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  • Who Are We Bailing Out Exactly?

    Polling shows that while 61% Americans oppose bail outs for Wall Street investment companies, 56% support “the federal government taking steps to help prevent people from losing their homes.” Apparently, who is asking for government help and why is crucial to public support for federal government intervention. That is one reason why Democrats are so anxious to ram through housing legislation as quickly as possible: the more information we have about who is actually defaulting on their mortgages and why, the less deserving of help many look.

    As Steven Malanga documents at RealClearMarkets, mortgage fraud soared in America at the height of the boom was highest in states with the highest concentration of subprime mortgages. From 2001 to 2007 reports of fraud to the federal government on mortgage application climbed more than ten-fold. Mangala writes:

    So-called ‘occupancy fraud’—in which a speculator claims he will live in a house he is buying when it is actually a property he is purchasing for investment purposes– accounted for about 20 percent of all mortgage swindles during the go-go years of subprime lending, according to a study by BasePoint Analytics, which specializes in detecting mortgage fraud.

    The level of occupancy fraud is significant because it suggests that speculation accounts for a larger part of the troubled mortgage market than most people realize. For one thing, some of the country’s highest foreclosure rates are in states which until recently had a hot, investor-driven housing market, notably California, Nevada and Florida. In fact, among the five states with the highest rates of foreclosures, defaults by known speculators (that is, those who admitted they were buying investment properties) account for more than one-fifth of all mortgages going bad.

    Earlier in this year City Journal contributing editor Nicole Gelinas examined why so many more borrowers showed they were willing to walk away from their mortgages during this bubble:

    Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives. Yes, this behavior is new—but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.

    So the more data that comes in from home foreclosures, the more it seems there is not a lot of difference between Wall Street banker bailouts and bailouts for subprime mortgage borrowers. The American people deserve to know this before Congress puts them on the hook for hundreds and billions of dollars in potentially bad loans.

    Posted in Economics [slideshow_deploy]

    One Response to Who Are We Bailing Out Exactly?

    1. James Chapleau Wisco says:

      What statistics are available on the sex, marrital status, racial, income, education, geographic and single home owner with respect to people in default or behind on their mortgage payments. What groups account for what percentage of the problem?

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