Blockbusting

[Hiruko]

Originally Posted by treemoni

Wow. Well, at least you're honest about it. It makes no financial sense to give someone with less-than-optimal credit a high variable interest rate loan. None. It's predatory, period. I know someone who'd boast about the subprime loans they were approving. They knew full well those folks wouldn't be able to make the payments. Then 2008 happened and all of a sudden they weren't doing so well. I couldn't help feeling like they got what they deserved.

What you are saying is very true. However, there has to be higher return for the greater risk that a lender is taking on by financing the subprime borrower.

[BRU67]

Originally Posted by Hiruko

What you are saying is very true. However, there has to be higher return for the greater risk that a lender is taking on by financing the subprime borrower.

Agreed. There's a reason you want to have a high credit score! Saves you money. And if lenders cannot adjust their price to account for risk, they're simply not going to loan money to risky borrowers.

I can't believe we're actually having these discussions. But then again, it is 2019.

[treemoni]

Originally Posted by Hiruko

However, there has to be higher return for the greater risk that a lender is taking on by financing the subprime borrower.

Can you explain this in layman's terms? I'm not trying to be funny. I'm genuinely having a hard time trying to understand how it makes sense to ask for more money from someone that doesn't have it. How does asking for more money than you would ask from a person with good credit make financial sense? From my perspective, you are putting someone in a situation where they're guaranteed not to be able to pay, but you get more money from them up front. Then you can resell the property to someone else and potentially make more than you would have under the first terms.

Perhaps I'm not getting it. Please help me make sense of the math on this.

[treemoni]

Originally Posted by BRU67

And if lenders cannot adjust their price to account for risk, they're simply not going to loan money to risky borrowers.

Bingo. Don't lend to risky borrowers. But they know they can't take advantage of someone with good credit because they'll just walk if they see a bad deal. It's taking advantage of the person that doesn't have any options. They don't care about "helping" them own a home. This isn't charity work.

[BRU67]

Originally Posted by treemoni

Can you explain this in layman's terms? I'm not trying to be funny. I'm genuinely having a hard time trying to understand how it makes sense to ask for more money from someone that doesn't have it. How does asking for more money than you would ask from a person with good credit make financial sense? From my perspective, you are putting someone in a situation where they're guaranteed not to be able to pay, but you get more money from them up front. Then you can resell the property to someone else and potentially make more than you would have under the first terms.

Perhaps I'm not getting it. Please help me make sense of the math on this.

I can try to explain it this way. Let's say you own a two-flat you bought with your own money and you have a mortgage to pay on it. You put out an ad for an empty apartment and you get two tenants who apply for it.

Tenant 1 submits a credit report showing a 800 credit score and several accounts showing "green" on time payments. He has a employment verification form showing a job as an accounting consultant in the Loop that pays $150,000 per year. His current landlord gives him a great reference and says he's quiet and has paid all rent on time during the two years he's been there. Tenant 1 is a touch arrogant, and says he wants to be in your neighborhood for the nightlife and restaurants.

Tenant 2 submits a credit report showing a 480 credit score and several accounts that are 60 days or more past due or charged off. He has an employment verification form showing he's self-employed and he puts down $1,000 per month as his income. He gives no landlord reference and says he lives with his brother, but he needs a place right away as he can't stay there past the 1st of next month. Tenant 2 says he realizes his credit is bad but he's turning his life around and asks you for a chance.

Who you choose to rent your apartment, and why would you make that choice?

[BRU67]

Originally Posted by treemoni

Bingo. Don't lend to risky borrowers. It's taking advantage of the person that doesn't have any options. They don't care about "helping" them own a home. This isn't charity work.

Not lending to risky borrowers would have an adverse impact on low income people by preventing them from buying things. Are you saying there should be a universal interest rate that applies to anyone? Or are you saying subprime interest rates are too high for the actual risk? I suppose the latter is a rational argument, though to make that argument you should support it with data.

[treemoni]

Originally Posted by BRU67

Who you choose to rent your apartment, and why would you make that choice?

Tenant 1, obviously. The thing is, if Tenant 1 decided to not to sign my lease, I wouldn't then offer it to Tenant 2 for double the amount knowing he's a risk but doing it anyway because I'm looking for a payoff. I wouldn't consider Tenant 2 at all and would just keep looking for the right tenant. Tenant 2 could end up costing you in other ways.


Then again, I'm not a landlord or businessperson, and perhaps this is why. I don't want to be a millionaire. My thing is, if $1200 is market rate for the apartment, all tenants should be charged $1200. You definitely shouldn't charge the Tenant who can't pay MORE money because they're a "risk". If anything, you'd charge more to the person who can afford it. But that's not the way business works in America.

Originally Posted by BRU67

Not lending to risky borrowers would have an adverse impact on low income people by preventing them from buying things.

They need to learn to live within their means. We aren't entitled to nice things if we can't afford them.

[BRU67]

Originally Posted by treemoni

Tenant 1, obviously. The thing is, if Tenant 1 decided to not to sign my lease, I wouldn't then offer it to Tenant 2 for double the amount knowing he's a risk but doing it anyway because I'm looking for a payoff. I wouldn't consider Tenant 2 at all and would just keep looking for the right tenant. Tenant 2 could end up costing you in other ways.


Then again, I'm not a landlord or businessperson, and perhaps this is why. I don't want to be a millionaire. My thing is, if $1200 is market rate for the apartment, all tenants should be charged $1200. You definitely shouldn't charge the Tenant who can't pay MORE money because they're a "risk". If anything, you'd charge more to the person who can afford it. But that's not the way business works in America.





They need to learn to live within their means. We aren't entitled to nice things if we can't afford them.

But under your scenario, Tenant 2 would never be able to live anywhere or rebuild his credit and his life and work his way into Tenant 1 status. That's not a fair situation, at least if you believe in giving people second chances.

And sure you can charge people more based on risk! If 1 out of every 3 Tenant 2s default on their leases, and 1 out of every 50 Tenant 1s default on their leases, landlords whose business model is to rent to Tenant 2s will manage that additional risk by either charging more in rent or by buying properties in neighborhoods where building costs and taxes are much lower due to lack of desirability for one reason or other (crime, lack of transit, lack of jobs, etc).

Progressives would like to eliminate all of this by allowing landlords to only charge X amount of rent and only increase it by 1% or whatever small amount per year (rent control). But if my rents are limited and essentially frozen in place, and I have to pay $10k in attorneys' fees and lost rent for each person I have to evict, I'm going to make darn sure I don't get into that situation and will avoid Tenant 2s at all costs, as will everyone else. Except in the worst neighborhoods, where the high risk can be offset by dirt cheap property values. And even then, landlords will manage risk somehow - probably by not maintaining their buildings.

[BRU67]

Originally Posted by treemoni

Tenant 1, obviously. The thing is, if Tenant 1 decided to not to sign my lease, I wouldn't then offer it to Tenant 2 for double the amount knowing he's a risk but doing it anyway because I'm looking for a payoff. I wouldn't consider Tenant 2 at all and would just keep looking for the right tenant. Tenant 2 could end up costing you in other ways.


Then again, I'm not a landlord or businessperson, and perhaps this is why. I don't want to be a millionaire. My thing is, if $1200 is market rate for the apartment, all tenants should be charged $1200. You definitely shouldn't charge the Tenant who can't pay MORE money because they're a "risk". If anything, you'd charge more to the person who can afford it. But that's not the way business works in America.





They need to learn to live within their means. We aren't entitled to nice things if we can't afford them.

To be clear, most landlords do not have "sliding scale" rents, where Tenant 2 gets charged $300 more or whatever than Tenant 1. Generally what happens is that Tenant 2 will be rejected for the same reasons you would reject him and he'll have trouble finding a good place in a decent area.

However, this is capitalism so there are landlords out there (often institutional) who will develop a business model based on "subprime" tenants. They manage their risk by charging more rent relative to their costs. Usually these landlords operate in lower income neighborhoods. Once again, there are advantages to having good credit!

[treemoni]

Thanks for the insight. Really helpful stuff.