Bailout

Who gets hurt by toxic mortgages?

By Felix Salmon

Mike at Rortybomb explains just how dangerous mortgages can be, even to people who avoid the toxic ones:

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.

I’m reminded of Brad DeLong’s calculation of the amount that Edmund Andrews has gained by taking out a mortgage he couldn’t afford: if Andrews had behaved responsibly, says DeLong, he would have ended up in much the same place as he is now, but in the meantime he has spent about $97,000 extra over the course of five years. (Plus, of course, got himself a juicy book contract.) The subprime borrowers are often winners; it’s the rest of us who are the losers.

Full post as published by Macroprudential on July 08, 2009 (boomark / email).