loans which allowed customers to choose loans that had an adjustable interest rate, a teaser rate below the actual rate allowing customers to pay less than the monthly payment, and the unpaid interest was added to the loan balance, and this rate could adjust monthly.
These loans had historically been granted to sophisticated customers who understood all the dynamics of the loan, and who could well afford it. The loan qualifications became looser and looser as time went on eventually allowing no down payments, stated income, and finally allowing the borrowers to qualify on the teaser rate vs. the actual interest rate.
These loans went main stream and the volume of these loans rivaled if not exceeded the volume of subprime loans.
Just one more example of how crazy the world had become at the height of the housing bubble!
