The Milken Institute has stepped up. If not (quite) to defend subprime lending and all it has come to stand for, then at least to argue that the truth of the matter is rather more complex than the urge to find the villain of this piece would have it.
“Homeownership is at the heart of the American dream,” they argue in the first of three notes. And their research finds that subprime lending has helped increase homeownership in the US. You may argue, as Felix Salmon would, that that result isn’t necessarily a good one – but they’ll be few politicians prepared to take the line that enabling people to own their homes (often for the first time) isn’t a thoroughly good idea. Another strut for Gillian Tett’s line on the complexities of finger-pointing in the credit mess.
In the second, they argue that the subprime products per se are not the problem. The industry does not have a standardised definition of prime and subprime – and in any case certain kinds of products, now attracting ire, were not marketed to subprime borrowers exclusively. Looking at mortgage foreclosures across 29 products, all are candidates for foreclosure. It is impossible to place the blame on one product, or even one type of borrower. Product innovation in the industry should not be a casualty of this fallout – and foreclosures at some level are a necessart part of the mortgage market.
Finally, the Institute looks at hybrid loans – where the interest rates are fixed for a given period and then become variable – which have come in for a lot of flak. Foreclosures here are likely to rise, they say, as house prices cease rising and people struggle to refinance.
We’d note at this point that in the US a standard mortgage is usually a 30-year, fixed-rate loan, which according to the Institute comprises about 84 per cent of prime originations in the past eight years or so, and 44 per cent of subprime originations. In the UK, in contrast, the idea of a fixed two or three year term followed by a floating rate is entirely standard. Lord knows how we’ve survived.
The Milken Institute notes that while hybrid mortgages accounted for 36 per cent of subprime foreclosures in their data, fixed-rate loans weren’t far behind, with 31 per cent. And of all prime foreclosures, 74 per cent occur with the 30-year, fixed loans, with hybrids and ARMs accounting for under 21 per cent.
So, as the Institute’s James Barth and Peter Passell argued in the WSJ this week, it’s just not that straightforward. The willingness to take big risks in the midst of a housing boom is not confined to the impulsive or the myopic. And people lose their houses for all sorts of reasons, not just the underlying product they were flogged at the time of sale.
Herb Greenberg relays the thoughts of a mortgage industry veteran who makes the same point: “The Government and the market are trying to boil this down to a ‘sub-prime’ thing, especially with all constant talk of ‘resets’.” That makes it easier to explain away – but the problem is really far more wide-ranging. And it’s going to get worse before it gets better.
So what then for the US government’s efforts?
Barth and Passell argue:
In the end, it simply isn’t the government’s job to convince people that some financial risks aren’t worth taking, or that housing prices can go down as well as up.
Is it, though, their job to clear up after?