Data Release Tells the Story Behind Subprime
Since the beginning of the credit crisis, the word subprime has been tossed around a lot, and for good reason. But most references have been regrettably vague, due to a shortage of data and a preponderance of anecdotal stories. The recent release of institutional reports by the Boston Federal Reserve Bank and The Center for Public Integrity have helped to fill in some of the holes surrounding the subprime collapse, by identifying who it happened to, who enabled it to happen, and where it happened.
The Center for Public Integrity (CPI) report was brilliant in both its scope and its depth. It identified the 25 largest originators of sublime lending, and “revealed that these 25 entities accounted for a whopping 72 per cent of subprime loans during the 2005-07 period.” The first three alone – Countrywide Financial, Ameriquest Mortgage/ACC Capital Holdings, and New Century Financial- accounted for $250 Billion. Especially disturbing is that most of these institutions had previously been convicted of predatory lending. Furthermore, most have since imploded. Those that survived have only done so with the help of taxpayer-financed bailout funds. ” ‘Some of the banks being bailed out were directly responsible for their own demise,’ said John Dunbar, one of the report’s chief authors. ‘This is a self-inflicted wound.’ ” So much for justice…
It’s not as if this was a universal phenomenon and that large and small banks alike were making subprime loans- quite the opposite, in fact. One local newspaper writes that, “JPMorgan Chase, Countrywide and Wells Fargo originated a combined total of 1,108 high-interest loans in the two-county area in 2007, the data shows. For JPMorgan Chase and Wells Fargo, that represented more than 27 percent of the two companies’ local lending.” Compare this to one local lender’s portfolio, of which subprime loans accounted for only 3.1%.
The CPI study also examined trends in the underwriting of subprime mortgages and surprise, surprise, determined that “Lehman Brothers was the biggest underwriter of mortgage securities from 2000 to 2007, at $106 billion, followed by RBS Greenwich Capital at $99.3 billion, and Countrywide Securities, at $74.5 billion. Morgan Stanley (MS), Credit Suisse (CS), Merrill Lynch (BAC), and Bear Stearns also ranked high on the list of financiers.”
It’s unfortunate that underwriters and investors are perhaps most at fault here, but have proven least willing to play ball when it comes to fixing the crisis. I guess we shouldn’t be surprised that the most recent housing relief legislation (reported by the Mortgage Calculator last Friday) was rejected by Congress, given how much money these firms donated in the most recent round of elections.
With regard to where the crisis unfolded, “the report found that 9 of the top 10 lenders were based in California, including all of the top five. In addition, 20 of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy, the report said. Most of those were nonbank lenders.” The map below (courtesy of CPI) highlights the areas plagued by sub-prime lending; “the greater the concentration of high-interest lending in any metropolitan area, the ‘hotter’ the color.” You can cross-check this with a list of cities with the highest foreclosure rates.
With regard to who the crisis affected, we all know that it was the poor and irresponsible and ignorant who were most eager to take out subprime loans, right? According to the Boston Fed report, this is precisely wrong:
In short, the subprime crisis is both more simple and more complex than originally thought. As expected, the companies with their hands in government pockets were spearheading the subprime lending spree. Also, the regions with the highest density of foreclosures were naturally the regions with the greatest concentration of subprime activity. The surprise realization, however, is that the crisis is much broader (from a socioeconomic standpoint) and hence may be more difficult to resolve, than was previously anticipated.