Foreclosure Not So Lite?

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For those who want to delve into the intricacies of subprime mortgage math, my item on subprime mortgages garnered some reaction, including an item from Felix Salmon at Portfolio.com seems to have taken up the challenge of proving that my view is nothing less than evil. Felix’s central objection is that most subprime loans were refinancings, and leave borrowers facing the loss of the equity they had in their house as well as personal liability for unpaid debt that remains after a foreclosure. Felix says:

Yes, you do lose your life savings along with the house. Most subprime mortgages are refis, which means that very few of them are non-recourse: just because you lose your house doesn’t mean that you don’t still owe money to the lender. When you go into foreclosure and/or bankruptcy, you will lose all your savings as the lender tries to recover as much of the value of the loan as possible. Remember that it’s the homeowner, the individual, who owes the bank money: a mortgage is a personal debt.

You can read Felix’s full reaction here–he makes several other points as well.

Without a doubt the situation of people who had equity in their homes, refinanced, and now stand to lose them, is not by any definition “foreclosure lite.” But my point was that in the main the concern of the press and of Washington has not been with those people. He can go through the voluminous reporting on this in the Wall Street Journal or the the New York Times, and he will find that the bulk of the stories in fact focus on people who bought, rather than refinanced homes. Those–and not the experience of people I’ve known with ARM mortgages–were the main data points I was working off.

Are those the only relevant data points on who the victims are of the subprime meltdown? I don’t claim to be sure. Brad Delong makes the very reasonable point that no one is:

It’s true that somebody who took out a zero-down teaser-rate loan in a non-recourse state has essentially gotten a couple of years of living in a house at a very reasonable rent. And it is true that California is a non-recourse state. But to evaluate this argument we need the numbers. And we do not yet have them.

(FYI, A non-recourse state is one in which a lender can’t recover more money after a foreclosure.)

I think Brad is right. We do need more numbers. And they will indeed help evaluate both my argument and that of people who are convinced that subprime loans and ARMs are an unprecedented evil perpetrated on an unwitting American public.