Skunkgal - Too Much Skunk In Your Junk

subprime loans are good

subprime loans are getting a bad rap, and it’s unfortunate b/c when doled out correctly, they can do a lot of good. in many ways, a good credit score is a number that can be gamed, and consequently it can be hurt even if you’re responsible but not necessarily knowledgeable. an excellent credit score is just a shorthand way for banks to know that you’re responsible. but if you have a low score, it doesn’t necessarily mean you’re a bad money person. it just means you might not have known how to work the credit score game–a situation that tends to afflict minorities and immigrants. banks can responsibly loan to low-scoring customers; it just takes a little more legwork.

anyways, here’s an excellent defense of subprime loans. basically what it says is that ethical subprime lenders — those who weren’t using loans to sell up to wall street — have low default and foreclosure rates AND they still make money (and continue to make money, even as everything else tanks).

In recent months, conservative economists and editorialists have tried to pin the blame for the international financial mess on subprime lending and subprime borrowers. If bureaucrats and social activists hadn’t pressured firms to lend to the working poor, the story goes, we’d still be partying like it was 2005 and Bear Stearns would be a going concern. The Wall Street Journal’s editorial page has repeatedly heaped blame on the Community Reinvestment Act, the 1977 law aimed at preventing redlining in minority neighborhoods. Fox Business Network anchor Neil Cavuto in September proclaimed that “loaning to minorities and risky folks is a disaster.”

This line of reasoning is absurd for several reasons. Many of the biggest subprime lenders weren’t banks and thus weren’t covered by the CRA. Nobody forced Bear Stearns to borrow $33 for every $1 of assets it had, and Fannie Mae and Freddie Mac didn’t coerce highly compensated CEOs into rolling out no-money-down, exploding adjustable-rate mortgages. Banks will lose just as much money lending to really rich white guys like former Lehman Bros. CEO Richard Fuld as they will lending to poor people of color in the South Bronx.

But the best refutation may come from Douglas Bystry, president and CEO of Clearinghouse CDFI (community-development financial institution). Since 2003, this for-profit firm based in Orange County—home to busted subprime behemoths such as Ameriquest—has issued $220 million worth of mortgages in the Golden State’s subprime killing fields. More than 90 percent of its home loans have gone to first-time buyers, about half of whom are minorities. Out of 770 single-family loans it has made, how many foreclosures have there been? “As far as we know,” says Bystry, “seven.” Last year Clearinghouse reported a $1.4 million pretax profit.

Community-development banks, credit unions, and other CDFIs—a mixture of faith-based and secular, for-profit and not-for-profit organizations—constitute what might be called the “ethical subprime lending” industry. Even amid the worst housing crisis since the 1930s, many of these institutions sport healthy payback rates. They haven’t bankrupted their customers or their shareholders. Nor have they rushed to Washington begging for bailouts. Their numbers include tiny startups and veterans such as Chicago’s ShoreBank, founded in 1973, which now has $2.3 billion in assets, 418 employees, and branches in Detroit and Cleveland. Cliff Rosenthal, CEO of the National Federation of Community Development Credit Unions, notes that for his organization’s 200 members, which serve predominantly low-income communities, “delinquent loans are about 3.1 percent of assets.” In the second quarter, by contrast, the national delinquency rate on subprime loans was 18.7 percent.

surprise! poor people and minorities can be responsible home owners and money managers. it just helps when banks realize that their interests are actually aligned with their customers’ (which has definitely not been the case in the past 20 years or so). it also helps when brokers don’t lie and take advantage of people who turn to the financial sector for assistance.