I always feel a little regret when I discover a writer or artist after their death, and this is one of those unfortunate cases. The New York Times has an obituary for Doris Dungey, who blogged at Calculated Risk under the pseudonym Tanta. Her co-bloggers are assembling an index of all of her posts on the mortgage industry for which she once worked.
This is my least favorite way to discover a writer, but I’m glad I discovered her writing all the same. She covers a difficult topic with humor and a sense of humanity. Rest in peace.
One unforeseen difficulty was that it became possible for certain participants who had always lived in the prime world to compare the profit margins on good old Fannie Mae fixed rates (maybe 50 bps if you were good at it) to those subprime deals (easily 150-200 bps if you were fair-to-middlin¬’ fastidious). Increased subprime lending could even improve those prime margins: as more and more of your weakest loans fell out of the bottom tier of your GSE loans [Government-Sanctioned Entity, such as Fannie Mae and Freddie Mac -LJ] and into the top tier of your subprime loans, you got paid better by the GSEs in the form of improved guarantee fees (since your average credit quality was so much better) and by your subprime investors (since your average credit quality was so much better). There was, in short, a moral hazard in play: in the shift from non-price to price rationing, more borrowers got mortgages, but it wasn¬’t always clear that they got the cheapest mortgage they should have gotten.
Those of us who were there at the time that the story about how ¬”subprime is a way of serving the poor¬” got written do, then, tend to be somewhat more skeptical of this claim than others. The fact that many participants did not start out with the intention of preying on borrowers doesn¬’t change the fact that predation became widespread, or that a form of lending that had once been reserved for people with a lot of equity became associated just a few years later almost exclusively with people who had no money at all.
We can certainly debate the extent to which price-rationed lending provides true benefit to the historically credit-constrained. I¬’m game. I just think that market participants with short institutional memories are a menace. To all of us.