When refinancings go wild

Think most people who went for sub-prime loans were itchy renters or investors looking to get into the market? According to a story in the L.A. Times, 90% were actually refinancings by existing homeowners (usually the cash-out kind) in which otherwise unsophisticated borrowers were led, much like cows to the slaughterhouse, to a a notary public to sign documents of dubious transparency:

Discussion of the problem often focuses on first-time home buyers who stretched to buy homes they couldn't afford. But experts who've crunched the numbers say 90% of people who took out sub-prime loans from 1998 to 2006 were already homeowners...

When lenders ramped up sub-prime lending in the mid-1990s, it was touted as a way to expand homeownership among people with low incomes or shaky credit histories. And many have pointed to the modest growth of homeownership -- from 64% of households in 1994 to 69% of households by 2005 -- as evidence that sub-prime lending had genuine benefits.

But Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies, notes that most of that expansion in homeownership occurred in the late 1990s, before sub-prime lending exploded.

Elizabeth Renuart, a housing attorney with the National Consumers Law Center in Boston, said many sub-prime lenders and brokers targeted people such as Miller.

They were promised cash, based on the equity in their homes. And the solicitations were rarely clear about the fees and interest rates, advocates for homeowners say.

Moreover, sub-prime loans always charged higher interest rates. That meant bigger commissions for the loan agents and brokers who sold the loans, and provided higher returns to investors who bought securities composed of bundled sub-prime loans.

"It was push marketing," Renuart said. "As the engine revved up from Wall Street to invest in these things, the pressure was on the brokers to make these loans."