subprime mortgages

Back in 2007, a relatively unknown Harvard Law professor named Elizabeth Warren warned that "for a growing number of families who are steered into...risky subprime mortgages...trust in a creditor turns out to be costly." In the months after the housing crash, Warren became a very public beacon of reason -- it's no wonder she is now considered the lead candidate to head the new Bureau of Consumer Financial Protection, created by the financial bill he signed last week. Republican lawmakers and many mortgage bankers are leery of what they perceive to be Warren's anti-bank rhetoric, but many Democratic leaders and consumer advocates praise her "enormous credibility," as Treasury Secretary Timothy Geithner put it.

Getting a subprime, or non-conforming mortgage, just got a lot harder. Wells Fargo, the third-largest bank in the U.S., announced it is closing a division devoted to issuing what they call "non-prime" mortgages, car loans, and credit-card loans. The bank will no longer issue subprime loans and is eliminating 3,800 related jobs. Wells Fargo was one of the leading mortgage lenders during the last housing boom.

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How are your math skills? Did you breeze through high school algebra and Econ 101, or struggle through the former and never get to the latter? It turns out, perhaps not surprisingly, that people who know more math and economics are less likely to default on their mortgages.

Stephen Meier, an assistant professor at Columbia Business School, tested sub-prime borrowers in three states on their basic math skills, economic literacy and thinking skills. He found that those with the least numerical knowhow were delinquent on their mortgage 24 percent of the time, twice as often as those with the most.

This group was also three times more likely to face foreclosure than their math-savvy counterparts.

I guess it's good to be unique. But is California a little too unique for its own economic good? It seems the nation's real estate crisis is playing out a bit differently here than elsewhere. Maybe it's because we are so big? Or so populous? Or so broke?

As they say in SoCal: "Whatever!" The fact is, the mortgage market is, well, different in California.

The check's in the mail.

The money promised to homeowners in Florida and 39 other states -- part of a 2008 settlement with a mortgage lender that came to symbolize the worst practices in the realm of subprime lending -- began to flow last week.

Some 2,700 Florida residents who had lost their homes after Countrywide Financial Corp. foreclosed on their mortgages can look forward to checks totaling a little more than $6,000 each. Seems like chump change to someone who's lost their home. Yet, Florida homeowners may be faring better than most.

Think time travel is impossible? Then explain how we've moved the clock back to 2003.

The latest Census stats on homeownership show that just 67 percent of U.S. households own their home, down from a peak of 69 percent in 2007. That brings the share of homeowners back down to its level seven years ago.

The nation actually has a few more homeowners than it did last year – just over 75 million -- because the population overall is growing. But foreclosures have pushed millions of families out of their homes in the last two years, and with it their chance to live the American Dream.

Those numbers alone don't tell the whole story, though. Some segments of the nation are losing ground faster than others.

After months of delay, on Friday the House of Representatives passed its "Wall Street Reform and Consumer Protection Act," 223-202. That fairly tight vote should tell you something: this reform is a 1279-page tissue of compromise. Let's leave the first part to others to dissect, for now, and focus on what "consumer protection" actually means here.

The big news is that the bill establishes the Consumer Financial Protection Agency, which will have the power to regulate not just mortgages but most kinds of "financial products" you or I might be tempted to buy, from credit cards to electronic funds transfers (with one huge exception: car loans from a dealer).

But the reason we've got this bill is mortgages, mortgages, mortgages, and the many features of the products and their sales practices that set borrowers up to fail. One example the Obama administration gave when it first proposed the agency early this year is the "yield spread premium," -- a bonus that mortgage brokers get from a lender when they sell a customer a loan with an interest rate higher than the one he or she qualifies for.

I'm actually not sure the bill as passed would give the agency a slam-dunk case against yield spread premiums or other harmful product features. The agency can't crack down unless the product or practice is likely to cause "substantial injury" that consumers couldn't reasonably avoid, and that injury is not outweighed by benefits "to consumers or to competition."

When Fannie Mae, Freddie Mac and the Wall Street mortgage-backed securities machine all went the way of King Kong and Godzilla last year, that left just one home finance giant standing: the Government National Mortgage Association, or Ginnie Mae. Ginnie Mae bundles together mortgages into securities, and backs their sale to investors.

Ginnie Mae survived by sheer luck. It only guarantees mortgages insured by the Federal Housing Administration, and during the subprime craze FHA became irrelevant, backing barely 3 percent of all mortgages. But with subprime's demise, FHA lending has surged, insuring more than one-third of all new home loans. And suddenly Ginnie, an understaffed bureaucracy, has become an essential source of financing for home loans.

A new investigation from The Center for Public Integrity and Washington Post reveals the sorry result: Ginnie has funneled an estimated $100 billion to dozens of mortgage lenders with records of reckless and sometimes illegal business practices.