The New York Times (see here and here) is not the only major metropolitan newspaper that employs a business columnist who doesn’t appreciate the benefits of a robust market in mortgage financing.
Channeling the Times’ Gretchen Morgenson, the Chronicle’s Loren Steffy decries the irresponsibility of those involved in the overheated subprime mortgage market. In so doing, he passes along an anecdote on how he resisted the temptation to take out a subprime mortgage to finance a home in Houston before he had sold his home in Dallas. Steffy suggests that he has financial discipline that both the subprime lending industry and most of the subprime borrowers lack. Maybe so, but what is clearer is that he doesn’t appreciate the benefit to him and other consumers of risk-taking in the subprime mortgage financing market.
Sure, there were a substantial number of people who took out subprime mortgages who didn’t have the financial capacity to pay them. A large number of those folks will default on their mortgages and lose their homes, which is unfortunate. However, the bigger losers will be the holders of the equity tranches of mortgage-backed securities (“MBS’s”) and subprime originators who are now left holding the bag with mortgages that they can’t sell. Don’t feel too sorry for them, though. Given that those investors made a lot of hay during the boom years, they are now simply enduring the risk of relaxing underwriting standards too much in an attempt to sustain the hot market. These are sophisticated investors and financial institutions that are willing and able to take the risks of these investments and to bear the losses associated with such risks.
Going forward, the number of subprime mortgages originated will go down, as will the number of subprime MSB’s sold into the market. Yields on the subprime MBS’s will likely rise and the underwriting standards will get stricter, so the supply of subprime mortgages will constrict to meet the reduced demand. The MBS’s and other financial products that have been developed to hedge risk in the subprime market are valuable tools to facilitate such a correction.
Which brings us back to Steffy. Perhaps he is more financially disciplined than those involved in the subprime mortgage market. Or perhaps he is has the same aversion to risk as Suze Orman. Whatever the reason, he decided not to take the risk of carrying two mortgages, which is fine. But another homeowner in the same position as he was might decide that taking on the subprime mortgage was worth the risk, which is fine, too.
The point is that the financing market for subprime mortgages gave Steffy a choice to engage in what could have been wealth-creating risk-taking. Nothing is wrong with electing not to take that risk. But it is wrong not to acknowledge that it is a good thing to have the opportunity to make that choice, which is what the subprime mortgage financing market provided.