Letters to the Editor
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It's a lot harder to have the courage to pop a bubble
Honestly, if the WH/Congress had stepped in while the rise in house prices was still lifting all boats, it would have been far more likely to be painted as "anti-poor."
So, while there were probably plenty of people that were complicit in their downfall, the banks were supposed to be the adults in this situation. That's not to say that people weren't very, very, very, predictably stupid. Taking a mortgage you can't afford when the payment resets because house prices always go up is stupid, especially after having witnessed a bubble burst around the turn of the century. Those people are likely to be punished enough--repossessions and at least 7 years of problems with credit. What really burns my butt is potential inappropriate selling--refinancing 65 year olds with fixed payments into negative amortization loans and the like--I don't know how big that issue is, but I'm hoping that the connection of big, greedy investment banks in ownership of some of the subprime companies may allow some of these (hypothetical perhaps) grannies getting put out on the street.
So regulators, get on it, before the lawyers beat you to it and get billions while each granny gets $48.56 in a class action settlement.
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The critics of the critics
Anyone defending the subprime lenders is trying to preserve the duck-in-a-barrel target market of lower-middle class folks who can be easily manipulated because they aren't so familiar with fine-print bait and switch tactics. This is the same technique that works with the barrage of credit card offers, which are gratefully taken by those who shouldn't get them and quickly maxed out when thin times inevitably come. Usurious interest keeps these exploited folks in poverty, and pushes them there if they weren't quite there yet otherwise. They are the first to be laid off and the first to need advocates in the system. Who will speak for them? When will the out-of-control corporations realize that you can only get so much blood from a stone? Probably not til the economy collapses under the weight of the greedy from the top, and the tapped-out at the middle and bottom. Or when the government takes it's necessary role as credit market regulator.
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A question
Will the subprime lenders really go bankrupt? I have heard that a very large number of those loans were sold off by those lenders quite quickly after making them, and that much of this debt is owned by mortgage-backed securities and such. This would suggest that the subprime loaners made a killing without having to deal with what they probably figured would be a heavy foreclosure rate. Now, maybe if there are no buyers for the debt, they'll slow down on making these loans or act more responsibly, but color me not optimistic on that front.
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Subprime lenders will go bankrupt
They have buyback clauses in the debt--if a certain amount of loans go bad within the first 6 months, say, they are obligated to buy back the loan/security. That is what is driving them to the wall. So many loans are going bad that they don't have the money to buy them back.
The other issue with originators of securities is that they often slice them up into tranches with different ratings. The ones that they can't unload, if they can't unload some of the tranches, tend to be the lower rated ones. So they can be caught out by that. I-banks won't go bankrupt over this, but it may sting a little.
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Important to consider the benefits of increased home ownership, but...
Is a % uptick in home ownership due to 'cheap' housing money worth a recession when the increased risk shudders through the economy? While it is important to acknowledge the upside of cheap loans (good borrowers get houses for cheaper), one should also be concerned about the downside as well. Dismissing those concerned about the ramifications of risky lending on such a large scale as anti-poor "credit snobs" is really quite silly.
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What chutzpah!
Many subprime lenders made extravagant claims to entice people with low incomes and poor credit histories to take on unaffordable mortgage debt, then made buckets of money off them. The unrealistic promises, fine-print "gotchas," hidden fees, and generally lousy terms that these lenders offered to their customers are classic examples of predatory lending practices.
Now, though, the bubble has burst and these lenders are being hoisted on their own petards. What better way to deflect attention from their own exploitation of the poor and desperate than to blame their critics of the very same thing?
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The actual recipient of the subprime loans
I am pretty sure I read either here or on Calculated Risk that the bulk of the subprime loans went not to first time home buyers but to people refinancing their house.
I have seen numerous stories about people who replaced affordable fixed interest mortgages with questionable loans (and then defaulting) in order to cash out equity in their homes. Not all this home equity has been spent wisely...
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Myopia
I'm an optimist, and don't believe the popping of the housing bubble will spell long term gloom for U.S. economy, though I think some time of recession is likely in the works. Economies don't chug along forever without getting a hiccup, but then again i don't think that's a bad thing in the long run.
The problem with subprime is not that they were too greedy, but rather they had short sighted greed. This goes for both the person selling the loans directly, and the organizations themselves. The person pitching the loan is not incentivized to think long term, they are paid when they close. It doesn't matter that loan then goes into foreclosure 2 years later. The captains of the organization while ultimatley responsible in the long term are often caught up in their meglomania and short term lust to grow ever faster that they forget about next year let alone three years. Badly run corporations often run with this kind of myopia.
Tighter regulation on lending practices would likely both prevent both bad loans from being made and make it harder for poorer folk from getting loans. However the question remains in this situation why exactly do we need tighter lending practices? Lending tegulation is best served to prevent lenders from gouging customers, and unscrupulously ripping them off with complicated terms. That is not the case with subprime even with the exotic ARMs. The complicated loan structures weren't structured in way to create greater profits for the lender, but as method deferring cost and risk to a later point - again short term thinking. The interests of the lenders and the borrowers are the same - prevent foreclosure. I don't know how you exactly regulate a longer term view.