The New York Times ran an article this weekend about the economic shudders being felt as a result of the rise in late payments and defaults in mortgages, particularly those taken by "subprime" mortgagees. Now, as this article and others have noted, there's great wringing of hands as people second-guess the soundness of the practice of have given mortgages to people with imperfect credit.
To be fair to the New York Times article, the second half of it questions whether homeownership in general has been too highly prized. Owning a home does have the effect of locking away disproportionately large portions of people's assets. It also immobilizes people, making them less able to relocate for jobs or relationships. Certainly there are upsides to homeownership, but as the article fairly points out, it's not a panacea.
But what the article didn't challenge was the notion that this increase in mortgage failures leads to the inevitable conclusion that mortgages should ever have been offered to subprime borrowers at all. In fact, the facts in the article themselves suggest something else is at the root of the problem.
And that is the exploitative terms by which these mortgages were offered. It seems that lenders only offered mortgages to these borrowers at impossible terms - variable rate mortgages that were inevitably going to become unaffordable just a few years later.
The theory, I suppose, is that mortgage lenders feel they need to offer more expensive mortgages - ones with a greater profit potential - in order to justify taking on the credit risk. If, for example, a lender lends 100 people with a 90% likelihood of paying the money back $100,000 at 10% interest, the lender will expect to get $10,000 in interest income from 90 people, or $900,000. Whereas if it lends $100,000 to 100 people with only a 50% likelihood of paying back the loans, it would only expect to get back $10,000 in income from 50 people, or $500,000. In order to make up that expected profit difference, the lender would have to offer the less credit-worthy people a more expensive loan - one, say, at 20%, which would result in $20,000 in interest from 50 people, or $1,000,000.
Obviously these numbers are made up and the example ignores other intricacies of the mortgage market - like the fact that the lender has a security interest in the property and can pursue foreclosure in the face of default (which, in a rising market, can itself be a profit center if the lender can sell foreclosed properties for more than the loan had been worth). But it points out a logical disconnect in the whole approach, for who can most ill-afford the more expensive loans but those less credit-worthy: the poorer people. If anything, they should be offered the least expensive loans - the ones they would best be able to repay on limited incomes.
It's a tremendous irony in American economics that life is always most expensive for the people least able to afford it. It makes poverty a virtually inescapable vicious cycle since by virtue of having fewer financial resources people are prevented from accruing enough to be fairly treated as respected members of the economy. Sure, we can throw platitudes around about how people who don't pay their debts get what they deserve. But poverty is not a character flaw. Wealthy people can be deadbeats, people who have the resources to repay their debts and simply refuse to honor them. But that is a far cry from people who intend to pay their debts and are simply prevented from doing so due to their exploitive nature. Furthermore, thanks to the lender, the person's inevitable failure to pay will simply make them poorer - in this case not only by wresting from them their house and any money they put into it, but also by jeopardizing their entire family's job and school performance through the stress and disruption of the eviction, and by further damaging their credit, thus making it even less likely that they will ever be able to get reasonable financing (or even a decent rental home) ever again.