Sub-Zero Sympathy for Sub-Prime Speculators

Lenders who engage in high-risk lending schemes would be required to give borrowers 10 days’ notice of a change in the terms of their loan. The lender also would have to provide contact information for three mortgage counseling agencies. In addition, the lender would be required to grant borrowers who request it a 30-day grace period before starting the foreclosure process.

And what constitutes a “high-risk lending scheme”? According to the Times-Dispatch:

A high-risk mortgage loan covered by the bill would be one whose interest rate exceeds that of U.S. Treasury securities with a similar maturity by 5 percentage points or more or whose upfront points and fees were greater than 7 percent of the total loan amount.

It’s always a sad story when some poor family loses a house and gets dumped on the street. I’m sure that some of those 62,000 foreclosures will be honest, hard-working people who worried that they’d get priced out of the market by ever-escalating home prices if they didn’t jump on board quickly, borrowed more than they really could afford, and ended up losing their shirts. Some few, no doubt, were pressured into taking loans by fast-buck artists who minimized the risks. I feel a measure of compassion for those people. Trouble is, I suspect they account for a relatively small portion of foreclosures here in Virginia.

What do-gooder legislation like Gov. Kaine’s ignores is that many home buyers, whether they planned to live in the house themselves or were simply speculators looking to flip the house for a profit, were motivated by a hope for easy gain from home prices that promised to escalate forever. Many foreclosures result from people walking away from bad bets — from an unwillingness to pay, not an inability to pay.

The legislation also ignores this complexity: Some borrowers wind up losing their houses because they re-financed homes they’d owned for years in order to take out equity, either to spend, pay off other debts, or use otherwise. By taking out equity when houses were appreciating in value, they destroyed the equity cushion that could have tided them over when times turned tough. Just another form of speculation.

A recent study by the Federal Reserve Board of Boston, “Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures,” concludes that, while sub-prime borrowers in Masschusetts are significantly more likely to default on their loans than prime credit borrowers, falling housing prices have played a much a greater role in foreclosures than generally acknowledged.

We present two main findings. First, homeownerships that begin with a subprime purchase mortgage end up in foreclosure almost 20 percent of the time, or more than 6 times as often as experiences that begin with prime purchase mortgages. Second, house price appreciation plays a dominant role in generating foreclosures. In fact, we attribute most of the dramatic rise in Massachusetts foreclosures during 2006 and 2007 to the decline in house prices that began in the summer of 2005.

My mother was smart enough to see the real estate bubble coming in south Florida and sold out her condominium near the top of the market. A young, professional woman purchased the unit from her. Not to live in, but to speculate with. She’d pocketed handsome sums from previous speculations and was expanding her holdings. The market soon turned south, and I wouldn’t be surprised if her properties were foreclosed upon. I don’t bear the woman any personal animus, but I have absolutely zero sympathy for any misfortune she might have suffered — indeed, I might describe my sentiment as sub-zero sympathy, as in, she got was was coming to her if she was forced to foreclose.

Americans are a compassionate people, and we feel the pain of people who have fallen upon hard times. But when government steps in to ease their plight, people learn the wrong lesson: Instead of gaining a healthy respect for taking risk, they expect government to come to their aid. We have become a nation that privatizes profit but socializes loss. That can lead only to riskier and self-destructive behavior. We Virginians should not encourage excessive speculation in any way.