Who Gets Hurt by Toxic Mortgages?

Mike at Rortybomb explains just how dangerous mortgages can be, even to people who avoid the toxic ones:

If I was a degenerate crackhead who snuck into your neighborhood and mugged you for $50, the Wall Street Journal Opinion Page would want me thrown in jail. Now imagine that I’m a degenerate crackhead who took out a subprime loan to move next door to you, in an arrangement that I’m likely not going to pay off. I might not even make one payment. If I default you’ll lose 10% of the value of your home from the externality effect. Assuming your home is worth $300,000, there’s a 20% chance I default in 2 years (realistic numbers), and you lose 10%; 300,000*.2*.1 = I’ve just robbed you for $6,000 while the Wall Street Journal Opinion Page cheered me on. And that’s one house – I’ll have a dozen neighbors. Now mind you, the product was great for me – I got to smoke crack indoors, in a house I could never realistically afford, which was a big plus. The subprime lender sold my loan to a pension fund in Denmark for a nice fee. It goes in the win column for us.

I’m reminded of Brad DeLong’s calculation of the amount that Edmund Andrews has gained by taking out a mortgage he couldn’t afford: if Andrews had behaved responsibly, says DeLong, he would have ended up in much the same place as he is now, but in the meantime he has spent about $97,000 extra over the course of five years. (Plus, of course, got himself a juicy book contract.) The subprime borrowers are often winners; it’s the rest of us who are the losers.

Comments

[john s. gordon:]

you say the crackhead was the winner, however the real winners are the people who packaged the toxic stuff into securities & collected their big fat fees for it; the rating agencies who gave an AAA to FFF trash & collected their big fat fees for it; the investment banks with their big fat fees; etc. etc....
> jack

Jul 09 11:02 AM

[Gregman2:]

It would be good, however, to mention modes of preventive screening
out to begin with. Shouldn't the lender have been able to detect a likelihood of this eventuality to begin with initially? See:
www.homevaluepredictor...

Jul 10 12:17 PM

[TinyTim:]

"he would have ended up in much the same place as he is now, but in the meantime he has spent about $97,000 extra over the course of five years"

does not compute??

I agree with Jack.
Also, I own my home free & clear, that crackhead will "hurt" me just as bad. If hurt means the temporary drop in my comps.

Jul 10 04:08 PM