# Reason for large amount of subprime loans? **URL:** \ **Category:** Factual Questions\ **Created:** [July 20, 2012, 9:32pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890 "2012-07-20T21:32:53Z")\ **Posts on this page:** 8\ **Page:** 2
**Author:** ![JustinC](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/justinc/32/8083_2.png) [@JustinC](https://boards.straightdope.com/u/JustinC)\ **Post date:** [July 27, 2012, 4:00pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/21 "2012-07-27T16:00:34Z")
And there’s always the FED put to take for granted. The FED has dropped interest rates and injected funds to avert further market declines associated with the Savings and loan crisis, Gulf War, the Mexican crisis, the Asian crisis, the LTCM crisis, Y2K, the burst of the internet bubble and the 9/11 attacks. It has become so embedded in the psyche that to do otherwise would provoke outcries of promoting another Great Depression, when the consequences of doing so has/will likely result in the same. ---
**Author:** ![Esox\_Lucius](https://avatars.discourse-cdn.com/v4/letter/e/848f3c/32.png) [@Esox\_Lucius](https://boards.straightdope.com/u/Esox_Lucius)\ **Post date:** [July 27, 2012, 4:12pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/22 "2012-07-27T16:12:32Z")
> [@doorhinge](#): > > The U.S. CONGRESS. > > The Congressional banking committee created laws that push the “everyone should have a home” ideology. Even if the homeowner couldn’t afford the payments. Congress doesn’t read the bills it passes so idiotic bills became law. Mortgage companies, homeowners, banks, and Fannie/Freddie all took advantage of the situation. The subprime mortgaes were broken up and repackaged as sound investments (after all, housing prices never go down :rolleyes: and suckers in the U.S. and other countries bought up everything they could. Then the bubble burst. Did that idea originate with Congress, or were Congressmen encouraged to do it by the banking lobby? There are always complaints of politicians being in the pockets of Their Corporate Masters ™, so was that the case here? Or is there no way of knowing? ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [July 30, 2012, 5:49am UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/23 "2012-07-30T05:49:13Z")
> [@doorhinge](#): > > Exactly. Prime-rate mortgages were heavily regulated. You have to prove who you are, that you have a means to pay back the loan, that you had money to put towards the price of the home, that you weren’t already heavily in debt, etc. > > Sub-prime mortgages were less regulated and it was Congressal banking committee and Congresses responsibility to provide those regulations. Do you want a loan? Can you sign your name? Here’s your money. Fannie and Freddie were later required to buy up these unvetted loans in order to keep pushing the “everyone should own a home regardless of whether they can afford to pay back the loan”, agenda. > > People trusted that Congress could not possibly do something so stupid. The people learned a hard lesson. Really? The restrictions for good customers (“prime”) were more regulated than for bad customers (“sub-prime”)? Or do you mean the restrictions were lifted for all, but the poor risks were the ones who got into trouble, in general? ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [July 30, 2012, 7:24am UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/24 "2012-07-30T07:24:53Z")
> [@doorhinge](#): > > It wasn’t “over-regulation” but the “lack of regulation” that led to the sub-prime mortgage debacle. Before CRA, potential homeowners had to be vetted by mortgage companies BEFORE they qualified for a loan. The basic rule was that the homeowner had to prove that they could repay the money borrowed. The initial CRA in 1977 helped homeowners who couldn’t qualify under “prime” mortgage standards. The CRA was later modified to make sub-prime loans even easier to obtain. As more people became aware that anyone could now obtain a poorly-regulated, easy-to-obtain, sub-prime mortgage, sub-primes became the mortgage of choice. Would you mind giving specific sections of the CRA requiring “liar” loans that were so common during the housing bubble? How about the fact that brokers were incentivized to write supprimes above prime loans, since they paid a higher interest rate? How about explaining why minority neighborhoods with similar income levels of white neighborhoods getting a significantly higher level of subprime loans? Finally, perhaps some evidence that the Bush administration, who were well known for their regulatory zeal, went after or threatened banks to force them to write bad loans? The state attorney generals, seeing what was going on, appealed to the Fed to regulate (or enforce regulation) on loan quality - and Greenspan refused. Must be because of the CRA. And while you’re at it, why not give some evidence that the banks complained about these onerous requirements to a sympathetic congress. By the way, your source is a cretin. Proof > [@](#): > > Of course, Angelo Mozillo didn’t need very much prompting on this score. He believed exactly what the CRA regulators believed: that these lax lending practices were the wave of the future, democratizing the glories of home ownership. Right. Mozillo did it because of his firm belief in equality. Making loads of money had absolutely nothing to do with it. Writing loans very dangerous for the borrowers showed how much he loved them. ---
**Author:** ![doorhinge](https://avatars.discourse-cdn.com/v4/letter/d/a5b964/32.png) [@doorhinge](https://boards.straightdope.com/u/doorhinge)\ **Post date:** [July 30, 2012, 4:10pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/25 "2012-07-30T16:10:34Z")
> [@md2000](#): > > Really? The restrictions for good customers (“prime”) were more regulated than for bad customers (“sub-prime”)? > > Or do you mean the restrictions were lifted for all, but the poor risks were the ones who got into trouble, in general? I mean that prime-rate mortgage applications took 30-60 days for the mortgage providers to verify your information. And they did verify it. Sub-primes could be granted in a few days and even overnight. You want money for a mortgage? Daniel Sadek had borrowed money available for sub-prime mortgages. Sadek gets paid by you for giving you a loan and Sadek gets paid by someone else for selling them your mortgage. Sadek wasn’t even required to retain a certain percentage of the loans he makes. The bottomline is that Sadek has risk, no skin in the game. If you can’t repay the loan, the sucker who Sadek sold your mortage to doesn’t get paid. Sedek buys a Ferrari Enzo and makes movies. > **[Car News - Latest Auto News, First Looks and First Drives | Edmunds](https://www.edmunds.com/car-news/)** > > Car News from Edmunds keeps you informed of the latest auto news, first looks, first drives and videos. \*Sadek says 95 percent of Quick Loan Funding’s mortgages were made to subprime borrowers. If we had a prime borrower on the line, we hung up on them,‘’ Buksoontorn says. We were geared toward subprime because they were easier to close. We were giving them money no other bank would dare to give them.\* [http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTqNSIm9G.To](http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTqNSIm9G.To) Just to set the record straight, I’m not excluding any of the morons in the sub-prime, adjustable-rate mortgage debacle from their personal responsibility. Morons bought homes they couldn’t normally afford. Morons gave mortgages to people who normally couldn’t afford them. Morons sold repackage sub-prime loans as triple A “financial instruments” that were anything but triple A. Morons bought those financial instruments without personally investigating that these were sound investments (what are they being paid 6 figure incomes for?). Many people simply believed that “houses never lost value”. Everyone was making money and very few wanted to rock the boat. The people and agencies who warned that providing loans to people who couldn’t afford them was an extremely bad idea, were ignored or shouted down. No one who bought or sold the original sub-prime, adjustable-rate mortgages did anything illegal. None of them skirted the Federal or State sub-prime rules and regulations as they existed at that point in time and that is the key phrse, “as they existed”. I believe it’s common knowledge and good business practice that money-lenders would not loan money unless there was a very good chance that they will be repaid. A 2 to 4 percent default rate was considered an “acceptable” risk, depending on the market place. Only the government or a charity is in a position give away money at a loss and, of course, that money isn’t their own. I’m not in a position to penalize any of the buyers, sellers, or bundlers. Many of them have lost homes, money, or have gone bankrupt. Good! Unfortunately, the market had become so large that many homeowners, businesses, investors, renters, transportation manufactuors, builders, resturants, construction trades, municipal workers, and taxpayers in general were hurt by the bursting bubble. However, we are all in a position to penalize the rules makers WHO WERE ELECTED TO WATCH OUT FOR OUR BEST INTEREST AND FAILED TO DO SO. Many members of the Congressional banking committee and the members of Congress who created (by not properly regulating the industry) this situation AND later refused to slow down or bring a halt to sub-prime, ARM bubble are still in Congress. Why? They were too stupid/lazy to do their job properly and they were reelected by convincing their constituants that Congressional stupidity is SOP and it was all those greedy people who took advantage of poor, stupid Congress that were responsible. \*Our capital markets operate on the basic premise of risk versus reward. Investors taking a risk on stocks expect a higher rate of return than do investors in risk-free Treasury bills, which are backed by the full faith and credit of the United States. The same goes for loans. Less creditworthy subprime borrowers represent a riskier investment, so lenders will charge them a higher interest rate than they would charge a prime borrower for the same loan. To avoid the initial hit of higher mortgage payments, most subprime borrowers take out adjustable-rate mortgages that give them a very low initial interest rate of around 4%. But with annual adjustments of 2% or more per year, these loans typically end up charging around 10%. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,470. A 6-percentage-point increase in the rate caused an almost 100% increase in the payment. Ouch!\* > **[The Skinny on Subprime | The Motley Fool](https://www.fool.com/investing/value/2007/07/10/the-skinny-on-subprime.aspx)** > > Beachfront property for free! _The term “subprime” refers to the credit characteristics of individual borrowers. Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers…_ [http://www.fdic.gov/news/news/press/2001/pr0901a.html](http://www.fdic.gov/news/news/press/2001/pr0901a.html) ---
**Author:** ![Darth\_Panda](https://avatars.discourse-cdn.com/v4/letter/d/ee7513/32.png) [@Darth\_Panda](https://boards.straightdope.com/u/Darth_Panda)\ **Post date:** [July 30, 2012, 4:19pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/26 "2012-07-30T16:19:56Z")
I highly recommed [The Big Short](http://www.amazon.com/The-Big-Short-Doomsday-Machine/dp/0393072231) by Michale Lewis for anyone really interested in learning about the details of the 2008 crash, subprime loans, CDos, etc. Great book. ---
**Author:** ![doorhinge](https://avatars.discourse-cdn.com/v4/letter/d/a5b964/32.png) [@doorhinge](https://boards.straightdope.com/u/doorhinge)\ **Post date:** [July 30, 2012, 4:35pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/27 "2012-07-30T16:35:39Z")
> [@Esox\_Lucius](#): > > Did that idea originate with Congress, or were Congressmen encouraged to do it by the banking lobby? There are always complaints of politicians being in the pockets of Their Corporate Masters ™, so was that the case here? Or is there no way of knowing? The road to heck is paved with good intentinons. Can you imagine the banking industry starting this because they wanted to make poor financial risks? Banking certainly took advantage of the situation when it became available. So did everyone else. The idea of low-cost, AFFORDABLE housing was an idea that had been bandied about for decades (centuries?). CRA was not a bad idea. Helping people is not a bad idea. Making stupid fianancal regulations and not addressing the growing problems associated with those stupid regulations was a terrible idea. Requiring that fannie/freddie contribute to the problem by allowing them to buy up unvetted, faulty mortgages should be considered a criminal act. It’s difficult to pinpoint who came up with the ideas but I know which organization allowed the sub-prime ARM’s to become such a large part of the mortgage writing industry and that’s CONGRESS. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [July 30, 2012, 5:38pm UTC](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890/28 "2012-07-30T17:38:51Z")
The purpose of CRA was to fix a perceived problem - that banks were not writing loans in neighborhoods with a high minority population, even when other factors were the same as white neighborhoods. Again I want to see specific language that forced banks to silently write bad loans. It was kins of an affirmative action for banks, and reasonable people are aware that affirmative action does not require companies to hire illiterates for management jobs. Were all involved morons? The bank execs who made immense amounts of money from the bubble and got off easy don’t seem to qualify. (I’m sure even the ones whose companies went under are suffering on their yachts.) Purchasers of houses with bad loans might be qualified, but during the bubble those who tried to safe found themselves getting further and further behind, and they were told that the ever-rising value of their new home made this a no-lose situation. In any case, the purpose of credit checks is to keep the banks from loaning money to morons who can never repay it. The banks had all the power, and thus most of the blame. In fact there were case reported where mortgage salesmen convinced little old ladies whose houses were paid off to take out new loans - and these little old ladies lost their houses. No CRA credit for that! [Previous page](https://boards.straightdope.com/t/reason-for-large-amount-of-subprime-loans/628890.md?page=1)