I wrote earlier about a study by the NYFED, that provided insight as to what the average subprime loan looked like. The study laid out the horrific terms of these subprime loans but didn’t talk about the people or circumstances that caused the subprime loans to be enticing. Sunday’s Star and Tribune chronicles one such circumstance.
Bradley Collins Jr. is a painting contractor. He averages an income of $60,000/year and supports his family of 5 on that income. According to the article, about 3 years ago, Collins and his wife thought they would take advantage of the real estate boom occurring in the NW part of the Minneapolis metro. With the encouragement of two salesman from a “property management company,” they bought 4 houses for a total price of $1.2M. The story as we all know, continues with the real estate market busting, the resales of the homes not occurring, the owners failing as landlords and the homes falling into foreclosure.
Stories like these, while perhaps not typical of all the subprime issues, are why I will continue to say that the government has no business being involved with any kind of subprime bailout. There are 4, $300,000 mortgages involved here. Not one of which a family of 5 making $60,000 is likely to be able to qualify for with any “normal” lending standards.
As ridiculous as Bradley Collins Jr. story is, it reveals the worse of the subprime debacle including; unqualified borrowers, lenders who weren’t paying attention to their business, brokers who were at the least unethical and probably illegal and a perceived pot of gold in the real estate market that they were all trying to mine their piece of. The story also drives home a truth of the real estate industry. In the subprime world, or really in any mortgage situation, there are few times that any 2 situations are identical. Between the market, the property, the debtor and the lender, each situation is unique. Mortgage lending institutions are are a big portion of what got us into the subprime mess but they are still the entities equipped to deal with each situation and work with through the details. It’s their investments that are being lost in these situations so they are the ones that have the financial incentives to find the best work out solution for each property.
Using the Government and their “one size fits all” approaches to deal withe the mortgage issues will only take a bad situation, make it substantially worse and use taxpayer money to do it.
In my best Bill Engvall imitation…”Here’s your sign!”
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I agree with you. Neither the banks that came up with these mortgage contracts nor the people who signed them should be given a bailout by the federal government. The bailout is usually worse than the original problem anyway.
And in cases like the one you detail here, who cares is 4 $300,000 homes that no one is living in anyway are lost to foreclosure? The entire situation was artificial, from the Collins’ getting $1.2 million in loans on a $60k/yr salary, to the terms of the mortgages themselves.
Taking money from you and I (in taxes, inflation, or borrowing) to pay off these mortgages or bail out the banks just rewards actions like this, and will contribute to a repeat of the subprime mess. It may not repeat itself for years, and it may not be in residential real estate, but subsidizing moral hazard will just create more of it.
Let’s be careful here.
They were not “BANKS.”
They were mortgage-brokers who wholesaled their garbage to INVESTMENT BANKING COMPANIES such as Bear, MerrillLynch, Lehmann, etc.
Dad29
Agreed and you’ll note my distinction in the post. This distinction is another reason we should not have the govt. involved. The mortgage industry is regulated far differently (and less) than banks…much more wild west like and when you make your living with a gun, you take the risk of dying by the gun!