Wednesday, June 18, 2008

The upside of sub-prime loans

This American Life renewed by faith recently with their episode "The Giant Pool of Money" which is the most even and comprehensive while accessible review of the sub-prime crisis, telling the story from both sides of the loan equation--borrowers and lenders--and making international finance accessible (at least it seems to me). (TAL has disappointed of late, getting a bit tired, and making some annoyingly biased commentary on occassion)

Yet it still misses one point about the sub-prime lending that I have heard no one mention. At one level, sub-prime loans helped more people than it hurt.

So the this American Life story suggested that sub-prime loans are having default rates ranging from 10%-50% which is awful relative to the 2% typical default rate for the mortgage. But that means that 50%-90% of people got a sub-prime loan to buy a house that they otherwise wouldn't be able to. 50%-90% took one step closer to the American dream of home-ownership, which many advocates (not me necessarily) means also more stable families, less crime, higher savings, better education, etc.
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