If you are a renter or someone who took out a simple 30-year fixed mortgage, it’s not surprising that you might feel like the mortgage crisis is, well, not exactly your problem. You’re not the one who got into any sort of messy mortgage. What does a subprime loan have to do with you?
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.
Plus, if your crackhead neighbor walks away from the house, and the bank delays foreclosing on it, then you’re sitting there with an abandoned property next door – something that happens all too often these days. That also doesn’t do much for your property values.
All of this also explains why there’s not exactly a groundswell of opinion pressing Congress to bail out homeowners in trouble. Banks, for whatever reason, don’t come across as badly as the crackhead homeowners do when it comes to possible subprime stories like this. And no one wants to be seen as enabling an addict, even if it means their own property values take a hit.
As Mike detailed, there are some pretty good reasons for labeling these mortgages toxic. And none of them offer much consolation to the homeowner next door.