This Business Week article suggests that sub-prime borrowers are treating their homes as rentals. They’re paying credit cards first, homes second.

According to Business Week, 32% of sub-prime borrowers were more than 30 days late in paying their mortgage in 2003. That number was 36% in 2006. On the other hand, the percentage that were late on credit card payments fell from 32% to 24%. A significant drop. You can view the rest of the article here.

The up-front cost of a sub-prime loan is obviously more than a rental deposit, but given the circumstances, and risk taken at the wrong time, these people might be smart to drop out of their expensive loan payments when the mortgage + taxes + PMI payment might damage their ability to obtain credit cards.

For these borrowers, the only difference between a sub-prime loan and paying rent is that you pay rent to the sub-prime lender instead of a landlord, the payment is probably 15-30% higher, and you incur some costs at close (unless you roll them in). For the remaining 64% who take out these loans and can make the payments, the risk might be worth the reward. Especially if they’re able to acquire an asset that increases in value at a monthly rate HIGHER than the difference between what they would pay in rent, and their mortgage payment. This is very possible over a 3-4 year period, and holds the potential to lift these people into the Middle Class.

What’s interesting about the sub-prime debate going on in Oregon, and other States, is how little it is understood by the people enacting the laws. For 64% of borrowers, sub-prime loans may in fact offer them a way out of the endless payday loan cycle, by giving them ownership of an asset that has the potential to grow at 3-8%/year. Ironically, if subprime borrowers were given a pass on their property taxes, often 20% of the mortgage payment, these borrowers might actually be able to afford this asset. Cap payday and CC loans to them, give them education vouchers and free classes on budgeting, economics, and finance and they’ll have a chance to make it.

Somehow I doubt SB965 will lead to a debate about ending property taxes for sub-prime borrowers. That would mean the government would actually have to take responsibility for the working poor by sacrificing their revenue too. Not just the revenue of legitimate mortgage brokers licensed through the State. That’s the easy way out.

Popularity: 16% [?]