Surowiecki has been a paid speaker at RE conferences:
from Slate:
Drawing lines is easier when considering Surowiecki. He writes almost exclusively about business and economics in The New Yorker for its "Financial Page" column. He started lecturing for profit earlier this year after publishing his book The Wisdom of Crowds and says that in his eight or nine paid engagements he has spoken only about his book. He insists he's never taken money from any entity he's written about or plans to write about and that he wouldn't write about anybody he'd taken money from. Surowiecki is currently booked to speak at the Real Estate Connect 2005 conference. If you can determine the organization's agenda and explain how he might compromise the magazine by speaking there, please drop me a line. (Interest declared: I've edited Surowiecki and consider him a friend.)
Where, also, is Mr. paid speakerguy's evidence that there are more winners than losers? A nonprofit studying nyc subprime forclosures came to the exact opposite conclusion (nedap.org)
Having more winners than losers is hardly consolation for the losers. Plus, when the cumulative effect of the losers losing is the lowering of prices, this will likely turn some winners into losers. How many defaults and ruined lives does it take to judge the whole subprime experiment a failure? 10%, 20%, 51%? If anything less than a majority lose their houses, is it still a success?
Surowiecki needs to get his priors out in plane view. He is pretty clearly equating "home ownership" with "winner" as Tanta observers. There are plenty of situations beyond defaulting on an unaffordable mortgage in which home ownership is worse than renting. There is evidence that home ownership screws up labor mobility. When you are the labor, that ain't good. There are lots of ways to lose money on a house other than through the mortgage. Ask just about anybody in Detroit. Or Love Canal. The "rent or buy" calculation is done in recognition of the fact that sometimes renting is a financially superior option. Subprime lending has apparently shifted the balance of risks between owning and not owning in an undesirable direction. Whether it has been worth doing cannot be clear at the level of thought demonstrated in merely equating ownership with winning.
Surowiecki, at least, does not accuse those who think of subprime lending as often close to predatory of being bigots. That sort of stupidity has also made the rounds.
I mean, what else would you expect from a guy who extols the "Wisdom of Crowds"? Interestingly enough, he's written somewhat extensively on dysfunctions of collective wisdom. You'd think he'd have his antennae up for misplaced optimism.
The reason the 2/28s hadn't hit the fan hard was that prices kept going up. Now that the fuel has gone away, it's an inevitable conclusion that default rates will go up. The "more winners than losers" assessment may be a wee bit premature.
"The fall is spectacular. It's the sudden stop at the end that dampens it a bit."
Im kind of surprised at this little ditty of his. Plenty of his writing is quite sensible, but this is borderline nonsense, and almost appears as if he was put up to task of making someone else's point. Or perhaps he had a really off day, or just got outright lazy on this one and didnt do the research. I just cant see how someone who has shown the ability to understand more complex issues could so horribly drop the ball on this one, when it's pretty much one of the most important stories out there to get right.
It also never seems to occur to people like Surowiecki that the numbers he sees on "defaults" and "delinquencies" do not refer to the percentage of all borrowers currently "losing." They refer to the ratio between the current balance of delinquent loans (in a given book of loans) to the current balance of all loan in the same book. It's not like we're running some national scorecard that identifies the absolute number of people who are now or have ever defaulted on a loan.
And really, I get so tired of people who seem to know the definition of "subprime" (generally, a borrower who has already defaulted on a debt at least once) while being unable to use it in a sentence. Does it not matter to your "analysis" that your average subprime borrower is, by definition, already "doubling down" at the time this "bet" is placed?
I begin to think that the "subprime = poor people" thing is not just rhetorical disingenuousness, it's just plain old ignorance. Low incomes can, in fact, support low debts. I've seen it happen. There remains a difference between letting the poor borrow and letting the poor borrow too much. It isn't "a bet" if the probability is 1.0.
Tanta and kharris have it exactly right, that the basic problem lies in the assumption that "owning" a home is inherently "winning". This just shows how deeply rooted is the mistaken belief that real estate only goes up, and is absolutely the best investment you can possibly make -- an investment on which you just can't lose.
Thanks Alo for that candid expose of your one time (possibly continuing) employer and friend, and Geoff (possibly also a friend, but indeed generous enough) for having my kind of nose.
Not declared yet is that subprime lending practices allow more, not less, customers support those house prices that used to count on earned income from wages, not earned income from investments...like RE holdings. It is a partial recognition (like so many misleads) that wages are lagging...that you are a "loser" if your income is tied to what you do and not what your investments are. You work for a living? How sad...
"Where, also, is Mr. paid speakerguy's evidence that there are more winners than losers? A nonprofit studying nyc subprime forclosures came to the exact opposite conclusion (nedap.org)
Alo | 04.26.07 - 10:53 am | # "
That "study" has more holes in it that swiss cheese and of course it's not a biased group who conducted it...
Producer, any data you have to counter Nedap's study, pls lay on table.
Calmo - you're welcome - but the words in slate were not mine (sorry for lack of quotes) but Jack Shafer's -who authored the examination of New Yorker writers' speaking payments.
Let's not forget that the subprime market would never have grown to it's current size if the profits made from these loans were not so ENORMOUS. It was the oversized profits in the whole sales chain that was the driving factor behind these mortgages. Not the premise of giving low and moderate hardworking Americans a chance to own the American Dream. Do you think this market would be so hot if the interest rate on a 2/28 would decrease if you met your mortgage obligations on time? Your reward for proving that maybe you were not so risky after all.
This reminds me of a local newspaper article comparing rates paid by drivers with identical driving records. The premium they paid to GEICO, was not based on their driving risk, (no accidents, no tickets over twenty years) but on their occupation. A janitor paid twice the premium as an engineer for the same coverage. If you are low income it is impossible to get ahead no matter how honest or how hard working you are. We all know how intrest expense adds to the cost of everything. I am all for profit but I am also for fairness. When we were starting out the deck was not so stacked against you as it is today. Basically you are at the mercy of a computer generated loan environment. Somebody has already decided how you are to fit into the predetermined model.
"The botom line is if there are more losers than winners over time, then there will be no players."
How do you explain the fact that the lottery continues to get players? Waaaaay more losers than winners, but people still play.
It's not just comparing the number of winners vs. losers. You also need to figure in the potential gains and losses. In a lottery, the loss ($1/play) is very small compared to the gain (millions).
I'm sure there are other factors at play, too. But that one sprang to mind.
Government data on household wealth show that, for poor people, owning a home is just about the only way of acquiring any net wealth.
And that's especially true for African-Americans and Hispanics, in part because they receive so little in inherited wealth.
Once people have some wealth, they can leverage it to grow more wealth, perhaps by using their home as collateral to invest in a business. This is what Donald Trump does, and there's no reason why poor people should not also be able to take advantage of it too.
So there's good social policy and economic policy reasons for government policies to expand ownership of homes, especially for groups that have been unable to buy in the past because of racism or market failures.
This is an updated version of the 40 acres and a mull that ex-slaves never received.
But the flaw in that plan is that to grow their wealth, homeowners must have equity in their homes.
Increased equity is not possible when home values are falling, or when there's no downpayment, or when monthly payments don't cover any principle.
Surowiecki's point, I think, is that we shouldn't throw out the baby with the bathwater. Not all subprime lending is bad.
Increased equity is not possible when home values are falling, or when there's no downpayment, or when monthly payments don't cover any principle.
Well, then. That clearly rules out putting people into loans that they cannot service with current income.
That, in turn, should keep lower income folks with good bill paying habits from getting subprime loans: if they're getting subprime, it's only because they aren't making a down payment or aren't making amortizing payments, right?
This means that lower income folks with good bill paying habits go back to prime loans, where they belong.
And the problem is?
Fred, I'm not so quick to congratulate Surowiecki for doing battle with the idea that subprime lending should be banned. As I have heard exactly zero suggestions that any regulator, legislator, or even mildly informed citizen is suggesting that.
But even if this weren't a strawman, I fail to see the point. You seem to be arguing that prime-credit loans on reasonably priced properties can help the poor. I'll go with that for the purposes of argument. So why not get rid of subprime, since it's apparently beside the point?
yeah if from a milion poor souls who take out a subprime mortgage and are hit by the reset 999 999 go to the foreclosure because unlike the last 1 guy they havent won in lottery 300 milion.
so yes, giving milion people a mortgage 999 999 of them will never be able to repay is being called spreading the risk
But the flaw in that plan is that to grow their wealth, homeowners must have equity in their homes.
Increased equity is not possible when home values are falling, or when there's no downpayment, or when monthly payments don't cover any principle.
Surowiecki's point, I think, is that we shouldn't throw out the baby with the bathwater. Not all subprime lending is bad.
fred c. dobbs
yes the theory is nice, bank takes away a large amout of their income for mortgage because these people would never be able to save otherwise. but fred poor people are poor because they are bad in math. they cant count their expenses in comparison to their income, they take out credit cards which they are not able to finance,
in this consume world we are being bombarded by advertisement, sometimes i realize that i got caught by an advertisement even though i thought it could never happen to me.
about financial contracts, even i a completely paranoid walking money calculator am going crazy when i am raeding financial contracts and lose myself in them.
so if anyone is giving a 2/28 arm instead of fixed mortgage to people with lower income should be hanged/shoot/whatever because he is simply taking advantage of well say, simple people.
Why do so many people think subprime and bad credit ratings are a disease unfairly cast upon some rather than an objective analysis of past credit behavior? I have a CRAZY idea instead of assisting poor credit candidates into more debt, how about teaching them how to manage their current debt?
Remember poor behavior is cured with good behavior not encouraging poor-er-er behavior.
If I can illustrate Fred's point? Take the hypothetical low income, poor credit subprime mortgage holder. Let's assume she pays an amortizing loan of some sort, and she's part of the 90% or even, being more pessimistic, the 70% who doesn't default. This becomes a forced savings program, like the "opt-out" form of a 401k. Let's say the costs are higher than renting. Let's say the property actually depreciates in real value - maybe even in nominal value, so that the return is negative - a lousy investment, as some 401k's have been.
Okay, now let's assume that this same person remained a renter. Her disposible income is actually higher, and she could invest or even just save the difference (a decent savings account should give you some kind of positive real return. Under this scenario, she'd be much worse off buying. But of course this assumes that she would do one of those things with the money - or even, say, "invest" in education producing a credential that raises her income. Now let's go back to the fact this is a typical poor credit, low-income person. Is this how they handle their money? For that matter, how much of the current consumption really does them any good at all? In practical terms, what I think Surowieki was making about wealth accumulation: the choice is between a bad investment and none at all.
What's funny is even if our hypothetical character does "opt out" of her bad-investment house 401 with serial home equity extraction, she ends up with no less wealth than she would have as a renter - just less of whatever she's spending it on because the money is so much more expensive, but perhaps more useful because it comes in bigger discrete nuggests rather than the handful of sand slipping through their figures most people in this class find their income. Like the bad investment Christmas Clubs, that can be useful in the absence of budgeting and will power.
I think there's a serious misreading of this piece going on here. In the first place, far from "equating 'home ownership' with 'winning'," Surowiecki argues that it was in part the delusion that home ownership is always better than renting that led borrowers astray. Most of the piece is precisely about the dysfunctions in judgment and the "misplaced optimism" that's led to the problems in the subprime market. And the "bet" he's talking about at the end isn't a "bet" in the sense of pure speculation, but the bet that subprime borrowers are making that they'll be better off owning homes than renting them.
Is the banning thing a straw man? I don't know. Nouriel Roubini, who I think most people would call at least mildly informed on the subject, has argued that regulators should simply have prohibited entire classes of subprime loans, and suggested that laws that would eliminate a third of all subprime loans would be a good thing. So that's at least on the table.
I thought the main thrust of the piece was an attempt to explain why subprime borrowers have made the seemingly senseless financial decisions they've made. Unless you think that borrowers are simply mindless dupes of lenders, that doesn't seem like an unreasonable thing to try to do.
For the third time on this thread, and about the jillionth time in my career, can someone tell me why assuming that all or even most low-income people are no more than deadbeats is not horseshit? If we're going to have an "I care for the poor" contest, how do you think you win by smearing low-income people in this way?
The problem with subprime is that it expanded out from loans to people with bad credit histories and into people with mere low incomes--the low-income loans were "subprime" because there was no downpayment, terrible debt ratios, and frequently unverified income or assets (because they weren't enough to support the loan amount required to buy a house these days, not because they aren't enough to support any loan amount).
There is data, from lots of sources, that tells us that people who could qualify for a prime loan are getting subprime loans. They just can't get a prime loan for $500,000, because their incomes cannot service such a loan at any goddamn interest rate. So let's stop pretending that our low-income folks can "build wealth" trying to buy a house priced at 10 times their annual income with a loan carried at 100% of monthly income. That's three-card monte. Perhaps people don't know what three-card monte is. It is not a bet you can win.
If we're all so fired up about helping the poor build wealth, we should be talking about how to bring home prices down and incomes up. Talking about how to allocate capital to putting them into debt slavery in order to transfer what income they have to mortgage lenders, while this "wealth" disappears, as it must, when home price inflation finally goes away, is hardly in my mind a way of helping out.
And the "bet" he's talking about at the end isn't a "bet" in the sense of pure speculation, but the bet that subprime borrowers are making that they'll be better off owning homes than renting them.
You make it sound so rational. Why, here's someone taking a neg-am ARM, who will clearly be unable to ever afford anything other than the minimum payment, or one of those 2/28s, where they'll never be able to afford the adjusted payment, sizing up the options and concluding they'll do better than renting.
If you believe these borrowers are making rational assessments, you have to believe that they're either misled (they don't have the correct information on the loan terms and the price of the home, even if their reasoning process is sound) or that HPA will always or most often bail them out. We are not talking about the good old-fashioned subprime risk premium, wherein you get the 6% fixed because you've got a good FICO and I get the 9% fixed because my FICO sucks and we can both afford our house payments. We're talking about you get the 6% fixed and I get a negative-equity loan with payments that leave me $10 a month after taxes to buy peanut butter with. Talking about the actual terms of these loans is not beside the point.
Our good Dr. Roubini, and tens of thousands of others including me, would love to see the predatory part of subprime lending go away. That means we think the part that is mere three-card monte needs to be illegal. Stacked decks are not legal anywhere else, so why do they get a pass in mortgage lending? But to take away the predatory third is not to ban anything that can prove it's a legit casino. If this isn't a strawman argument, what is? Surowiecki is appealing to a class of borrowers who actually stand a chance of being better off in order to argue against regulation that would prevent those who have no chance from entering the game. He either doesn't understand what the proposed regulation is, or he doesn't understand how predatory loans work, or he does, in fact, conflate cost/benefit analysis with OTB. And I am basing this on what the article actually says, not what it might be nice if we imagine that it said in order to get Surowiecki off the hook of his argument.
Question: How has the good Doctor Roubini's investment advice gone over the last few years? I've heard some argue that his portfolios have performed very badly, but I personally don't know.
Well, that response missed every point I thought I made, but people naturally repond to what they expect to hear rather than what's said. But then I suppose I could be thinking I'm making one point while making none at all.
Keith, what has that got to do with his (imputed) position on predatory lending?
There are people--and I can't say if Roubini is in this group because I don't know--who take seriously the idea of allocation and misallocation of capital, and who therefore do not invest in things they think already get too much capital. I, as an example, will buy prime-quality MBS, but I won't buy Alt-A and subprime stuff, because I don't think I need to pile my capital on to that stuff. I take a lower return, in theory at least, than someone else does. No one has to agree with my investment strategy, but measuring it against "highest possible return" is, well, applying the wrong standard to it. Don't you think?
TStockman, tell me how I missed your point. You appeared to be saying that the "typical" subprime borrower is irresponsible with discretionary income. Also, that homeowing is "forced" savings, and that these "typical" people, if they are left as renters, will not save because no one is forcing them to. Therefore, home owning is wealth building because it means we make them behave. We being whoever it is who claims to have the moral authority, as well as the economic wisdom, to tidy up their affairs for them.
I challenge these "facts":
That there is a "typical" subprime borrower who is both low income and a terrible money manager.
That the fact that a low income cannot support an inflated house price is a question of the low income person's money management skills.
That "forced savings" is disinguishable from "redirected consumption" in this context.
That any borrower who cannot afford the monthly payment can be said to be saving anything.
Well, Tanta, that depends, on whether we're talking about a different risk-return preference, which is fine, or simply bad investment advice which generated significantly negative returns, which is what a lot of housing bears (not necessarily Roubini) have done.
What's the difference between somebody who gets paid and gives advice that generates negative investment returns and a predatory lender?
Tanta, you believe the government should legally prohibit people from taking out loans that they want to take out and that lenders are willing to give them. So it's pretty clearly you, and not TStockmann, who is claiming the "moral authority" and the "economic wisdom" to tidy up borrowers' economic affairs.
Stockmann's argument is not that "we're" making the borrowers behave by allowing them to take out loans. It's that they are trying to make themselves behave -- to essentially enforce savings on themselves. This may not be an accurate picture of subprime lending as a whole, but the behavioral-economics literature does suggest that people do deliberately constrain themselves in many ways in order to force themselves to do things they know they would otherwise fail to do.
I'm also confused by your argument that subprime borrowers are not "poor money managers." You believe these people are taking out massive loans that they have no hope of repaying, based on inadequate information and a delusionary view of what will happen to housing prices. Isn't this the definition of poor money management?
Revo said: fred poor people are poor because they are bad in math.
Wow! All we have to do to end poverty is to teach people how to add and how to figure compound interest!!!
Gee, and I thought it had something to do with skills, luck, pluck, will power, education, health, age, race, class, gender, nationality. . . and most of all, whether your parents are poor.
Indeed.
Viewing home ownership as a "bet" is part (most?) of the problem.
Say 'mortgage ownership' rather than 'home ownership' rather.
Tanta - thought you might enjoy . . .
The Baby Blog » Blog Archive » SubPrime Lending - Real stories from the front line…
Surowiecki has been a paid speaker at RE conferences:
from Slate:
Drawing lines is easier when considering Surowiecki. He writes almost exclusively about business and economics in The New Yorker for its "Financial Page" column. He started lecturing for profit earlier this year after publishing his book The Wisdom of Crowds and says that in his eight or nine paid engagements he has spoken only about his book. He insists he's never taken money from any entity he's written about or plans to write about and that he wouldn't write about anybody he'd taken money from. Surowiecki is currently booked to speak at the Real Estate Connect 2005 conference. If you can determine the organization's agenda and explain how he might compromise the magazine by speaking there, please drop me a line. (Interest declared: I've edited Surowiecki and consider him a friend.)
Speaking of The New Yorker. - By Jack Shafer - Slate Magazine
Where, also, is Mr. paid speakerguy's evidence that there are more winners than losers? A nonprofit studying nyc subprime forclosures came to the exact opposite conclusion (nedap.org)
Having more winners than losers is hardly consolation for the losers. Plus, when the cumulative effect of the losers losing is the lowering of prices, this will likely turn some winners into losers. How many defaults and ruined lives does it take to judge the whole subprime experiment a failure? 10%, 20%, 51%? If anything less than a majority lose their houses, is it still a success?
Surowiecki needs to get his priors out in plane view. He is pretty clearly equating "home ownership" with "winner" as Tanta observers. There are plenty of situations beyond defaulting on an unaffordable mortgage in which home ownership is worse than renting. There is evidence that home ownership screws up labor mobility. When you are the labor, that ain't good. There are lots of ways to lose money on a house other than through the mortgage. Ask just about anybody in Detroit. Or Love Canal. The "rent or buy" calculation is done in recognition of the fact that sometimes renting is a financially superior option. Subprime lending has apparently shifted the balance of risks between owning and not owning in an undesirable direction. Whether it has been worth doing cannot be clear at the level of thought demonstrated in merely equating ownership with winning.
Surowiecki, at least, does not accuse those who think of subprime lending as often close to predatory of being bigots. That sort of stupidity has also made the rounds.
I mean, what else would you expect from a guy who extols the "Wisdom of Crowds"? Interestingly enough, he's written somewhat extensively on dysfunctions of collective wisdom. You'd think he'd have his antennae up for misplaced optimism.
The reason the 2/28s hadn't hit the fan hard was that prices kept going up. Now that the fuel has gone away, it's an inevitable conclusion that default rates will go up. The "more winners than losers" assessment may be a wee bit premature.
"The fall is spectacular. It's the sudden stop at the end that dampens it a bit."
I guess people won't understand why this MUST be stopped, before a few banks implode and take the depositor's money with them.
Im kind of surprised at this little ditty of his. Plenty of his writing is quite sensible, but this is borderline nonsense, and almost appears as if he was put up to task of making someone else's point. Or perhaps he had a really off day, or just got outright lazy on this one and didnt do the research. I just cant see how someone who has shown the ability to understand more complex issues could so horribly drop the ball on this one, when it's pretty much one of the most important stories out there to get right.
I smell something fishy...
It also never seems to occur to people like Surowiecki that the numbers he sees on "defaults" and "delinquencies" do not refer to the percentage of all borrowers currently "losing." They refer to the ratio between the current balance of delinquent loans (in a given book of loans) to the current balance of all loan in the same book. It's not like we're running some national scorecard that identifies the absolute number of people who are now or have ever defaulted on a loan.
And really, I get so tired of people who seem to know the definition of "subprime" (generally, a borrower who has already defaulted on a debt at least once) while being unable to use it in a sentence. Does it not matter to your "analysis" that your average subprime borrower is, by definition, already "doubling down" at the time this "bet" is placed?
I begin to think that the "subprime = poor people" thing is not just rhetorical disingenuousness, it's just plain old ignorance. Low incomes can, in fact, support low debts. I've seen it happen. There remains a difference between letting the poor borrow and letting the poor borrow too much. It isn't "a bet" if the probability is 1.0.
Tanta and kharris have it exactly right, that the basic problem lies in the assumption that "owning" a home is inherently "winning". This just shows how deeply rooted is the mistaken belief that real estate only goes up, and is absolutely the best investment you can possibly make -- an investment on which you just can't lose.
The Japanese used to think that, too.
I dearly wish that there were some way to get Surowiecki to read Tanta's posts on this.
Thanks Alo for that candid expose of your one time (possibly continuing) employer and friend, and Geoff (possibly also a friend, but indeed generous enough) for having my kind of nose.
Not declared yet is that subprime lending practices allow more, not less, customers support those house prices that used to count on earned income from wages, not earned income from investments...like RE holdings. It is a partial recognition (like so many misleads) that wages are lagging...that you are a "loser" if your income is tied to what you do and not what your investments are. You work for a living? How sad...
"Where, also, is Mr. paid speakerguy's evidence that there are more winners than losers? A nonprofit studying nyc subprime forclosures came to the exact opposite conclusion (nedap.org)
Alo | 04.26.07 - 10:53 am | # "
That "study" has more holes in it that swiss cheese and of course it's not a biased group who conducted it...
"It's not like we're running some national scorecard that identifies the absolute number of people who are now or have ever defaulted on a loan."
Why not. Otherwise all we have is biased blather. The botom line is if there are more losers than winners over time, then there will be no players.
Producer, any data you have to counter Nedap's study, pls lay on table.
Calmo - you're welcome - but the words in slate were not mine (sorry for lack of quotes) but Jack Shafer's -who authored the examination of New Yorker writers' speaking payments.
Let's not forget that the subprime market would never have grown to it's current size if the profits made from these loans were not so ENORMOUS. It was the oversized profits in the whole sales chain that was the driving factor behind these mortgages. Not the premise of giving low and moderate hardworking Americans a chance to own the American Dream. Do you think this market would be so hot if the interest rate on a 2/28 would decrease if you met your mortgage obligations on time? Your reward for proving that maybe you were not so risky after all.
This reminds me of a local newspaper article comparing rates paid by drivers with identical driving records. The premium they paid to GEICO, was not based on their driving risk, (no accidents, no tickets over twenty years) but on their occupation. A janitor paid twice the premium as an engineer for the same coverage. If you are low income it is impossible to get ahead no matter how honest or how hard working you are. We all know how intrest expense adds to the cost of everything. I am all for profit but I am also for fairness. When we were starting out the deck was not so stacked against you as it is today. Basically you are at the mercy of a computer generated loan environment. Somebody has already decided how you are to fit into the predetermined model.
"The botom line is if there are more losers than winners over time, then there will be no players."
How do you explain the fact that the lottery continues to get players? Waaaaay more losers than winners, but people still play.
It's not just comparing the number of winners vs. losers. You also need to figure in the potential gains and losses. In a lottery, the loss ($1/play) is very small compared to the gain (millions).
I'm sure there are other factors at play, too. But that one sprang to mind.
Government data on household wealth show that, for poor people, owning a home is just about the only way of acquiring any net wealth.
And that's especially true for African-Americans and Hispanics, in part because they receive so little in inherited wealth.
Once people have some wealth, they can leverage it to grow more wealth, perhaps by using their home as collateral to invest in a business. This is what Donald Trump does, and there's no reason why poor people should not also be able to take advantage of it too.
So there's good social policy and economic policy reasons for government policies to expand ownership of homes, especially for groups that have been unable to buy in the past because of racism or market failures.
This is an updated version of the 40 acres and a mull that ex-slaves never received.
But the flaw in that plan is that to grow their wealth, homeowners must have equity in their homes.
Increased equity is not possible when home values are falling, or when there's no downpayment, or when monthly payments don't cover any principle.
Surowiecki's point, I think, is that we shouldn't throw out the baby with the bathwater. Not all subprime lending is bad.
Increased equity is not possible when home values are falling, or when there's no downpayment, or when monthly payments don't cover any principle.
Well, then. That clearly rules out putting people into loans that they cannot service with current income.
That, in turn, should keep lower income folks with good bill paying habits from getting subprime loans: if they're getting subprime, it's only because they aren't making a down payment or aren't making amortizing payments, right?
This means that lower income folks with good bill paying habits go back to prime loans, where they belong.
And the problem is?
Fred, I'm not so quick to congratulate Surowiecki for doing battle with the idea that subprime lending should be banned. As I have heard exactly zero suggestions that any regulator, legislator, or even mildly informed citizen is suggesting that.
But even if this weren't a strawman, I fail to see the point. You seem to be arguing that prime-credit loans on reasonably priced properties can help the poor. I'll go with that for the purposes of argument. So why not get rid of subprime, since it's apparently beside the point?
yeah if from a milion poor souls who take out a subprime mortgage and are hit by the reset 999 999 go to the foreclosure because unlike the last 1 guy they havent won in lottery 300 milion.
so yes, giving milion people a mortgage 999 999 of them will never be able to repay is being called spreading the risk
But the flaw in that plan is that to grow their wealth, homeowners must have equity in their homes.
Increased equity is not possible when home values are falling, or when there's no downpayment, or when monthly payments don't cover any principle.
Surowiecki's point, I think, is that we shouldn't throw out the baby with the bathwater. Not all subprime lending is bad.
fred c. dobbs
yes the theory is nice, bank takes away a large amout of their income for mortgage because these people would never be able to save otherwise. but fred poor people are poor because they are bad in math. they cant count their expenses in comparison to their income, they take out credit cards which they are not able to finance,
in this consume world we are being bombarded by advertisement, sometimes i realize that i got caught by an advertisement even though i thought it could never happen to me.
about financial contracts, even i a completely paranoid walking money calculator
am going crazy when i am raeding financial contracts and lose myself in them.
so if anyone is giving a 2/28 arm instead of fixed mortgage to people with lower income should be hanged/shoot/whatever because he is simply taking advantage of well say, simple people.
Why do so many people think subprime and bad credit ratings are a disease unfairly cast upon some rather than an objective analysis of past credit behavior? I have a CRAZY idea instead of assisting poor credit candidates into more debt, how about teaching them how to manage their current debt?
Remember poor behavior is cured with good behavior not encouraging poor-er-er behavior.
Tanta -
If I can illustrate Fred's point? Take the hypothetical low income, poor credit subprime mortgage holder. Let's assume she pays an amortizing loan of some sort, and she's part of the 90% or even, being more pessimistic, the 70% who doesn't default. This becomes a forced savings program, like the "opt-out" form of a 401k. Let's say the costs are higher than renting. Let's say the property actually depreciates in real value - maybe even in nominal value, so that the return is negative - a lousy investment, as some 401k's have been.
Okay, now let's assume that this same person remained a renter. Her disposible income is actually higher, and she could invest or even just save the difference (a decent savings account should give you some kind of positive real return. Under this scenario, she'd be much worse off buying. But of course this assumes that she would do one of those things with the money - or even, say, "invest" in education producing a credential that raises her income. Now let's go back to the fact this is a typical poor credit, low-income person. Is this how they handle their money? For that matter, how much of the current consumption really does them any good at all? In practical terms, what I think Surowieki was making about wealth accumulation: the choice is between a bad investment and none at all.
What's funny is even if our hypothetical character does "opt out" of her bad-investment house 401 with serial home equity extraction, she ends up with no less wealth than she would have as a renter - just less of whatever she's spending it on because the money is so much more expensive, but perhaps more useful because it comes in bigger discrete nuggests rather than the handful of sand slipping through their figures most people in this class find their income. Like the bad investment Christmas Clubs, that can be useful in the absence of budgeting and will power.
Maybe I'm wrong, but I think this is the point.
I think there's a serious misreading of this piece going on here. In the first place, far from "equating 'home ownership' with 'winning'," Surowiecki argues that it was in part the delusion that home ownership is always better than renting that led borrowers astray. Most of the piece is precisely about the dysfunctions in judgment and the "misplaced optimism" that's led to the problems in the subprime market. And the "bet" he's talking about at the end isn't a "bet" in the sense of pure speculation, but the bet that subprime borrowers are making that they'll be better off owning homes than renting them.
Is the banning thing a straw man? I don't know. Nouriel Roubini, who I think most people would call at least mildly informed on the subject, has argued that regulators should simply have prohibited entire classes of subprime loans, and suggested that laws that would eliminate a third of all subprime loans would be a good thing. So that's at least on the table.
I thought the main thrust of the piece was an attempt to explain why subprime borrowers have made the seemingly senseless financial decisions they've made. Unless you think that borrowers are simply mindless dupes of lenders, that doesn't seem like an unreasonable thing to try to do.
a typical poor credit, low-income person.
For the third time on this thread, and about the jillionth time in my career, can someone tell me why assuming that all or even most low-income people are no more than deadbeats is not horseshit? If we're going to have an "I care for the poor" contest, how do you think you win by smearing low-income people in this way?
The problem with subprime is that it expanded out from loans to people with bad credit histories and into people with mere low incomes--the low-income loans were "subprime" because there was no downpayment, terrible debt ratios, and frequently unverified income or assets (because they weren't enough to support the loan amount required to buy a house these days, not because they aren't enough to support any loan amount).
There is data, from lots of sources, that tells us that people who could qualify for a prime loan are getting subprime loans. They just can't get a prime loan for $500,000, because their incomes cannot service such a loan at any goddamn interest rate. So let's stop pretending that our low-income folks can "build wealth" trying to buy a house priced at 10 times their annual income with a loan carried at 100% of monthly income. That's three-card monte. Perhaps people don't know what three-card monte is. It is not a bet you can win.
If we're all so fired up about helping the poor build wealth, we should be talking about how to bring home prices down and incomes up. Talking about how to allocate capital to putting them into debt slavery in order to transfer what income they have to mortgage lenders, while this "wealth" disappears, as it must, when home price inflation finally goes away, is hardly in my mind a way of helping out.
And the "bet" he's talking about at the end isn't a "bet" in the sense of pure speculation, but the bet that subprime borrowers are making that they'll be better off owning homes than renting them.
You make it sound so rational. Why, here's someone taking a neg-am ARM, who will clearly be unable to ever afford anything other than the minimum payment, or one of those 2/28s, where they'll never be able to afford the adjusted payment, sizing up the options and concluding they'll do better than renting.
If you believe these borrowers are making rational assessments, you have to believe that they're either misled (they don't have the correct information on the loan terms and the price of the home, even if their reasoning process is sound) or that HPA will always or most often bail them out. We are not talking about the good old-fashioned subprime risk premium, wherein you get the 6% fixed because you've got a good FICO and I get the 9% fixed because my FICO sucks and we can both afford our house payments. We're talking about you get the 6% fixed and I get a negative-equity loan with payments that leave me $10 a month after taxes to buy peanut butter with. Talking about the actual terms of these loans is not beside the point.
Our good Dr. Roubini, and tens of thousands of others including me, would love to see the predatory part of subprime lending go away. That means we think the part that is mere three-card monte needs to be illegal. Stacked decks are not legal anywhere else, so why do they get a pass in mortgage lending? But to take away the predatory third is not to ban anything that can prove it's a legit casino. If this isn't a strawman argument, what is? Surowiecki is appealing to a class of borrowers who actually stand a chance of being better off in order to argue against regulation that would prevent those who have no chance from entering the game. He either doesn't understand what the proposed regulation is, or he doesn't understand how predatory loans work, or he does, in fact, conflate cost/benefit analysis with OTB. And I am basing this on what the article actually says, not what it might be nice if we imagine that it said in order to get Surowiecki off the hook of his argument.
Question: How has the good Doctor Roubini's investment advice gone over the last few years? I've heard some argue that his portfolios have performed very badly, but I personally don't know.
Well, that response missed every point I thought I made, but people naturally repond to what they expect to hear rather than what's said. But then I suppose I could be thinking I'm making one point while making none at all.
Keith, what has that got to do with his (imputed) position on predatory lending?
There are people--and I can't say if Roubini is in this group because I don't know--who take seriously the idea of allocation and misallocation of capital, and who therefore do not invest in things they think already get too much capital. I, as an example, will buy prime-quality MBS, but I won't buy Alt-A and subprime stuff, because I don't think I need to pile my capital on to that stuff. I take a lower return, in theory at least, than someone else does. No one has to agree with my investment strategy, but measuring it against "highest possible return" is, well, applying the wrong standard to it. Don't you think?
TStockman, tell me how I missed your point. You appeared to be saying that the "typical" subprime borrower is irresponsible with discretionary income. Also, that homeowing is "forced" savings, and that these "typical" people, if they are left as renters, will not save because no one is forcing them to. Therefore, home owning is wealth building because it means we make them behave. We being whoever it is who claims to have the moral authority, as well as the economic wisdom, to tidy up their affairs for them.
I challenge these "facts":
That there is a "typical" subprime borrower who is both low income and a terrible money manager.
That the fact that a low income cannot support an inflated house price is a question of the low income person's money management skills.
That "forced savings" is disinguishable from "redirected consumption" in this context.
That any borrower who cannot afford the monthly payment can be said to be saving anything.
So what was your point?
Well, Tanta, that depends, on whether we're talking about a different risk-return preference, which is fine, or simply bad investment advice which generated significantly negative returns, which is what a lot of housing bears (not necessarily Roubini) have done.
What's the difference between somebody who gets paid and gives advice that generates negative investment returns and a predatory lender?
Tanta, you believe the government should legally prohibit people from taking out loans that they want to take out and that lenders are willing to give them. So it's pretty clearly you, and not TStockmann, who is claiming the "moral authority" and the "economic wisdom" to tidy up borrowers' economic affairs.
Stockmann's argument is not that "we're" making the borrowers behave by allowing them to take out loans. It's that they are trying to make themselves behave -- to essentially enforce savings on themselves. This may not be an accurate picture of subprime lending as a whole, but the behavioral-economics literature does suggest that people do deliberately constrain themselves in many ways in order to force themselves to do things they know they would otherwise fail to do.
I'm also confused by your argument that subprime borrowers are not "poor money managers." You believe these people are taking out massive loans that they have no hope of repaying, based on inadequate information and a delusionary view of what will happen to housing prices. Isn't this the definition of poor money management?
Revo said: fred poor people are poor because they are bad in math.
Wow! All we have to do to end poverty is to teach people how to add and how to figure compound interest!!!
Gee, and I thought it had something to do with skills, luck, pluck, will power, education, health, age, race, class, gender, nationality. . . and most of all, whether your parents are poor.