Credit democratization

by Rob Horning

8 April 2007


I’ve been wavering on the verge of swallowing the right-wing spin on the subprime mortgage market, that its vast expansion in previous years was somehow a extension of the American dream to those too poor to previous partake in the almighty glory of real estate ownership (and mortgage-interest tax deductions—the feature on my tax program that allows me to compare my tax burden with that of others in my age and income demographic depressed me a little bit). I felt as though I were feeling around in the fog, looking for the way out of the miasma of conservative complacency regarding inequities in the credit market, so Gretchen Morgenson’s piece in today’s NYT business section came at the right time for me, helping me regain my bearings. It would be one thing if subprime borrowers were doing some kind of semi-charity work, along the lines of microfinanciers, extending reasonable loans to those the market rejects as too risky or unprofitable (i.e. small, short term “paycheck loans”, which big banks won’t bother with), with charities (or the government, in a society serious about mitigating income inequality) absorbing the losses that makes them bad business. But criticizing subprime credit lenders should not be conflated with criticizing subprime borrowers, who are invited into credit markets only on terms that, as Morgenson details, seem to guarantee their failing into a trap, rolling over refinancing fees and interest payments into an ever-growing debt burden. Lenders, who couldn’t be troubled with small-time borrowers before, suddenly find it worth their while to pocket fees from the origination and refinancing of subprime loans with teaser rates, adjustable rates, higher fees and penalties, and so on—especially when they can repackage the risk in default swaps. This gave lenders the incentive to sell the loans to prospective borrowers, promising them participation in the American dream of home ownwership and the free money of the ever inflating housing bubble (never too late to cash in! houses never go down in price!). Hence the tricks that make initial payments seem reasonable, within reach, sustainable—until the new rates kick in, or the tax assessment comes, for which funds apparently aren’t put in escrow for some subprime loans. With routine mortgages, borrowers often set aside money for taxes and fees into an escrow account as part of their mortgage payments. This makes the payments higher, hence the desire to exclude escrow payments in subprime loans, where the main idea is to dupe borrowers into buying homes they can’t really afford (on which the tax burden is likely higher, as well). Now, with rates and expected payments higher, and the housing market unable to sustain refinancing based on the presumed increase in property values, subprime borrowers face foreclosure and subprime lenders face, well, nothing at all—they walk away with the profits, a nice little transfer of wealth from a broad, poor segment of society to a narrow, already wealthy one. Just one of the many ways American society has come up with for funneling money to the top on false promises of democratization. “Democracy” means in this instance, being taunted and enticed by admonitions that everyone should aspire to the same sorts of homes. The equality in regard to what we can dream about and aspire to (the doors are seemingly open to us all, but the difference in the terms on which they ar eopen is masked) becomes a desperate attempt in reality to live beyond our means while someone else profits from our floundering.

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