at Calculated Risk, makes a couple of interesting points today. The first, which
is very important and not well understood at all, is that just because subprime
mortgage default rates are at 5%, say, that does not mean that 95% of subprime
homeowners are managing to stay current on their mortgages.
A foreclosed subprime loan can represent the second, third, or nth subprime
loan that borrower has had on the same property. In this case, the last loan
in the series ended up in foreclosure; the first n loans ended up as prepayments
due to refinances, which means they count in the "successful" pile
of loans. Looking at current rates of delinquency or foreclosure cannot tell
you anything about cumulative numbers, and it does not track one borrower
all the way through all the refis until the end game. It is perfectly possible,
at least hypothetically, to have a situation in which 40% of subprime homeowners
eventually end up in foreclosure or short sale or jingle mail, but only after
three or four loans, so that on any given month, on the current total book
of outstanding subprime loans, "only" 4% are currently in foreclosure.
The point here is that we simply do not know what percentage of subprime borrowers
are ending up in default or foreclosure. It’s conceivable that the ratings agencies
or someone else might be able to do the math, but it seems that no one has done
it, as of yet.
Tanta then goes on, however, to quote Carola
Katz Reid, and this is where she loses me:
The dramatic finding is that for low income minorities, low-income whites,
and middle-income minorities, the financial returns to homeownership over
even 10 or more years of owning a home are extremely small. Indeed, for low-income
minority homeowners, the average value of their housing only increased from
$50,000 to $65,000—roughly a 30 percent increase over a 10 year period.
While this does represent an increase in house value, this rate of return
is less than the “riskless” return on Treasury bills.
This is, in a word, bullshit. Low income minorities don’t tend to have $50,000
in cash lying around to spend either on housing or on Treasury bills. In fact,
their net worth is normally just about zero. That doesn’t mean they can’t get
a mortgage, however, and if you can manage to find say $10,000 for a downpayment,
you can borrow the other $40,000 for a step on the bottom rung of the property
Ten years later, you’ve probably paid down half the mortgage, and your house
is worth $65,000. Which means your net worth has gone up from the $10,000 you
scrounged for the downpayment to $45,000 — an increase not of 30% but of 350%.
Try getting that from Treasury bills.
Now, with high returns comes high risk, and there surely is a reasonably significant
probability that our low-income homeowner will end up losing the $10,000 as
her home goes into foreclosure. (On the other hand, if that $10,000 was invested
elsewhere, for instance in a small business, it might just as easily be lost
there, too.) As we saw initially, we don’t know what the real probability of
foreclosure is. But to say that "the financial returns to homeownership
are extremely small" is simply wrong.