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How Old-School Lending Benefits Local Communities

by Peter G. Miller
January 6th, 2008

Over at Calculated Risk, one of my favorite blogs, Tanta makes an interesting point. She discusses the case of a borrower who was foreclosed, yet title to the property did not change for years — meaning the defaulting owner remained responsible for property taxes, maintenance and other costs.

“Reading things like this, calculatedrisk.blogspot.com/2008/01/jingle-liens.html”>says Tanta, “also always makes me think of the endless complaining you get over FHA appraisal and property inspection practices. Every time you’re tempted to think those are silly and bureaucratic–delaying closing for another 30 days while an attic window pane is repaired–and in need of “modernization,” remember these properties that were decrepit at the time they were first mortgaged by those modernized conventional subprime lenders, nearly worthless at the point the borrower could no longer carry the payments, and then nothing more than urban blight after years of the lender refusing to take title. FHA, for all its flaws, never walks away from title.”

Actually, I don’t think the FHA is remarkable in what it does, it merely follows the normal and usual standards which used to be in place – and are still in place with local lenders.

What changed?

Before securitization if you wanted a mortgage you went to your local lender, typically an S&L. The reason you went to the S&L is that it paid an extra .25 percent on savings accounts and was largely forbidden from making commercial loans.

If something went wrong with a loan, the lender took title because it was local, it was part of the community. Now it’s often unclear who actually owns a mortgage because title can shift in minutes with the sale of a security or the creation of a new class of investors who own a portion of the debt.

Localization. Who would of thought it could mean so much for mortgage loans?

Globalization. Who would have thought it had still-another hidden cost?

The FHA. Still another reason why old-school lending makes sense.

For the whole story at Calculated Risk, see: Jingle Liens

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