During my recent “Real Estate Bubble Explained” project, I found it was common for lenders to brag about their affordable mortgages. They were talking about their subprime mortgages.

Anything that let more people buy homes back then was considered to be a good thing. Mortgages that would have been branded as predatory in earlier times were now as wholesome as mom and apple pie.

For example, I LOVE the title of this graph from the FDIC in 2006. Interest-only mortgages, and Option ARMs, “Help Homebuyers Bridge the Affordability Gap.”

Growth of Nonprime, Interest-Only and Pay-Option Mortgages 2001-2005

Note. Sometime after I first posted this graph in 2016, FDIC removed the page from their website but it was previously posted at https://www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_summer04.html

And here they justify 40-year mortgages.

“The extended amortization period reduces monthly mortgage payments, thereby stretching a buyer’s purchasing power.”

FDIC doesn’t even sell mortgages. They’re a bit above the fray but the conventional wisdom in 2006 was simply the more affordable the mortgage, the better – even interest-only, option ARMs and 40-year loans.

Affordability

The reason the number of affordable/subprime mortgages skyrocketed during the boom was because lower lending standards mean more people can get mortgages and that means mortgage companies can sell more mortgages.

There was a race to the bottom.

Prime mortgages were all similar so the competition between lenders was fierce. But if you sold subprime, er, I mean, affordable mortgages, you had a helluva lot less competition so for years you could sell more mortgages and, in addition, charge higher fees. During the boom, loan officers could make 2 to 3 times more money selling one subprime mortgage versus one prime mortgage.

It seems insane to me that loan officers would get paid more for selling the worst mortgages. Shouldn’t loan officers get paid more for selling the best mortgages? 

But the economics didn’t work that way. If everyone is selling prime mortgages, there’s more money in selling something more unique like affordable/subprime mortgages.

Many mortgage companies weren’t happy selling sustainable, competitive, prime mortgages even though sustainable mortgages help create more stable neighborhoods, especially in less stable areas.

American Dream

It seems some lenders will always push to have more affordable mortgages to sell.

They’re looking for an edge, something unique to sell, something outside the super competitive prime mortgage market.

And looking at what they said during the boom, lenders will always justify their affordable/subprime mortgages by saying they’re just trying to help;

  • Low and moderate income families,
  • Underserved and minority communities,
  • Spread the American Dream of homeownership

Affordable/subprime mortgages are, of course, never sold for what they really are, a way for mortgage companies to make more money.

Sustainability

Sustainable mortgages may not be as profitable to mortgage companies but they lead to;

  • Smaller booms,
  • Smaller busts,
  • More neighborhood stability,
  • Creation of more household wealth, especially in low income neighborhoods, and
  • More economic growth nationwide.

Nothing since the Great Depression has destroyed more household wealth in low and moderate income, underserved and minority neighborhoods than the affordable/subprime mortgages sold during the Great Real Estate Boom.

Median Household Net Worth 2000 to 2011 By Quintiles

Instead of focusing on the short-term affordability of mortgages, we should focus on the long-term sustainability of our neighborhoods.

Instead of letting the short-term profitability of mortgage companies shape our neighborhoods, we should let the long-term sustainability of our neighborhoods shape our mortgages.

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