Most subprime mortgages in the US were issued to members of the middle classes – people who would have been eligible for a normal prime mortgage on the basis of their income, assets and credit history. The current perception that most subprime mortgages in the US were sold to lower-income groups is thus inaccurate. This is one of the conclusions of a recently published book entitled ‘Subprime Cities: The Political Economy of Mortgage Markets’, compiled under the editorial supervision of Manuel Aalbers, assistant professor in Social Geography and Planning at the University of Amsterdam (UvA).
The book features contributions from leading international academics such as David Harvey (City University of New York) and Saskia Sassen (Columbia University and London School of Economics). The authors that contributed to Subprime Cities were dissatisfied with the general tone of articles on the mortgage markets and financial crisis by economists published in the printed media and academic journals.
The key conclusions of Subprime Cities:
A section of the book focuses on securitisation (the reselling of mortgage portfolios to investors). The current financial crisis is often largely blamed on the securitisation of mortgage loans. Subprime Cities broadly confirms this view, but stresses the need for nuance. The practice of reselling mortgages has been ongoing for decades, and was highly successful until 2001: reselling allowed for the lowering of interest rates and stimulated banks to issue more credit. The problems started when investment banks diversified from low-risk loans and started reselling subprime mortgages that had been appraised as low-risk products by the credit rating agencies.
The securitisation boom was sparked by the bursting of the dot-com bubble: money flooding in from the IT sector and other ‘new economy’ sectors was invested in real estate and financial products secured by real estate. This process confirms David Harvey’s capital switching theory from the 1970s and 1980s: in times of crisis, capital will seek out safe investment havens, resulting in overinvestment in other economic sectors. In time, this overinvestment will trigger a new crisis. Such crises – especially those simultaneously involving the real estate and financial sectors – can rapidly deteriorate into a major international crisis that transcends sector boundaries.
Bad loans more likely to be sold to ethnic minorities
In the US, ethnic minorities were more likely to be targeted by subprime mortgages than white consumers. When compared to a white family with the same income level, a black family is almost twice as likely to have been sold a bad loan. Most foreclosure sales are therefore concentrated in neighbourhoods with a high percentage of ethnic minorities, including a large number of middle class neighbourhoods. Furthermore, the subprime loans and foreclosure sales were also highly concentrated in a limited number of states: half of all foreclosure sales took place in a handful of states in the south-western US and Florida. This is partly due to regulations at state level.
New financial regulations
Regulation of the financial sector is being adjusted in response to the financial crisis. Many critics claim these new regulations are aimed at preventing the previous crisis instead of the next one. This is partly down to simple logic: when something goes wrong, efforts are made to prevent the same mistake from occurring again. More problematically, though, the new financial regulations are inadequate: even if the new regulations had been in force at the time, they would not have prevented the financial crisis that started in 2007. Many securitisations and other derivative instruments are still not adequately regulated; the same applies to many credit rating agencies and mortgage lenders. Most US mortgage lenders are not subject to the recently tightened banking regulations, as they are not formally regarded as banks.
The Netherlands has the world's largest mortgage market
In relative terms, the Dutch mortgage market is the largest in the world. Even in absolute figures, the Netherlands is second only to Great Britain and Germany in terms of mortgage debt (‘leading’ far larger countries such as France and Italy). With a mortgage debt of €40,000 per capita (including children and tenants), the average Dutch citizen has a higher debt than the average Greek or American (although Greece and the US do have higher debts per capita in the public sector). The Netherlands’ exceptional position is mainly attributable to its home mortgage interest deduction scheme, which is more generous than any other comparable scheme in the world. This high level of per capita mortgage debt is not attributable to high real estate prices; houses are expensive in the Netherlands because its residents had more access to large loans until 2009, while the mortgage rate deduction scheme helped drive up prices. If the current scheme is not adjusted or measures prove inadequate, our mortgage debt will continue to rise at a faster pace than our house prices and income levels.