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Miles of New Orleans remain pretty much the way Katrina left it two years ago -- with 123,000 owner-occupied homes and 80,000 rental units damaged or destroyed. And as one of the poorest regions of the U.S., it should come as no surprise that subprime mortgages have deeply penetrated its mortgage market.
How bad are subprime woes in New Orleans? According to Bloomberg News, about 21% of Louisiana's 60,000 subprime mortgages were at least 30 days past due in last year's fourth quarter, up from 15% in 2004, the year before Katrina. Only Mississippi and Michigan had higher subprime delinquency rates.
And the subprime woes are a great example of the widening income disparity in the U.S.. That's because subprime mortgage originators are transferring these bad mortgages at a deep discount to hedge funds -- whose wealthiest owner, James Simons, took home $1.7 billion last year. For example, H&R Block, Inc. (NYSE: HRB) agreed April 20 to sell its subprime mortgage lender, Option One, to Cerberus Capital Management LP, a New York private-equity and hedge-fund manager.
Meanwhile, retired New Orleans cook Hattie Warren, who survived Hurricane Katrina, is now at 82, struggling with the $100,000 subprime mortgage she took out to pay bills. Her $860 a month ARM payment, eats up three-quarters of her income from Social Security and the rent daughter Gloria pays to share their two-family Creole cottage.
While Warren tries to renegotiate the rate on the mortgage, what matters most is that hedgies like Cerberus can profit from her distress. After all, he who has the gold rules -- Cerberus has it and Warren doesn't.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in H&R Block.
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