Saving Subprime

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In the public’s eye, subprime loans have fallen into their own kind of hell. Nobody wants them. Nobody likes them. Subprime loans should just roast away, along with the shady lenders who dealt in them.


But wait a minute. The sentiment against subprime loans has veered way too far. Done right, subprime loans are a great innovation, especially for Los Angeles.


Think about it. A subprime loan is a good, fast way for those whose credit is dented or nonexistent to get into a home. Remember, these are folks who probably otherwise would not qualify for a home loan and who may have been locked out of the American Dream in the past. But, if they can get a subprime loan, they can start building equity and enjoy the other advantages of home ownership. After a few years, perhaps they can shake off the subprime and get a regular, prime loan.


Subprimes are important to Los Angeles, where home prices are exceedingly high. Many borrowers cannot qualify to buy a home unless they go the subprime route. And the more homes in marginal neighborhoods that switch from renter-occupied to owner-occupied, the better off the neighborhood.


Now, the important words are “done right.” Lots of subprime loans apparently way too many were done wrong. Many buyers were prodded into loans they clearly never should have taken out. Some buyers, for example, were wowed by affordable monthly payments because of early, low teaser rates, and apparently ignored or did not understand that the rates ballooned after two years, creating ruinously high payments. Borrowers lost or will lose their homes. The lenders and brokers, meanwhile, got commissions and fees by making the loans, and then passed the risk to the next guy by selling the doomed loans to Wall Street and institutional buyers.


The good news is that the market took care of a big part of the problem. Once defaults started rising a few months back, the big buyers stopped buying the loans, causing the worst of the subprime lenders to seize up immediately. New Century of Irvine was among about 40 nationwide that went kerplunk. Regulators took action in other cases. Fremont General of Santa Monica, for example, was instructed to get out of the subprime business.


The danger now is a political one. Congress can’t pass up the temptation to overreact and soon may consider legislation that will hurt more than help. (Did someone say “Sarbanes Oxley”?)


All this came to mind last Tuesday when the chairman of the Mortgage Bankers Association made a speech to the National Press Club in Washington. He allowed that he had a black eye, what with some in his industry, along with some brokers, having created the subprime mess. But he said that potential laws now being discussed by in Washington are likely to turn the screws so tightly on the subprime industry that it may result in financially stressed consumers getting less access to loans.


The chairman, John M. Robbins, had some interesting statistics. Among homeowners, he said, 5.1 percent are subprime borrowers with adjustable rate mortgages. And of those, the foreclosure rate is 10.8 percent. So 10.8 percent of 5.1 percent equals a little more than one half of 1 percent hardly a widespread meltdown, as widely depicted.


A big chunk of the subprime loan industry got hijacked by the unscrupulous. But done right, subprime loans serve an important need and have a good public purpose. In the words of a former president, subprime loans for sure need to be mended. But not ended.



Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

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