By FRED WEINBERG Penny Press Publisher
By FRED WEINBERG
Penny Press Publisher
You’ve been hearing a lot in the business news these days about something called "sub-prime" lending and, in general, the "news" has all been bad.
It appears to be because the news media is now crying out for the political and regulatory classes to "do something".
Certainly some home mortgage lenders have gone way overboard in lending to people who they almost had to know won’t make their first year of payments.
But, presumably, those lenders also took a first mortgage on some real estate and they will get some—if not all—of their money back when they foreclose on and sell the real estate they loaned against.
That’s a fact which always seems to be left out of the stories on Fox, CNBC and in the business sections of the newspapers.
And, then there are the investors who invested their hard earned money with the lenders who made the loans.
How stupid do you have to be to invest money with people who are loaning money to deadbeats?
Do they deserve any special protection from the government?
And how about the people who borrowed the money?
We’re hearing fantastic numbers about the default rate, much of which appears to be pure speculation on the part of reporters and analysts who probably cannot balance their own checkbooks.
The truth is that the first payment most people make each month is the payment for the roof that covers their family.
That truth usually only changes when the payment is simply so overwhelming that it cannot be made.
Or, the borrower no longer has any reason to keep making the payments—like they owe more on the house than it is worth.
And, if a lender is silly enough to put a borrower in that position, and a borrower is silly enough to take the money on those terms, exactly what is the government’s role here?
The fact is that sub prime lending happens when there is so much money available that the lenders have made all the loans they can to people they are sure will pay them back—the "prime" loans for lack of a better term.
Then, someone gets an idea.
Why not charge a little more to compensate for the risk of making loans which might not all get paid back, some resulting in foreclosure.
And they name that group of loans "sub-prime".
If you live in Southern Nevada, you may even have one, despite the fact that you pay all your bills on time.
Housing prices in Las Vegas are so high that in many cases a prime loan candidate in Tulsa is a sub-prime borrower in Las Vegas because the house costs so much more relative to the buyer’s income.
So it is entirely possible that sub-prime loans are being made to prime borrowers right here in sin city because of circumstances beyond the control of just about everybody.
Is that a bad thing?
Lending money is a business just like selling bread.
Bread is priced first by what it costs to bake and then by what your competitors can sell it for relative to you. If you cannot sell it for what your competitors do, then you go broke.
Selling loans is also priced at what the money costs and what your competitors are charging relative to you.
The cost of lending money includes the risk that some of the loans you make will not be paid back. That you will have to foreclose on the collateral, sell it and assume the risk that you will lose money in the process.
The higher the risk, the higher the cost.
If you have spotty credit but are willing to pay slightly more in interest to buy a house than sub-prime lending is a good thing, because otherwise you would not be able to buy a house.
So what happens when the government wants to impose new rules on such loans—which, by the way, is really none of the government’s business?
The answer is simple.
There won’t be any sub-prime loans because they will be rendered both unprofitable and too difficult to make.
So all of the people who used these sorts of loans to buy a house and are making their payments will no longer be able to buy a house.
And we would point out that there are a huge number of "sub-prime" borrowers who are paying their mortgages like a video poker machine with a royal flush.
Here’s a word of advice for regulators and politicians who think they have an issue here.
Let the bad lenders go broke and the fraudsters go to prison.
But leave the American Dream of owning a home intact.
Do something politically unnatural.