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.Powered by Sidelines