Sub-Prime Lending and the Slums of Tomorrow

American citizens have long associated the word “slum” with inner cities — and for good reason. That’s where the slums were. But Christopher B. Leinberger, a Brookings Institution fellow writing for The Atlantic, thinks the United States is on the cusp of a change: Tomorrow’s slums will be in what we commonly refer to as the “suburbs.”

The recent, deceased housing boom may represent the crest of “suburban” development. Leinberger sees changing market preferences pushing growth and re-development back into the urban core of America’s metropolitan areas. And he sees poverty leaking out of the inner city slums into the subdivisions of the aging “suburbs” outside the core. Where traditional cities once experienced fiscal stress and suburban counties prospered, he now sees the opposite:

Many of the fringe counties in the Washington, D.C., metropolitan area, for instance, are projecting big budget deficits in 2008. Only Washington itself is expecting a large surplus. Fifteen years ago, this budget situation was reversed.

A number of factors are driving this change (reader warning: This is Leinberger’s analysis as viewed through Jim Bacon’s lens.):

Consumer preferences. Surveys have shown that roughly one third of the population would prefer to live in traditional urban environments with mixed uses and grid streets designed around walkability. Another third are torn between traditional urbanism and low-density communities with segregated land uses. But only 5 to 10 percent of the housing stock in most urban areas is in walkable places. Combine that imbalance with the rising cost of gasoline, which discourages long-distance community, and the fact that families are getting smaller — hence their need for large, suburban-style dwellings is decreasing — and market demand will shift capital and developers’ energy into urban re-development at the expense of single-family dwellings on the metro fringe.

Political barriers to suburban redevelopment. In theory, developers could re-develop aging subdivisions and shopping centers into walkable communities. In practice, that’s very difficult. Two problems. First, suburban utility systems and road networks are designed to support lower density populations. Re-development would require tearing much of the infrastructure and rebuilding it from scratch — very, very expensive. Second, NIMBYs and other obstructionists fight re-development that might increase density and, in their perception, congestion. While a market may exist in “suburban” counties for redevelopment, the economic and political obstacles are formidable.

Durability and livability. The quality of stick-built housing in jursdictions outside the urban core is lower than the quality of housing built four or five decades ago. (There are exceptions, of course, but as a rule this is true.) Houses will depreciate faster. Furthermore, I would add, communities of cul de sac subdivisions and shopping centers do not generate the pride of place that older communities do. People are less inspired to reinvest in maintaining and upgrading their properties. These areas will rapidly lose value compared to areas elsewhere.

The sub-prime mortgage mess. Suburban housing is way overbuilt. With foreclosures mounting, vacancies are mounting. And that creates social problems. Leinberger cites the case of Windy Ridge outside Charlotte, N.C., where 81 of the subdivision’s 132 small, vinyl-clad houses were in foreclosure late last year.

Vandals have kicked in doors and stripped the copper wire from vacant houses; drug users and homeless people have furtively moved in. In December, after a stray bullet blasted through her son’s bedroom and into her own, Laurie Talbot, who’d moved to Windy Ridge from New York in 2005, told The Charlotte Observer, “I thought I’d bought a home in Pleasantville. I never imagined in my wildest dreams that stuff like this would happen.”

Outmigration of the poor. When affluent households move back into the city and gentrify the neighborhoods, where do the displaced poor people go? Many move into decaying, inexpensive property outside the urban core — into the “suburbs.” We can see this happening in the Richmond region, as urban slum dwellers from the City of Richmond move into neighboring Henrico and Chesterfield counties, accelerating the decline of ’50s and ’60s-era neighborhoods through crime, vandalism and insufficient financial means to maintain properties.

This thesis is not entirely new. University of Virginia professor William Lucy has tracked the demographic changes I write of from census to census, and I have been making this argument myself for more than a decade now. What’s new in 2008? We’re hitting the trough of another housing cycle and the glaring deficiencies of the past are becoming more visible to all. If we look hard enough, I’m confident that we could find more than a few Windy Ridge-like subdivisions here in Virginia.

The slummification of Virginia suburbs will not be uniform. Some neighborhoods, where houses are newer and better constructed, and where neighborhood amenities are superior, will hold back the tide. In some instances, county governments will encourage re-development of mixed-use, walkable neighborhoods. But overall, the migration of the “urban” poor into suburbia is not a process easily reversed.

(Hat tip to Deena Fulchum for pointing me to The Atlantic article.)


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  1. Anonymous Avatar

    Hate to say it, but in the words of the Big Bacon, “Big Whoop!”

    Inner suburban decline is not a new story. I wrote about 10 years ago for Business Week, concentrating on the declining inner suburbas of Cleveland such as Mentor and to some extent, Parma.

    You can see it all around Richmond, particularly around the Chippenham Parkway of Chesterfield and around the Parham Road corridor. Many of the houses there were built in the 1950s and 60s and are small and undesirable by today’s 3,000 sq.ft. or more standards. Once glamorous shopping malls such as Willow Lawn and Regency Square are in decline. Cloverleaf went down the tubes years ago.

    Will newer, outer suburbs, such as Twin Hickory, Wyhdam or Magnolia Green, someday become run-down shells? I don’t know.

    Please let me know if Atlantic has moved the ball at all on this topic.

    Peter Galuszka

  2. Jim Bacon Avatar

    Peter, as you say (and as I noted in my post), the thesis is not new. Atlantic is merely updating it for the sub-prime mortgage mess. The lead anecdote, which I quoted from, was pretty vivid.

  3. Anonymous Avatar

    Interesting article.

    Except it makes the same erroneous argument that EMR makes: The high price of urban housing shows that it is what people want.

    Actually, it cuts both ways.

    Anything that makes it less for consumers will decrease the supply , while increasing the demand for it (decaying suburbs in this case); anything that makes it more expensive for consumers will increase the supply, but depress the demand (attractive urban areas, in this case).

    If the article is correct then high urban prices will decrease the demand while increasing the supply, and as prices fall in the more suburban areas, supply will decrease and demand will increase.

    Unless you think that the other attributes of more urban living (convenience, walkable neighborhoods, shorter commutes, rats, crime, poor schools, no grocery stores) have an infinite value, then (at least the end result of) the scenario painted in the article is unlikely.

    Besides there are far more people needing affordable housing than can afford expensive housing. the article makes it sounds as if all of suburbia will be abandoned for high priceurban living, and this isn’t the case at all.

    Changing home prices and changing fuel prices will change the dynamics of where to live and work, but if the article is right, each will change the dynamics in opposite directions, and the result will be business as usual.

    The other thing to notice in the article is how much of it requires or will require changes in zoning.

    Peter is right. My own Alexandria neighborhood had smaller older homes, (but with larger lots). These are now being supersized to larger homes, and not being abandoned.

    Had the place been originally built with peanut sized lots, much of that renovation might not have occured, or been unsightly with huge homes on postage stamp lots.

    RH

  4. Rodger Provo Avatar
    Rodger Provo

    Jim –

    Good posting.

    The other factor that will contribute
    to this trend not mentioned in your comments
    is the typical construction
    standards employed in the new
    commercial and residential
    projects in our suburbs.

    We are not building vintage
    projects that will age well.

  5. Anonymous Avatar

    Roger, I’m not so sure I agree.

    I have a 20 year old home, a 70 year home, a 110 year home, and a 180 year home.

    That 180 year home is built out of logs chinked with plaster and horsehair. That 110 year home has antique wavy glass, but they are no where near as good as Anderson or Pella high-E windows. At the going rate of repairs, when that 70 year old home is 110, it will be in bettershape.

    In certain regards modern homes are lightly constructed, but compared to boats or airplanes, they are still massively overbuilt (and yet underconstructed). Nobody likes drywall, and it certainly isn’t durable, but it is ridiculously easy to repair. The new roofing systems are far more durable than (some of) the older ones.

    When I ripped out old cast iron plumbing, sealed with poured lead, did I replace it the old way, or the new? At what point does restoration become idiocy?

    We are a lot smarter about energy retention, passive design, and other things. That 110 year home has almost no windows on the south side of the house, and most of the living space is on the dark and drafty north side!

    It’s a great old house with a lot of nice features, but if you go through a thunderstorm in the new home, you can’t hear a thing outside: it is tight and quiet. In the old house you will be up close and personal with the same storm.

    I understand where you are coming from: there is a lot of stuff that seems ticky tacky. On the other hand I’m not so sure we should build evey place as if it was
    Fort Knox. Think of the resource usage, for one.

    If we are going to rebuild our whole settlement pattern anyway, we ought to be building throwaways, instead of investing in white elephants, or better yet build them so they can be recycled or dismantled and moved.

    RH

  6. Jim:

    You have almost tumbled into the truth. Almost.

    The cities are being gentrified. You can see it every day in DC. And, to some extent, the poor are being forced out. You can see the same thing in Lincoln Park in Chicago where the notorious Cabrini Green housing project was closed and upscale housing built in its place.

    I personally believe that much of the complaining from Prince William County about illegal immigrants is, in part, caused by a migration of less wealthy people (including illegal immigrants). This is very frustrating to many people in Prince William County who fled neighborhoods closer to the city in order to realize the suburban wonderland.

    What’s missing from the analysis is the fact that have always been relatively poor people in the suburbs. Trailer parks on Rt. 1 in Fairfax County. Low cost housing in Annandale. The relative size of this housing stock expands and contracts as economic conditions change. The size of the trailer parks on Rt 1 is smaller today that it was 30 years ago – but they are still there. Maybe they will get bigger as this trend progresses.

    I expect the anti-illegal immigration sentiment will only increase as areas within the suburbs expand to include lower income people. The perception will be that it’s the illegal immigrants who are brining down the value of the neighborhoods.

    I also believe that the inner cities will grow more tense. Some parts of the city will gentrify. Some areas will remain “inner city”. This will be particularly true in cities where there is a wealthy / non-wealthy segregation today – like Washington, DC. Northwest has always been wealthy, Southeast has always been relatively poor (at least for the past 40 years) and SW / NE are the gentrification battleground. As parts of the city get richer and richer and as the political power in the city shifts in favor of the people gentrifying. What will be the reaction of the people in the city who remain but fail to benefit from gentrification? How high would taxes have to go to before the richer people coming into the city could pay the poorer people who remain and make everybody feel satisfied?

    I also wonder about surveys where people say they prefer “walkable communities”. Maybe my cynicism is based on my efforts to get a minor step forward in a small corner of Fairfax County. There is plenty of room for sidewalks and trails. However, the political climate requires unanimous agreement by all affected landowners and that’s just never going to happen.

  7. Jim Bacon Avatar

    Groveton, I actually agree with most of what you say. (!!) The only comment I would quibble with is your questioning how strong and deep peoples’ commitment to “walkable communities” is. First, I would emphasize that the surveys indicated only that one third of the population really digs walkable communities. That leaves two-thirds who don’t like them or are ambivalent. The only reason this is significant is that only about 10 percent of the housing stock (by the author’s definition) qualifies as walkable.

    The other point is this: You are undoubtedly correct as to the reasons why you can’t get sidewalks and trails installed in your corner of Fairfax County. Actually, it sounds as if a significant number of people there *would* like walkable communities. The fact that an unachievable unanimity is required to do so buttresses the Atlantic article’s claim that it’s all but impossible to re-develop suburban communities. If you can’t get a sidewalk put in, you’ll sure as heck never be able to tear down a subdivision and rebuild it as a higher-density, mixed use project!

  8. E M Risse Avatar

    Jim Bacon:

    Great post!

    You have to hand it to Chris L., unlike Joel Kotkin, he has not sold out to the Business-As-Usual Foundations (the denizens of the Third Estate) and is willing to take a new look at things.

    Not long ago Chris was touting 6th generation “edge cities” (by what ever name he called them) as the shape of the future.

    As you point out, this is not new stuff, Bill Lucy and Dave Philips’ numbers have been showing this trend since the 1990 Census. See “Confronting Suburban Decline.”

    (Thier wonderfully titled more recent book “Metromorphis” has a lot more data but when they changed the title to please the publisher, it disappeared below the waves.)

    There is one other fish to fry here:

    When location-variable costs are allocated, the “old ‘suburbs’” of which Lucy, Philips and Linenberger speak will look very good compared to the one, two, five, ten and 20 acre McMansion ghettos. They will lose the most in value per unit, have the largest percentage value drop and be the hardest to recycle.

    Some clients are now looking to subdivision reconsolidation to implement in a few years.

    The 12 1/2 percent crowd will wail as ususal.

    EMR

  9. E M Risse Avatar

    Jim Bacon:

    Simple applications or Regioanl Metrics to the R = 10 Miles in the Core and the R = 10 Miles to R = 20 Miles Radius Band documents that there is a vast capacity for recycling to “life within walking distance” components of human settlement.

    Unlike what the 12 1/2 percenters like to pretend, that recycling will not be hard to do.

    The utility grid for .25 acre lots was for lower density per acres but with less consumption per capita and fewer vehicle miles per Household, not as much capacity is needed for much higher component density.

    EMR

  10. Anonymous Avatar

    There might be a little over-reading in this article. I believe he is focusing on suburban developments that don’t have good connections to either job centers or retail centers. Think of the developments thrown up off some random state hwy without any reason. Think Frederick or Warren County, WV, and maybe parts of PWC. These areas are undesirable compared to other suburban areas and buyer decisions are entirely cost based. That is why they can quickly become boarding houses. Places like Fairfax county will mostly be fine even if they don’t become walkable; they have decent access to jobs even if energy becomes expensive.

    The whole gentrification of inner areas is very strong right now and the only thing that is holding it back in areas is public housing. If you look at DC and Alexandria, the only areas that haven’t seen huge price increases are near public housing and have increasingly tense relationships between rich and poor. A few blocks is the difference between a million dollar and half million dollar home in a place like Old Town Alexandria. I also agree that in time the rich will win out and tear down the projects. I don’t think the school issue is as large as it’s made out to be as the demographics of families shows smaller families and childless singles and couples. Even with a single child in private or parochial school the costs aren’t that difficult.

    ZS

  11. Larry Gross Avatar
    Larry Gross

    so…… you can’t have a walkable/bikeable.. grid-streeted mixed use community if the folks that live in it.. get on a bus everyday and travel 50 miles to work?

    or… TOD along a VRE rail line is not feasible with a bedroom community 50 miles from where the jobs are?

  12. Anonymous Avatar

    “The suburbs aren’t dead. Sprawl will continue.”

    EMR is right: sprawl isn’t the right word for this.

    “The relative size of this housing stock expands and contracts as economic conditions change.”

    Succinctly put, that is the message I was trying to send. The idea that sprawl isn’t dead also touches on this theme.

    “What will be the reaction of the people in the city who remain but fail to benefit from gentrification? How high would taxes have to go to before the richer people coming into the city could pay the poorer people who remain and make everybody feel satisfied?”

    Ah yes, the winneres paying the losers – in such a way that everyone is better off.

    “Hell, if they’d pay me the reward money, I’d stop stealing” – Sundance Kid.

    “However, the political climate requires unanimous agreement by all affected landowners and that’s just never going to happen.”

    Yup. Same thing in my neighborhood. The residents voted it down – overwhelmingly. And, according to real estate professionals, they were right. Sidwalks decrease the value of your property, and yet you have to pay for them. What was that about the winners paying the losers?

    “The only reason this is significant is that only about 10 percent of the housing stock (by the author’s definition) qualifies as walkable.”

    Good point. We do need more walkable areas. Even here, my neighbors, on both sides, have taken it on themselves to mow connecting walking and riding trails among the properties. Fortunately, we are all friends. I still think there is a question as to how much we can spend to do it: my neighbors put in goat paths, not paved sidewalks.

    “The fact that an unachievable unanimity is required to do so buttresses the Atlantic article’s claim that it’s all but impossible to re-develop suburban communities.”

    As I put it, there is no cost to saying “No”. We need to reconstruct the zoning regs to do more than prohibit change.

    “you’ll sure as heck never be able to tear down a subdivision and rebuild it as a higher-density, mixed use project!”

    And that is why we have KELO. When zoning gets in the way of a bonafide public benefit, then it needs to go: but the losers ought to get paid adequately, not to say handsomely. As it stands now, they get squat.

    “…the “old ‘suburbs’” of which Lucy, Philips and Linenberger speak will look very good compared to the one, two, five, ten and 20 acre McMansion ghettos. They will lose the most in value per unit, have the largest percentage value drop and be the hardest to recycle.”

    This is probably true. You don’t want to be the most expensive house (or suburb) on your block (or area). But, it is equally true that if densely populated urban areas have the highest value (price), then they have the least upside and the most downside. As usual, EMR is telling half the story to gloss over the truth.

    “Some clients are now looking to subdivision reconsolidation to implement in a few years.”

    I don’t understand – please explain. Is this redeveloping existing subdivisions, like what was done near Landmark Mall?

    “..there is a vast capacity for recycling to “life within walking distance” components of human settlement.”

    Probably true, but irrelevant. I have lived in walkable and insular communities. Cars are still needed. There is a difference between caacity for recycling and demand for recycling: the benefits have to exceed the costs.

    that recycling will not be hard to do.

    “The utility grid for .25 acre lots was for lower density per acres but with less consumption per capita and fewer vehicle miles per Household, not as much capacity is needed for much higher component density.”

    Nice try, but, frankly you are out of your mind. Rebuilding those places is going to be mostly a total tear out and do-over.

    Fewer vehicle miles per household is going to mean redistributing the job centers, the shopping centers (at much lower capacity and variety), and the amenity centers. Not all of this will succeed at walkable scales and transportation (of some sort) will always increase the opportunities within reach.

    Until we see a real effort to redistribute jobs, all of this will be meaningless, as Larry has pointed out. All the walkable communities in the world won’t help much when the jobs are 20 miles away. (Larry says fifty, but the real answer is one.)

    That kind of tear out and do over is going to cost billions, but the ebb and flow of economic consitions that Groveton describes, means it will never happen.

    I think that ZS has a good analyisis, as usual. If you focus on those random bad developments and take that as the inevitable path for everyplace, then you will reach bad conclusions.

    Those places that exist where buyer decisions are entirely cost based are also the places that have the lowest downside. One reason they were chosen by buyers is that they could afford the least downside. For them, a boarding house isn’t a total loss, which is what they would have if they over reached (think sub prime loan).

    “the only thing that is holding it back in areas is public housing.”

    Another call for private property, and strong property rights.

    “…in time the rich will win out and tear down the projects.”

    Yep, money and politics is all about coercion. Strong property rights is the antidote. If those people in the projects owned them, and if they knew they were secure in owning and living in them…..
    When you get down to it, it is all about property rights.

    ———————

    I don’t think the actual school issue is as large as it is made out to be. (Easy for me to say, with no children.) It doesn’t matter: it is the perception of the problem that matters. That, and the beaurocratic inertia involved in changing it.

    When your biggest capital investment is involved in a movce, as well as your biggest emotional investment, you are disinclined to take risks.

    RH

  13. Anonymous Avatar

    Just as an exercise, let’s see if we can come up with a description for “sub prime lending” that does not sound so judgemental.

    What is sub prime lending?

    1) lending more than the usual amount, for a larger home that is wrth more. Why is this sub-prime? Because the downside risk is higher.

    2) lending with less than the usual downpayment. Why is this subprime? Because the risk of fullrecovery incase of default is higher.

    3) Lending with balloon payments. Why is this subprime? It has a risk of future events not working out as planned. For military families, a low interest, short term loan with a ballon payment is a reasonable risk. (As long as prices are stable or rising, which is the usual case.)

    4) Lending with variable interest rates. Why is this subprime? There is a risk that income won’t rise as fast as interest rates: leverage works both directions.

    That is the downside of the risks.

    The upside is that you might make more money than otherwise.

    So,

    Suppose instead of calling them (pejoratively) sub prime loans, we call them “measured risk” loans.

    Would we feel any better or different?

    No.

    Because, in the present environment, we (now) know that the risks were not carefully measured, or measured with a non standard ruler.

    But, there are upsides and downsides to what we are now beating up on as “sub prime” loans.

    Let’s not throw out the upsides, in an attempt to avoid the downsides. There are thousands out there that are perfectly happy with their “measured risk” loans.

    RH

  14. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Oh look! Suburbia is falling apart. Well I wonder… if the Atlantic is going to have a poster child, maybe they should have picked better.

    Is the problem that suburbia is turning into a slum? Or is the problem in Charlotte a government affordable housing program gone bust?

    http://www.charlotteobserver.com/local/story/407580.html

    Make sure you click on the maps.

  15. “Many move into decaying, inexpensive property outside the urban core — into the “suburbs.” We can see this happening in the Richmond region, as urban slum dwellers from the City of Richmond move into neighboring Henrico and Chesterfield counties, accelerating the decline of ’50s and ’60s-era neighborhoods through crime, vandalism and insufficient financial means to maintain properties.”

    As long as the federal gov’t influences enough Fortune 500 companies to stick around the NOVA Beltway, the suburbia fringe will remain alive and kicking. With the combination of improving traffic condition, job availability, lower violent crime rates, better outdoor amenities, new higher-income developments, and shiny new schools, I can’t see how the more “affluent” who have recently moved to the fringes, would choose to move back inside the Beltway.

    Perhaps the older suburbs b/n the Beltway and the fringe will encounter this change, but I think this would be due more from changes in property value from racial immigration. I would say this is what has happened to the suburbs of the 60’s and 70’s like Annandale, Springfield, Woodbridge and Manassas.

    There are enough people who by choice enjoy getting away from “it” all. What I see is actually a divide developing b/n those who have to work around the city, but chose to move as far as possible yet still remain close enough to commute, vs. those who wish to remain. I believe this is called urban conservative plight to fringe suburbia. 😉

    Besides, guys like Lienberger probably likes to kick conservatives when they are already on the ground. The WaPo has made it a habit of theirs.

  16. Larry Gross Avatar
    Larry Gross

    methinks there is some confusion on what a sub-prime loan is and is not.

    “A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.”

    http://www.investopedia.com/terms/s/subprimeloan.asp

    it doesn’t have anything to do with what kind of house or even what kind of loan. It has to do with the credit history of the borrower.

    Using even riskier financing arrangements – like ARMs and balloon notes in combination with borrowers with less-than-good credit is NOT “measured risk” unless you’re a person who thinks putting down $100 at a BlackJack table or a lottery ticket is ‘measured” risk.

    It’s gambling.

    The folks who make the loans are basically gambling if the loan defaults, they get their money back when the house goes back on the market BECAUSE the value of the house was escalating so rapidly that even in a matter of months it would develop substantial equity over the selling price.

    All of this went to hell in a handbasket when the value of homes stopped increasing.. and then collapsed.

    Basically what happened is that the housing market ran out of qualified borrowers and sought to sell more houses by tapping into a “market” that consisted of folks with documented histories (credit scores) of not keeping their jobs and/or paying their bills.

    Everytime you miss a payment date on ANY kind of a loan – it gets recorded and your credit score affected by it. When it happens numerous times, our credit score is toast.

    When someone with a low credit score signs up for a mortgage – the mortgage company knows UP FRONT that the guy does not pay his bills.

    But as long as there was increased demand for new homes such that they would appreciate between the sale and closing dates… then the mortgage company was assured they’d get the house.. and resell in a hot market it to not only get their money back but make money on the loan – beyond the interest charged.

    The increased demand was not a structural increase in demand but instead – CREATED – by opening up the market to folks who traditionally would not get a mortgage to start with.

    Sub-prime loans are the mortgage equivalent of pay-day loans because the folks who got these loans ALREADY had a track record of NOT paying their bills.

    Will folks who live in the suburbs who have paid their mortgages on time for years … walk away from those homes to move back to an urban area to live in housing that is 1/3 to 1/2 the square footage of their home in the suburbs – and they’d do that at a tremendous loss of value on their home in the current market?

    Why would someone do that?

    The folks with good credit who have lived for 10-20 years in the suburbs, if anything, now have the ability to snap up newer,nicer, larger suburb-built homes at bargain prices.. if they wish.

    Where will the sub-prime folks who bought homes in the suburbs go after they lose their homes?

    Well.. I don’t think they’re going to move back to the urban areas , they’ll probably look for rental housing… in the suburbs..

    no?

  17. Anonymous Avatar

    You are right, Larry, I didn’t include those who simply have bad credit in the list. I only listed some of what wiki calls the other factors.

    But remember, despite what Wiki says, they don’t necessarily suggest the borrower is likely to default: just that they are outside the normal guidelines. That gives the bank an excuse to charge higher rates, which is what it is really all about.

    You are wrong that it has nothing to do with the house. Not only that, but redlining still exists. You can have a good stable income, and stillhave bad credit, if your salary is all on commissions, for example, the bank considers that a risk. It is partly about risk, and partly about how much you can squeeze out. Gambling is what the lenders do – even to those with good credit.

    My brother in law has good credit, in one week he got laid off from his job, got hit by a drunk driver, and had a huge tree fall on his house. Now he’s in trouble. It has nothing to do with his house, or what kind of loan he has, or what the interest rate is.

    It is the bank’s business, and they are the ones getting skinned, except of course, the money they lend is actually ours. We want the best return on our money, but we don’t want the bank to take any risk to get it.

    No risk, no opportunity. What you really want is to prevent opportunity.

    The value of homes has not collapsed. It is what it always was. The prices are somewhat lower. Right now there are bargain hunters buying them up at bargain prices and low rates. The banks have to make a lot more loans to make the same money in this environment, and they will.

    You are right, the bank knows if a borrower has bad credit. That doesn’t mean he doesn’t pay his bills. I got turned down on a loan once, and when I tried to find out why, I found there were errors on my credit report. I took a long time to get them straightened out, but I still got the loan.

    You are simply wrong that this was CREATED entirely by opening the market to folks who normally could not get a loan. There is some of that. Some of it is caused by loans to perfectly good credit risks, who were speculating on homes. We have the same problem in commercial offices: built on spec and now standing vacant.

    What do you call a track record of not paying bills? It doesn’t take but a couple to pooch a credit rating. I once had an account that I thought I closed before I moved away. The computer dunned me for months – over 49 cents – and that hit my record.

    You act like every bad loan started out as a bad idea and a deliberate attack on your pocket to begin with, and that isn’t always the case.

    Yeah, the lenders, the mortgage brokers, and the financiers all screwed up. The market isn’t helping right now. Come back and look again in 3 to five years.

    Over long periods of time homes and stocks do pretty well, but there are downsides. All it takes is one person to unload his house for some reason, and it affects all the houses in the area. It takes time to bounce back.

    In the meantime, some people will have to resort to rental housing. That housing will be owned by speculators, they will have loans at higher interest rates, not because they are personally bad risks, but simply because they don’t occupy the house. It may be the very same house, that previously had a different high interest loan on it, underwritten by the same deposits in the same banking chain.

    The houses aren’t going away, the mortgaes aren’t going away, so nothing has really changed.

    Except the risk is lower because the prices are lower. If you really want low risk in the housing market, then build some more houses. Keep building them until the prices are depressed to near their intrinsic value.

    The intrinsic value of a 2500 sq ft structure is still much less than current valuations. We know that because we can buy the structures all day long. But, if you go find that exact same strucure sitting on a lot somewhere the structure – not the lot or utility services – will still be assessed at more than the structure is worth.

    It cost me $90,000 to put my hose on its lot in Alexandria, in 1989. The day I got my occupancy permit, it was assessed at $157,000, not including the lot. I told the assesor then, that it wasn’t an assessment, it was an invitation for arson. I could burnit down, collect the money and repace it for two thirds of its assesed value. That was then. Today it is assed at much more, and I can still replace it for a fraction of its assesed value.

    The difference between the assesed value and the intrinsic value is where the risk is, and that hasn’t got anything to do with my mortgage or credit rating.

    So, if you really want to reduce risk, build a lot more houses, until the prices (and the rents) come down. That way everyone is better off (except those existing owners).

    Which is partly what has happened, only not nearly enough.

    RH

  18. Anonymous Avatar

    “I would say this is what has happened to the suburbs of the 60’s and 70’s like Annandale, Springfield, Woodbridge and Manassas. “

    Flood Guy is exactly right.

    RH

  19. Thanks RH

    I would also add Falls Church to that list.

    Urban areas which would support this article first occurred in Old Town Alexandria in the 80’s. North Arlington started seeing this in the late 90’s as has Vienna.

    But the forces for urban revitalization for NOVA have greater headwinds, I think, than there are tailwinds behind suburban decay.

  20. Larry Gross Avatar
    Larry Gross

    the vast majority of folks who have poor credit histories are like all those guys in prison who say they are innocent…

    yes.. a certain percentage had “bad luck” but the vast, VAST majority of them have had bad credit for several years… with more than one creditor.

    Easy to pick them out – multiple credit cards, high credit card balances and no savings… they have little or no ability to recover from employment or financial setbacks. They live from one paycheck to the next until bad stuff happens to them.

    Bad credit is not bad luck. It’s actually gambling – not planning – that you won’t have bad luck..over the course of 30 years, which is a bad bet.

    and by the way… “redlining” did not cause MORE mortgages to be written – did it – would actually cause the opposite -right?

    if we had done..more redlining.. we would not be loaning money to sub prime market in the first place, right?

    re: fleeing the suburbs for the cities… FYI

    Headline: Condo sales in city slow with local market downturn

    The real-estate market downturn has slowed activity at two Fredericksburg condominium projects where sales were brisk as recently as last fall.
    …. but there hasn’t been a closing since October.

    They range in price from about $293,000 to $550,000.

    http://fredericksburg.com//News/FLS/2008/022008/02222008/358282

  21. Anonymous Avatar

    “Bad credit is not bad luck. It’s actually gambling – not planning – that you won’t have bad luck..over the course of 30 years, which is a bad bet.”

    Can I get you to have a talk with my wife?

    I concede the point about people with bad credit. But, you can have bad credit because you have no credit cards. You can have bad credit because you have several credit cards – with no charges on them.

    Lenders make loans to people with bad credit all the time. They like to make loans to people with bad credit – because they make more money that way. They made a bet, gambled, they wouldn’t have bad luck..over the course of 30 years, which is a bad bet.

    No, redlinng didn’t mean more loans, but it meant that all the loans made in that area carried a higher price tag.

    As for prison, DNA has shown us how often we can be wrong in high profile death cases. We haven’t got around to the rest of them yet, and there is no incentive or advocacy to do so. But if our present experience is any kind of guide, a fair number of those lesser offenders claiming innocence probably are. There are two current books out which show how some prosecuters have abused their privileges and responsibilities.

    Like loans or anything else, if we make the penalties too high, it can wind up costing us more than it saves. It might not, but we need to be aware of and concede the possibility, so that we can be on the lookout for when it happens.

    When it does happen, it is a waste of resources, and bad for the environment. When it does happen it means that someone is gaining unfairly, at someone else’s expense.

    I know. Bizarre.

    RH

  22. Anonymous Avatar

    $550,000 for a condo? Where is the intrinsic value?

    For $50,000 you can buy a pretty nice 20 year old boat. With the other $500,000 you could cruie the world for ten years.

    Course, it’s hard to get a mortgage on that plan.

    RH

  23. Larry Gross Avatar
    Larry Gross

    “But remember, despite what Wiki says, they don’t necessarily suggest the borrower is likely to default: just that they are outside the normal guidelines. That gives the bank an excuse to charge higher rates, which is what it is really all about.”

    this is amusing. you’re treating the “guidelines” as if they are separate from the reason FOR the guidelines.

    You’d be one of those guys lending money that would make such a statement – right?

    “You are wrong that it has nothing to do with the house. Not only that, but redlining still exists. You can have a good stable income, and stillhave bad credit, if your salary is all on commissions, for example, the bank considers that a risk.”

    whether a house costs 300,000 or 1,300,000 – it won’t change your credit record.

    If you DO HAVE a GOOD record, the price of the house will effect how much you can borrow.

    But if you have BAD credit – you’re only talking MORE RISK – not less.

    Redlining is a red herring.

    Redlining exists no matter what the standards are and it has much more to do with geography and location than the borrower.

    “My brother in law has good credit, in one week he got laid off from his job, got hit by a drunk driver, and had a huge tree fall on his house. Now he’s in trouble. It has nothing to do with his house, or what kind of loan he has, or what the interest rate is.”

    yes it does.

    first, you don’t buy MORE house than you can reasonably afford IF you run into bad luck.

    That’s where we have gone totally wrong.

    We buy 2400 sq ft houses with granite counter tops that we can afford ONLY IF we don’t have bad luck instead of a much more modest home that we can keep even if we do have bad luck.

    We push the limits and we leave virtually no margin for error.

    “It is the bank’s business, and they are the ones getting skinned”

    WRONG! when the “government” has to bail out these big companies – the “government” is the taxpayer.

    You know .. the same taxpayer that we are going to give rebates so they’ll spend more.. and then we’re going to turn around and add to the taxpayers liability -the cost of a bailout.

    “No risk, no opportunity. What you really want is to prevent opportunity.”

    no but what you are advocating is risk-less “opportunity” that encourages irresponsible and risky behaviors by essentially promising that if enough people do enough dumb financial things.. that the government will bail them out.

    this is totally irresponsible both from a personal perspective and a policy perspective.

    It’s like loaning an entrepreneur money – and telling him that even if his business goes belly-up – that he won’t owe the loan money – that it turns into an instant “grant” the moment his “opportunity” turns sour.

    it’s this attitude that has become rampant and encourages people to buy homes much more expensive that they can truly afford – if they have “bad luck”.

    The idea with houses and benefits is that YOU are RESPONSIBLE for planning ahead so that if “bad luck” does happen – that you’ve actually made provisions to weather it.

    “The value of homes has not collapsed.”

    No but they have LOST value and that is why the companies holding the debt had to write off a lot of it as “gone” .. as in not recoverable in any business-sense scenario.

    This is why Countrywide went belly-up and was bought at a much-reduced value from what it was originally worth.

    “You are right, the bank knows if a borrower has bad credit. That doesn’t mean he doesn’t pay his bills.”

    In a few cases, it can be due to “paperwork”. I had the same problem – a disputed bill – led to a sneaky back-door black mark that was quickly dealt with.

    The VAST MAJORITY of situations are REAL and it doesn’t matter in the end if the bank is being careful.

    It’s no skin off of their nose if they mistakenly turn down one or two loans but it IS disastrous if they approve dozens/hundreds of “questionable” loans that turn out to be “questionable” for good reasons.

    You’re advocating risky behaviors by characterizing them as “opportunity”.

    You’d be the same guy who would call “penny stocks” or the lottery as “opportunity” -right?

    “You are simply wrong that this was CREATED entirely by opening the market to folks who normally could not get a loan.”

    What are the consequences of a risky loan going belly-up?

    If the consequence is that the house sells again within a few weeks at a higher price – there is no consequence but what is the possibility of that situation being the permanent economic condition?

    “What do you call a track record of not paying bills? It doesn’t take but a couple to pooch a credit rating.”

    A loan company office with two eyes can clearly see the difference when they get a credit report.

    When they get the report, and it shows a history of not paying bills and/or a not secure income and they approve the loan anyhow because:

    1. – the loan is lucrative
    2. – there is no financial downside to the mortgage company from foreclosure

    what does that mean?

    loaning money to sub-prime folks created a frenzied housing market that drove prices up rapidly and the whole thing collapsed when the inevitable occurred – people with poor credit – walked away from too high loans.

    A person with less than solid credit ability should NOT qualify for higher priced homes but instead should only qualify for lower-cost homes but lower-cost homes were not what the hot market was in…so loan companies started making jumbo loans, balloon notes and ARMS to basically gamble that even if the loan went belly-up that the house would still sell quickly.

    The sub-prime borrowers were assured that because they could write off the horrendous interest rates – guaranteed to be written-off no matter how high or unjustified – that they could just sell the house and get out of it without financial consequences – and maybe even make some money on the transaction.

    The whole thing is just a slightly different version of the Savings and Loan Scandal that would have never occurred if the government had not insured the jumbo CDs – not matter how the money from them was invested.

    It’s really dumb…

    We confuse “opportunity” with government-guaranteed speculation.

    There IS a difference.

  24. Anonymous Avatar

    Sub prime lending:

    “Definition:

    Lending to businesses who do not qualify for “prime” rates, those rates reserved for borrowers with virtually blemish-free credit histories. Subprime lending is usually one to six points over the prime rate.”

    That is a lot different than your Wikipedia definition. There is a huge difference between being blemish free, and being a deadbeat sucking on the government subsidised interest teat.

    RH

  25. Anonymous Avatar

    “You’d be one of those guys lending money that would make such a statement – right?”

    I sometimes lend money. I lend money to people who cannot get a bank loan.

    I have NEVER lost on the deal. I make sure the collateral is worth more than the loan. And, unlike the banks, the collateral has to be something I would actually like to own. It is really pretty simple: Would I pay this much for the collateral? Would I be willing to own the collateral? Is the borrower willing to pay more interest than I’m making now?

    If all three answers are yes, there is almost no downside. (The borrower could ruin the collateral, but then it isn’t much good to him either. At some point you have to look each other in the eye and shake hands.)

    RH

  26. Anonymous Avatar

    “If you DO HAVE a GOOD record, the price of the house will effect how much you can borrow.”

    Nonsense. The price of the house has NOTHING to do with what I can borrow.

    RH

  27. Anonymous Avatar

    “You’re advocating risky behaviors by characterizing them as “opportunity”.”

    I am not “advocating” risky behaviors, only pointing out that risk is associated with profit. Payday lenders take unsecured risks, and they charge the interest they think is appropriate. If we think the interest is inappropriate, then we are free to go into that business.

    If we think banks are too liberal, we are free to go into that business and be more conservative/charge more.

    I don;t see what any of that has to do with whether or not home interest should be deductible. If the mortgagee defaults, he no longer gets the deduction, and, he has a lot bigger problems than that.

    RH

    RH

  28. Anonymous Avatar

    “A loan company office with two eyes can clearly see the difference when they get a credit report.”

    No, they cannot. In my case, I got turned down, and had to go to the credit bureau to find the reason. The bank didn’t know. In one case, my auto loan got recorded twice. I made payments on the loan on schedule. No late payments. But it appeared that I had twice the debt that I actually had.

    RH

  29. Anonymous Avatar

    An ARM or a balloon payment is not necessarily more risky.

    RH

  30. Anonymous Avatar

    Redlining is not a red herring if it results in more “subprime” loans.

    RH

  31. Anonymous Avatar

    “people with poor credit – walked away from too high loans.”

    Wait a minute. On one hand you blame this on speculators, on the other, on peple with poor credit.

    They are not the same thing.

    RH

  32. Anonymous Avatar

    “A person with less than solid credit ability should NOT qualify for higher priced homes but instead should only qualify for lower-cost homes “

    There are no lower cost homes (or very few), primarily because existing residents object to them. “They don’t pay their own way”. “They are a blight.” Etc Etc Etc.

    RH

  33. Anonymous Avatar

    “We confuse “opportunity” with government-guaranteed speculation.”

    The government did not guarantee speculation. Those that lost money, lost money AND the opportunity to deduct interest.

    Where is the downside to a policy that only rewards success?

    RH

  34. Anonymous Avatar

    http://www.knowledgeplex.org/kp/text_document_summary/article/relfiles/partner_content/nrc/ht_nrc_temkin.pdf

    “Subprime Lending:
    Current Trends and
    Policy Issues”

    Nowhere inthis document does it mention mortage intereste deductionas part of the problem.

    RH

  35. Anonymous Avatar

    “First, lending that can be considered subprime is frequently done as part of a program developed to serve unmet credit needs in the community or as part of a community development initiative. The type of program in which underwriting standards are stretched and/or rates, fees and points are higher than for other loan programs serves a legitimate need in many communities, and we do not believe that the definitions and questions have taken into account this special use for subprime lending.

    Additionally, ACB members frequently develop programs or originate individual loans that involve working with the borrower and that are on terms that are not granted to other borrowers. We believe that the reporting that is proposed by the OTS may stifle some of these programs. We request that the OTS use the tools that they already have to monitor and supervise these activities.”

    http://64.233.167.104/search?q=cache:7CPkJ80ZktYJ:www.ots.treas.gov/docs/r.cfm%3F48492.pdf+sub+prime+lending+defintion&hl=en&ct=clnk&cd=5&gl=us

    Again, no reference to the idea that interest deductions encourage subprime lending. However , there is considerable discuassion concerning the real definition of subprime lending.

    RH

  36. Larry Gross Avatar
    Larry Gross

    “The Community Reinvestment Act of 1977 and later liberalization of regulations gave lenders strong incentive to loan money to low-income borrowers. The Deregulation and Monetary Control Act of 1980 enabled lenders to charge higher interest rates to borrowers with low credit scores. Then, the Alternative Mortgage Transaction Parity Act, passed in 1982, enabled the use of variable-rate loans and balloon payments. Finally, the Tax Reform Act of 1986 eliminated the interest deduction for consumer loans, but kept the mortgage interest deduction. These acts set the onslaught of subprime lending in motion. (To learn more, read The Mortgage Interest Tax Deduction.)”

    http://www.investopedia.com/articles/basics/07/subprime_basics.asp

    If we did basic reforms that limited the amount of interest that could be written off to one owner-occupied home capped at the average home price and capped at the interest rate for prime loans – we not have the sub-prime “crisis” because we’d not have folks qualifying for loans – that should not.

    we have too many people buying “more” house than they can truly afford by thinking that as long as they can “make” the mortgage payment – that they can afford the house.

    These folks don’t think about, losing their job or not having adequate insurance or having 3-6 months of savings to pay your mortgage and food expenses if something unexpected does happen.

    I’m not unsympathetic but what we are doing is subsidizing behaviors that are risky and irresponsible – by doing what we are doing now – setting up a rescue plan financed by the folks who DID act responsibly.

    You talk about penalizing people.

    What about taking money from the folks who WERE responsible and DID plan ahead to give to folks who did not?

    how about finding some links that talk about that?

  37. Anonymous Avatar

    Those who were responsible and made their payents, got what they paid for according to the terms of their agreement.

    Banks make allowances for bad credit of all kinds, and incorporate it in the rates charged. Same with credit cards: bad risks pay more. Same with insurance.

    But, there is still some residual level that we all pay for. How do you propose to squeeze that out? If the bad risks can’t make their home payment, where will they get the money to recompense you?

    If banks can’t spread the risks and expenses around, they won’t be in business. That big expensive downtown office you never use is partially paid for by small office, off peak users.

    It used to be that you culd buy a replacement headlight for around $5.00. You had a chioce of round or rectangular. Now, headlights are all custome designed, and they run $300 and up. Every time a body shop replaces one for someone who “chooses” to buy a car with custom headlamps, then those of us still driving round headlamps pay part of the bill on our insurance.

    We could have “user pays” insurance in which you pay 100% of your own costs. In other words, you would have no insurance.

    We could have “user pays” mortgages in which you pay only your own costs. We would call it cash up front.

    There may be reasons to reduce/eliminate the interest deduction, but subsidizing deadbeats is only part of the story. Speculators may be part of the story. Jumbo mortgages may be part. Mortgage based deriviatives may be part. Put thogether a ratonal story, considering all the parts, and I’m willing to listen.

    But, the interest deduction has been around since income tax was invented, since 1913. Why is it only now it becomes a problem? Assuming we change the rules, people have made investments based on the long-standing rules of the game. What would changing the rules do to them?

    Some estimate that eliminating the mortgage deduction would reduce home prices 15%. More in high cost areas. Are we really willing to cut millions of peoples net worth in half to save a little bit on bad loans?

    And what would that do to localities that charge taxes on “market valuations”?

    You seem to think that any action, however remote, that you can dream up some kind of hypothetical cost to yourself for, should be eliminated.

    So do I, up to a point. You claim those that don’t use peak hour elctricityor roadways shouldn’t have to pay for them. I don’t think it is all that clear, or easy. Maybe I am paying 7/8ths of the cost for someone else’s peak hour electricity costs. I don’t like that, but IF it appears it is going to cost me the same or greater amount of dollars to avoid that cost, I don’t see the advantage in pursuing the change.

    The electric company sends me a bill every month, and if I don’t like it, I can use less electricity.

    What you are proposing is setting up a billing systems that basically says, trust me, you are getting your money’s worth. I’m not convinced that zealots won’t cost us even more than speculators and capitalists by moving too far in the right direction.

    I agree we have excesses. I don’t think excessive dogma, simple answers, or ignoring external costs of those anaswers, is the way to fix the excesses without creating others.

  38. Larry Gross Avatar
    Larry Gross

    this is not that complicated.

    We have government policies that encourage folks to buy “more” house than they can afford – as an economic lynch pin pushed by banks, land-owners, homebuilders, Home-Depots, Chambers of Commerce, you name it.

    The way anyone should rehabilitate poor credit is to get a loan for something that they CAN pay back without pushing the limits – and what we’ve done is encourage/incentivize people with poor credit buy something even more expensive than they can afford.
    We basically incentivized predatory lending practices on folks who were financially vulnerable and unable or unwilling to be prudent in their financial affairs.

    and in the end.. what will happen?

    well.. these folks won’t own homes and they WILL rent and no they won’t live in tents…

    so.. rental housing will be provided by the market – that it could have done all along if we hadn’t made it more profitable to build big expensive homes rather than truly affordable housing.

    that’s the irony here.. the folks who advocated 2400 sq foot homes characterized them as “affordable” while ignoring the real definition of “affordable”.

    It was all about greed and avarice .. that go hand-in-hand with subsidies…

  39. Anonymous Avatar

    “We have government policies that encourage folks to buy “more” house than they can afford “

    That is your theory, but where is the evidence? Why would I buy more home than I can afford, if I only get the subsidy as long as I can make the payents?

    Your idea makes no sense.

    The government has encouraed home ownership withthe mortgage interest deduction since 1913 for good reason. Home ownership encourages a health interest in maintaining the neighborhood, stability, wealth, and commerce.

    Why not accept that it has been one of governments better and most productive ideas, notwithstanding the current temporary difficulties?

    “We basically incentivized predatory lending practices on folks who were financially vulnerable and unable or unwilling to be prudent in their financial affairs.”

    How is the lender incentivised to be predatory by the mortgage deduction? The mortgage broker gets paid a flat fee for each deal.

    The lender only gets paid as long as the payments come in.

    The derivatives underwriter can only sell his products as long as they are deemed safe: usually they are packaged according to the length of time the loans have matured: the payments have been made.

    Your theories are created out of thin air and have no basis in fact and little support, as far as I can see. If you have any cites…

    Now, what we are seeing is calls for relief. Politicians are smart enough to package this as releif for beleagured homeowners. In fact it is releif for the lenders who made bad decisions.

    As far as I’m concerned, they can rot. I imagine you can’t stand the idea that what you consider are your tax dollars might be used for such a purpose. We like to think that investors should take the consequences of bad decisions along with the profit from good ones.

    For decades the government has made what are arguably good investments: ones that helped out with your home and mine, for example. The government has profited handsomely from all that we have spent on goods and services to maintain our homes. Noew mabe it is time for the government to take responsibility for some bad decisions.

    Overall the housing crisis has affected relatively few. most homes are paid for or have long standing fixed mortgages. It is only a few real losses that have been magnified in larger paper losses, which create a panic leading to layoffs, and more people that can’t make their payments.

    It doesn’t take that much to break the chain reaction, and it is for this same reason that the stock market has automatic circuit breakers to suspend trading in similar cases.

    If one unfortunate person in desperation sells a share of Coke for ten cents, does that really revalue the entire company? I don’t think so, but that is the way we act about housing.

    Give it a year to sort out.

    Oh yeah, and the real reason only big homes are profitable is because we set up large proffers and made subdivision to rational size lots impossible. That has NOTHING to do with mortgage rate deductions. Unless you want to postulate that local government knew they could get away with such predatory practices – because of federal government subsidies.

    RH

  40. Larry Gross Avatar
    Larry Gross

    “How is the lender incentivised to be predatory by the mortgage deduction? The mortgage broker gets paid a flat fee for each deal.”

    because they get NO FEE if they do not make the loan.

    This is all about selling more and more mortgages – like they are cars or big ticket items – to folks who put themselves at financial risk.

    This is like a car buying a 40K car when he only makes 25K a year.

    The car dealer wants the sale, the loan company wants the sale because they make money on the higher interest.. and it all “works” if the guy who buys the car eats beans and lives in a dump because he’s signed up for a loan that he can barely pay.

    We actually had this problem back when the interest on cars was allowed to be written off -and this problem pretty much went away when you no longer could write the interest off on your taxes.

    So, the lenders figured out a way to use the subsidy for other loans – homes – by relaxing the standards for credit worthiness and the government encouraged this by relaxing the standards and by allowing ANY AMOUNT of interest – no matter how high to be written off – meaning those of limited means would be expected a fat refund check every year.

    This scheme would not have worked if houses did not gain value quickly or worse, lost value because when the borrower got “upside down” on the loan (just like they used to with car loans), it would have been to their advantage to walk away from the loan..

    The only reason the scheme “worked” is because when the standards were relaxed – it created a huge heretofore untapped new home market – of folks who previously could not get loans because of tighter standards.

    The whole thing was destined to fail from the start – as this new group of home buyers would have a higher percentage of “walks” and once that higher rate of walks starting to take hold – there were many more foreclosed houses than there was buyers for them – and the excess supply, in turn, drove the prices down of ALL housing starting from the bottom and working up.

    None of this would have happened if the standards were not relaxed to allow folks with bad credit to buy homes they could not afford such that many more of them would fail to pay than borrowers with good credit.

    I’ve already provided you with links that outline the above.

    It’s not a theory.

    It’s a fact – a post mortem – that you can read and confirm at dozens/hundreds of financial sites.

    And the proof is – what the reforms are going to be – and guess what – the reforms are going to be to -… not make big loans for homes to folks who do not have good credit….which is the way it was when the government first started subsidizing home mortgages.

    What changed in between the time they started the program and now – is that they violated the underlying intent of the subsidy which was to subsidize a limited of amount of money for people’s FIRST home which was by price, limited to a starter home – and then only to people who had a demonstrated good record of repaying their debts and being gainfully employed for several years.

    this is the same old story with subsidies.

    They start out limited, capped and for narrow specific purposes to solve a particular problem – and once implemented – they turn into free money machines by folks that advocate expanding them and gaming them…

    p.s. watched the Bond Counsel of my local BOS tell them last night that it will be at least 2 and perhaps 4 years before this “blows” over – and that in the meantime – the interest rate on Municipal bonds has gone up more than a 100 basis points in just a few months which means the CIP plan just lost 1/5 of it’s value – on the spot.

  41. Anonymous Avatar

    “because they get NO FEE if they do not make the loan.”

    What has that got to do with the interest deduction? A mortgage broker gets no fee unless he closes the loan with or without the interest deduction. And low budget homeowners probably don;t take the dedction anyway.

    RH

  42. Anonymous Avatar

    “This is like a car buying a 40K car when he only makes 25K a year.

    this problem pretty much went away when you no longer could write the interest off on your taxes.”

    Where is the guy making 25k a year that itemizes deductions?

    You think people don’t default on car loans?

    RH

  43. Anonymous Avatar

    “meaning those of limited means would be expected a fat refund check every year.”

    How many people of limited means itemize dedctions?

    If you are of limited means, you paid very little in taxes, and probably had very little deducted. Where is this “Fat Refund” coming from?

    What have you got against folks of modest means?

    RH

  44. Anonymous Avatar

    “The whole thing was destined to fail from the start -“

    You mean since 1913?

    RH

  45. Anonymous Avatar

    “I’ve already provided you with links that outline the above.”

    I don’t se the links that support your point: and haven’t found any on my own. In my reading on lending policy, the interest deduction gets, at most, passing notice.

    That notice is that it may encourage/allow people to buy somewhat larger homes than otherwise. But, the refund is pretty small compared to the rest of the deal: it is generally not considered to be a deal maker / a deal breaker, or substantilly connected to the recent difficulties.

    RH

  46. Anonymous Avatar

    “this is the same old story with subsidies.

    They start out limited, capped and for narrow specific purposes to solve a particular problem – and once implemented – they turn into free money machines by folks that advocate expanding them and gaming them…”

    But you advocate subsidising green energy. You don’t think that system will be gamed, too?

    RH

  47. Anonymous Avatar

    “is that they violated the underlying intent of the subsidy “

    So it is the lenders fault, not the susidy’s fault.

    “intent of the subsidy which was to subsidize a limited of amount of money for people’s FIRST home which was by price, limited to a starter home – and then only to people who had a demonstrated good record of repaying their debts and being gainfully employed for several years.”

    If that was the intent, why wasn’t it written into the rules?

    If it is a matter of people who have established good credit records, why eleiminate the speculators and second home people? The evidently have plenty of money to invest, why not encourage them, same as the high risk folks? the way you reduce risk is diversify, not write yourself into a corner.

    RH

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