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August 9, 2005
Home Loans for Illegal Aliens
It has become recent news that some banks have started to make home loans to illegal aliens. They live here, work here, and want homes. On one hand it makes sense, you have an untapped market of consumers. On the other hand there is one big risk, deportation. Some of the big banks recognize this which has left these kinds of loans in the hands of smaller banks.
With legal residents, you have some degree of assurance that they'll be around in the long-term. Sure, something might happen, but odds are you'll be able to get something out of them if push comes to shove, at least some of the time. With illegal aliens, if they get deported the chances of recouping any losses on that mortgage leave the country with them.
The economic problem comes in that those risks need to be balanced with higher costs to cover those risks. The only unpredictable feature is if there is a push to start enforcing immigration law. DeLay and Tarcedo have made illegal immigration campaign issues and it won't take many terrorist attacks on US soil to convince people we need to secure the borders. All the sudden those loans become losses. If the banks price the loans appropriately the risk may be mitigated, if they don't it could be a problem.
Bad loans have a high coincidence level with depressions. When banks loss lots of money very bad economic things happen. Because this is an untapped and "shady" market to get into, odds are those banks aren't taking the appropriate steps. Combine that with other factors that may come in to play later (housing bubble burst, economic downturn, consumers starting to default on their already high debt loads, all those interest-only home loans coming due) and it could be a recipe for a financial nightmare.
Posted by John Bambenek at August 9, 2005 4:27 PM
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Comments
Mortgages are being issued on the assumption that it's impossible to lose money on them, because house prices always rise.
This is, of course, false. But being false doesn't mean bankers don't assume it's true. And any banker assuming it's true has no reason to care about the borrower's immigration status. After all, as long as the price of houses doesn't fall, the only money at risk is the legal costs for executing a foreclosure.
RESPONSE:
Well the cost of foreclosure isn't trivial. No one wants to buy a forclosed home, first off, so the value instantly drops. I doubt they cover the risks with illegal immigrants because the risk involved is not set. Right now, yeah, they'd be fine. If another terrorist attack hits the US because someone came in through Mexico, all bets are off.
Posted by: Matt at August 10, 2005 6:37 AM
I am outraged over this issue. Can you clarify something for me. My Bank says they have no choice and that the Government says they have to make these loans. So, who is lying?.
Dick Bennett
RESPONSE:
Banks are. Banks are free to make loans based on risk, risk of being deported is significant. Patriot Act requires SSNs, they don't have one. The ACLU might browbeat them, but all the MAINSTREAM banks won't touch this stuff leaving it to the middle tier banks.
Posted by: Dick Bennett at August 30, 2005 6:43 PM
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