
America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis - JumpCrisscross
http://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984
======
John23832
The title made me think that this was going to be about subprime auto loans,
which are definitely in "crisis" territory.

This whole mess (subprime auto, renovation, and home loans) comes from the
increasingly rent seeking nature of Wall Street. It used to be that fortunes
were both made and _lost_ on Wall Street. Now, for large investors ("whales"),
it's 3.5% or I take my money to another fund. If I don't have a consistent
positive return, then it's something wrong with the fund/firm, not the natural
order of things. This behavior encourages siphoning from pensions, the
retirement funds of average people and "fudging the numbers" on packaged
securities in order to keep up with the expected returns of the "whales".

The sad thing is, I don't see a change. We're going to keep going from crisis
to crisis because banks can't say no, and the government(s) deems them too big
to fail. This shit is fucked.

~~~
roymurdock
> We're going to keep going from crisis to crisis because banks can't say no,
> and the government(s) deems them too big to fail

Consumers can say no, and if they had better financial education and/or
financial prospects, maybe they would.

The elderly woman in the article initially refused the $50k renovation to her
5 bedroom home, but then agreed because she thought the government was going
to subsidize it for her.

The contractor was able to sell her the loan because she needed to reduce
heating/utilities/energy costs in her massive (for one or two people living on
SS presumably) home, and she thought the savings from the PACE program would
pay for the solar panels, smart lightbulbs, etc.

I don't know the exact details of her situation, but it seems like perhaps the
correct decision would have been to sell the house and move to a smaller, more
efficient house if the current house is too expensive to maintain given the
number of occupants and their age/level of income. I'm 24 and currently rent
half a large house in the suburbs from a single guy in his 60s who needs the
extra income to maintain the house which he bought when he had a larger
family.

Unfortunately it seems like the loan was misrepresented to her by the
contractor when she agreed to go into debt, and obviously many will do
anything to avoid moving out of homes/communities they've been in for a long
time. Others have no family to rely on or go to even if they do want to move.

I'm not a huge fan of Wall St. and big bank loan & derivative making and
selling culture, but it's not entirely to blame, nor was it entirely to blame
during the financial crisis of 2007-08 as many consumers took on home loans
they had no intention of ever making good on (maybe there was some
fraud/misrepresentation on the part of the contractor in this case, maybe
not). People have always been greedy since the beginning of time - we are just
struggling overall at the moment to raise financial literacy and strengthen
altruism: family/community/country-wide ties (patriotism) due to poor economic
conditions for the majority of Americans.

~~~
John23832
> Consumers can say no, and if they had better financial education and/or
> financial prospects, maybe they would.

I think that is blaming the victim. As the article says, you have repair
people describing the terms of the loan to people. If they don't understand
what they're selling (and I'm sure they don't) then how can you expect the
average person to? Not to mention the pressure selling that is probably being
used on targeted groups (I'm looking at the elderly, minorities and groups
that are generally less financially sophisticated).

Most people generally aren't in a position to "vote with their wallet". This
is because most people are leveraged to their eyeballs with rents. This is a
problem with Wall Street that trickles down, not a problem with the consumer
that worked it's way up.

> many consumers took on home loans they had no intention of ever making good
> on

I disagree with this as well. People generally are not scam artist. On the
contrary, most people like paying off their debts. Were people probably overly
confident in their ability to repay, sure. Saying that people intended to
default however, is not true.

\---

Wall Street (and it's derivatives... I'm looking at you, ad funded Silicon
Valley) is full of fraud. The fraud stems from the fact that the only people
who can realistically perform checks and balances on this group(s) are the
groups themselves. You may be able to blame the consumer when they have full
and clear knowledge of how the system works, but that's not the case. Wall
Street is full of so many obscurities and 40k ft descriptions that the average
consumer really has no chance.

A good example of how the average person thinks financially... how many
homeowners do you know that consider their home an "investment". Probably
most, if not all.

~~~
roymurdock
I'm not blaming the victim, I'm appealing for a more nuanced viewpoint than
"fuck Wall St." There are at least 2 sides to every loan - the originator and
the borrower - and it helps to examine dynamics on both sides of the table.

Is the book in the US generally stacked towards originators? Certainly, as I
argue, with financial literacy being so low, most home-owners wanting to do
anything to avoid moving, and family/community ties dissolving. Hell, I went
to business school and read 10Ks for a living, and can still barely manage to
figure out all the terms and conditions on my credit cards.

I just want to point out that alternatives (usually uncomfortable, but often
necessary) do exist to taking on opaque loans.

How does someone get into a situation where they are "leveraged to their
eyeballs with rents"? Sometimes it's purely out of necessity (need to be close
to sick family, within commuting distance of work, keeping a rent controlled
unit) but otherwise most people in the US generally have a choice of where to
live and how much to pay in rent. I could live in the city and pay 1.5x what
I'm paying now to live in the suburbs in an unorthodox situation, but I don't
because then my rent would be >30% of my annual income.

Maybe I'm wrong and I'm one of the lucky, shrinking few who still has this
option, the option of mobility than once made the US great? Because I'm young
and employable?

Also, if a homeowner considers their home an "investment" that means they
should be willing to liquidate that investment at some point when it makes
financial sense to do so. People get sentimentally attached to their homes,
which is not true of most "good" (read: fungible/liquid) investments.

We're definitely both against fraud, but unfortunately these government
programs that make life better for some by subsidizing mortgages, home
renovations, tuitions, etc. can and will always be gamed by unscrupulous
individuals. Question is - is the payoff to society (higher homeownership,
literacy, energy efficiency) worth it?

~~~
John23832
> I'm not blaming the victim, I'm appealing for a more nuanced viewpoint than
> "fuck Wall St."

I think we can amicably disagree. I'm not in the "fuck Wall St." camp. I
understand what it is supposed to do and the value it is supposed to provide.

> Maybe I'm wrong and I'm one of the lucky, shrinking few who still has this
> option, the option of mobility than once made the US great? Because I'm
> young and employable?

Yes. You have the option of mobility because you're young and employable.
Probably just because you're employable. The average person has horrible job
prospects where they are. Moving into uncertainty of even worse job prospects
probably isn't a realistic option. I think most people would try to make it
work with the job they _have_ (and get stuck with rents because of it), than
leave their job and possibly not be able to find one where they move (and to
have spent money moving).

> Also, if a homeowner considers their home an "investment" that means they
> should be willing to liquidate that investment at some point when it makes
> financial sense to do so. People get sentimentally attached to their homes,
> which is not true of most "good" (read: fungible/liquid) investments.

I'll go ahead and say this. Your home is _NEVER_ an investment. A house that
you own, maybe. But, I repeat, your home is _never_ an investment.

> We're definitely both against fraud, but unfortunately these government
> programs that make life better for some by subsidizing mortgages, home
> renovations, tuitions, etc. can and will always be gamed by unscrupulous
> individuals. Question is - is the payoff to society (higher homeownership,
> literacy, energy efficiency) worth it?

I agree here, but I think the better question is, "When the unscrupulous
individuals form a large, easily identifiable group, why sit idle and do
nothing?"

~~~
SubuSS
>Your home is NEVER and investment. A house that you own, maybe. But, I
repeat, your home is never an investment.

Can you expand a bit more on this?

Usually it might not directly turn into an investment, but it does act as a
'savings vehicle' in many cases. For example when I moved to US a long time
ago, the choice was between a 1200 rent and a 1600 mortgage (assuming I put a
down of 25k or so). At that point it felt like a very reasonable investment
and the market worked out afterwards where in it turned in a great ROI. If it
wasn't for that move, I would've still been pissing off money in rent.

Also the actual investment options today are not as cut and dry as it seems
either: There is no real 'assured' gain anywhere even though I do see the
3.5-6% returns number touted in the reddit personal finance circles. In the
long term, I would ideally split money between these, not eschew home as an
investment vehicle. With the right amount of thought and reasonable location
choices, it can indeed turn out into a great investment. This is not to ignore
the risks people take by overextending themselves / doing 'home flipping' but
to each their own.

~~~
jdmichal
Everyone is born short housing. Buying your first house is covering a short
position. Renting instead of buying is maintaining a short position. Buying
your second house is taking a long position.

(Copied directly from my other post in this thread [0], though if you do a
search I've said the same thing several times.)

[0]
[https://news.ycombinator.com/item?id=13376763](https://news.ycombinator.com/item?id=13376763)

~~~
SilasX
Others have elaborated further; here's Felix Salmon and Nick Rowe:

[http://blogs.reuters.com/felix-salmon/2009/07/17/who-
cares-a...](http://blogs.reuters.com/felix-salmon/2009/07/17/who-cares-about-
future-house-prices/)

[http://worthwhile.typepad.com/worthwhile_canadian_initi/2009...](http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/07/we-
are-born-with-a-short-position-in-housing.html)

------
mikeash
Seems like an example of how it's easy to be "fastest growing" when something
is really small. These loans started about five years ago and the cumulative
amount loaned is about $3.4 billion. Most of the activity has been in the past
year, so of course the rate of growth is over 100%. But the absolute numbers
are utterly tiny. For perspective, subprime loans peaked at over $600 billion
per year, and total mortgages outstanding are around $14 _trillion_.

~~~
lintiness
you'd make a lowsy newspaper salesman.

~~~
mikeash
I cannot dispute this.

------
smileysteve
W/o paywall [http://www.realtor.com/news/trends/americas-fastest-
growing-...](http://www.realtor.com/news/trends/americas-fastest-growing-loan-
category-eerie-echoes-subprime-crisis/)

~~~
sparky_
You da real MVP.

------
haney
Title is definitely a bit overblown, while it sounds like there's a definite
problem with the incentive structure that incentives people to sell loans that
borrowers can't afford, 22B isn't close to the size of housing bonds during
'08\. Further peppering the article with comments about it being the 'fastest
growing category' don't take into account the fact that the absolute size
isn't really that large. It sounds like someone should take a look at better
regulating these loans, but the sky isn't falling.

------
alvern
As someone who just signed up for grid tied residential solar panels, this
made me review my loan documents again.

Nothing in my documents mention PACE, or the debt-to-tax levy that ruined the
old ladies' financials in the article.

------
naspinski
As a real estate investor, I lick my chops when I see news like this. But as a
human being it's so terrible to see happen over and over again. Watch "The Big
Short" if you haven't - everything will crash again.

~~~
macawfish
So when are you and your fellow investors gonna stick to being human beings?
This game has gone on long enough. We're talking about peoples' lives. We're
talking about an entire generation of people who can't afford to buy houses
because the generation before them gave in to bad credit. We're talking about
entire generations of people who are going into a personal debt based economy
of fear and coercion. Is that the kind of legacy you want to leave?

~~~
conanbatt
Nonsense.

~~~
GavinMcG
I downvoted you because that's not a substantive response.

------
jMyles
> America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis

Quite possibly the most uninformative and click-baity title I've seen so far
in 2017.

------
diogenescynic
It's very similar. I was working at a mid-size bank a few years ago that was
into this. Buy up or make auto loans, bundle them and have them securitized
and rated by by a credit rating agency (Moody's, S&P, etc) then you can sell
the loans on the open market where they are scooped up. There are lots of
state pensions and other retirement plans that end up buying these securities.

It's the same problem as before--banks are incentived to make the loan, but
not hold onto it and therefore the banks don't really care about the quality
of the loan so long as they can sell the bag to someone else.

------
CodeCube
Can we just not? I'd prefer to avoid all that mess again ... hopefully, like
the ever-impending tech bubble (ie. .com 2.0), the threat of a bubble will
temper investors enough to slow growth to healthy-ish levels

------
jakebaker
I work in the clean energy industry, including with PACE, and can help to
answer some questions about PACE/Property Assessed Clean Energy Financing if
anyone is interested in specifics.

------
desireco42
I wish I could read this article... but i can't. It's been a problem for a
while here on HN. I wish moderators would not allow articles with paywall.

~~~
grzm
As long as there's a workaround, it's allowed.

[https://news.ycombinator.com/newsfaq.html](https://news.ycombinator.com/newsfaq.html)

Within the past few days the WSJ has changed access to their site and the
previous workarounds no longer work. I wouldn't be surprised if a new
workaround isn't found that WSJ submissions will no longer be accepted.

~~~
desireco42
Thank you for explaining this.

------
noonespecial
I wonder: If it's actually a tax assessment does it transfer with a sale of
the property to the new owner? I can foresee a scam of buying a property,
fixing it up with the max loan available and then flipping it to an unaware
buyer who checks _last year 's_ taxes as an estimate of what to expect and
then gets a nasty surprise.

------
sfrailsdev
[http://www.realtor.com/news/trends/americas-fastest-
growing-...](http://www.realtor.com/news/trends/americas-fastest-growing-loan-
category-eerie-echoes-subprime-crisis/)

Link for those without wsj access.

------
cestith
[http://www.realtor.com/news/trends/americas-fastest-
growing-...](http://www.realtor.com/news/trends/americas-fastest-growing-loan-
category-eerie-echoes-subprime-crisis/)

------
econner
How do I short this loan category?

------
imagist
Okay, it's fastest-growing, but is energy-conscious lending anywhere near the
size of subprime mortgages?

Even if it is, it doesn't seem like as big a tragedy if the bank seizes your
solar array as of they seize your home.

~~~
nommm-nommm
That's not how it work though.

These loans are added as a tax assessment on the property so the local
government adds the premiums on the tax bill and collects with tax payments.
Because its added as a _tax assessment_ if you stop paying on your loan its
the same as if you stopped paying taxes. Which means the city seizes your
entire house.

This structure makes it so the PACE loan is ahead of even the mortgage holder
in the creditors line.

That's even assuming its possible to seize your solar array, central air,
insulation, or windows. These loans are for adding permanent features;
permanent features of a house can't just be seized individually. They can't
seize your solar array in the same way they can't seize your extra bathroom.

If that's not bad enough these loans are being issued without a credit or
income check. They are being issued based on the amount of equity the borrower
has in their property without regards to financial health or ability to repay
and without the same lending disclosures required by other loans.

~~~
imagist
Ah, yeah. That's problematic.

------
gm-conspiracy
Is this why most buildings in Pittsfield, MA are covered with solar panels?

------
Shivetya
my beef with these loans is that local governments are using them as profit
centers and the having them paid with property taxes changes the level of
enforcement while likely keeping consumers in the dark as to the full
implications of the loans and penalties

------
MaysonL
Note that the headline is (perhaps intentionally) misleading: it _wasn 't_ a
subprime crisis.[0]

[0][http://www.cbsnews.com/news/heres-what-really-caused-
housing...](http://www.cbsnews.com/news/heres-what-really-caused-housing-
crisis/)

~~~
albedoa
The main study and previous evidence being cited here says that it wasn't
_disproportionately low-income_ loans that caused the financial crisis:

> Taken together, the evidence in the paper suggests that there was no
> decoupling of mortgage growth from income growth where unsustainable credit
> was flowing disproportionally to poor people.

It was still a subprime crisis if the crisis was caused by unsustainable
credit received by those who would not otherwise have had access to it.

They are saying it was not the Community Reinvestment Act (CRA) that caused
the crisis, as the contributing loans were not subject to CRA legislation.

------
rch
OK - The 'web' search/link isn't working for me anymore. Maybe it's time to
start rethinking WSJ submissions.

Based on the first paragraph, this is the exact same article:

[http://www.msn.com/en-us/money/realestate/loan-boom-
echoes-s...](http://www.msn.com/en-us/money/realestate/loan-boom-echoes-
subprime-crisis/ar-BBy7eg1?li=BBnbfcN)

~~~
JumpCrisscross
AMP version worked for me through the 'web' link.

~~~
jffry
For lazy desktop-browser users: [http://www.wsj.com/amp/articles/americas-
fastest-growing-loa...](http://www.wsj.com/amp/articles/americas-fastest-
growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984)

~~~
Bartweiss
They've broken that link since.

~~~
DennisP
Just worked for me. Maybe because I'm blocking javascript.

