Grab a new book. Open it to page 69. If the passage is compelling…. Today’s edition brings us to Alan Blinder’s “After the Music Stopped”…. On page 69, however, we see him pondering the origins of the subprime housing meltdown:
Consider the sad case of Alberto and Rosa Ramirez, a pair of Mexican American strawberry pickers in California whose annual income was in the $12,000 to $15,000 range and whose English was marginal at best. Egged on and assisted by an unscrupulous real estate agent looking for a big commission, the Ramirezes obtained a $720,000 mortgage from the notorious (and now bankrupt) New Century Financial Corporation to buy a $720,000 house. Yes, you read that right: They didn’t put a penny down, and the mortgage was forty-eight to sixty times their annual income!
The real estate agent apparently recorded their income as $12,000 per month and their occupations as “field technicians.” Slight errors. The Ramirezes moved into their McMansion with another family, and somehow, including receiving financial help from the real estate agent, managed to hang on for a few years before defaulting and losing their home to foreclosure.
Now, here’s a simple test of banking IQ: Should that mortgage have been granted? You may not be an experienced central banker, but your no answer is correct.
Unfortunately, New Century got the answer wrong in 2005 when it actually made this loan and many others like it. Other banks made similarly disgraceful loans. Yes, you are asking the right question: What were these guys smoking? Apparently, the weed was called greed. Make the loan, pocket the commission, pass it downstream, and let someone else worry about the consequences.
“Apparently, the weed was called greed.” Yep, unexpected!
I'm reviewing the book for Foreign Affairs. It's very good…