Predatory lending and other mortgage nonsense
Those of you in the US have probably heard plenty about the collapsing sub prime loan market. I follow the global economy pretty closely myself, subscribe to the Economist, read economics books, and so on. No big suprise here; it didn’t take a genius to figure out what was going on in the housing market. Smart affiliate marketers were moving away from mortgage leads months ago.
Cheap credit simply drives up prices, increased prices make it harder for people to afford things. Thus interest-only adjustable-rate mortgages have become very popular. In the extremely hot markets, such as California, interest only was really the only option for the average wage earner to even be able to afford payments. Since housing prices had upward momentum this was not only acceptable but seen as a good idea.
Suprise, it turns out housing prices actually weren’t grossly undervalued and prices weren’t going to keep making double digit gains year after year. In fact, the fundamentals have flipped.
Now certain individuals in the United States government and special interest groups are up in arms over “predatory lending.” The complaint is that lenders were giving people home mortgage loans to essentially unqualified individuals. A direct quote from someone off CNN.com “…pushing of exotic loans on people of color, female-headed households, families with children, people with disabilities.” its a little wonky, but it gives you an idea what side of the room this predatorial worldview is coming from.
Since mortgage leads have been such a huge part of affiliate marketing and internet lead generation this is an important issue to many here. Suprising isn’t it how a “doomsday” scenario can suddenly appear in a very large industry overnight — just like we saw with gambling.
Regardless, let me get back to the point. What is predatory about this? Lets look at the reality:
1. Loaning money to someone who ends up not paying it back — who is the real loser, the borrower or the lender?
2. Is it predatory to deny a loan to someone, even if a second party is ready to hand over the money, because the government says so? (haven’t held their job long enough, make $100 a month less than required, etc.)?
3. What about the President’s ownership society? He certainly has bragged about high home ownership rates. Could he be a predator too?
4. What about Alan Greenspan dropping interest rates to the floor to bail out investors in a stock market bubble? The lower middle class with little to nothing invested in the stock market got nothing in return but rapidly inflating home prices. Not such a bad deal if they already owned. Not such a good deal for those who purchased a year or two ago. Hell, this guy even applauded sub-prime and exotic mortgages a few years ago. Could Alan Greenspan actually be the Predator-in-chief?
At the end of the day, the fact remains, investors have been gobbling up ultra-high risk loans for only a few percentage points extra gain. The government could just play hands off and lets these guys f*** themselves. Something tells me thats not quite what will happen.
All your points are valid.
I think the problem here is that we expect someone with a total household income of $40,000 a year to have some understanding of compound interest or economic factors that affect the payment they are undertaking.
At the same time the mortgage industry has incentivized brokers to sell riskier loans. A broker can make 1 point on a 30 year fixed, or they can make 1.25 points on an exotic mortgage. The difference is that the exotic mortgage also allows the loan amount that compensation is figured from to be inflated because borrowers are fixated on payment.
Then when you allow the broker to hide his fee from the borrower, you are inviting people to ignore the best interest of the borrower.
Essentially the same thing happens in sub-prime auto lending. A customer is focused on payment and not on other variables, which in essence allows a finance manager at a dealership to rob them blind.
Could say the same about credit cards, or payday loans….The economy is addicted to easy credit. Which is why when that goes away, the after effects of this 2 decades long party are going to be pretty severe.
Expecting the lower and middle classes to learn about and understand finance is like expecting your dog to not eat the steaks you set on the table while you run to the store for milk. It is just not going to happen.
Comment by Diorex — March 23, 2007 @ 10:35 am
If it doesn’t happen than you need to have some darwinian survival of the smartest going on. No government bailouts or any other such nonsense that teaches no real lesson. If you made bad decisions, lending to people who had horrible credit, or buying things you cannot afford, you should deal with the consequences. Negative consequences are the only way people learn.
We have too much of an entitlement society and we need more of a personal responsibility society.
Comment by Chris Beasley — March 23, 2007 @ 12:20 pm
The subprime market is a story of poor lending standards. Here is the crazy thing; everyone knew about it; the fed, the lenders, the realtors, and the borrowers. It was something more than an accident waiting to happen. It was an accident planned in advance.
check out the housing bubble video on:
http://economicdespair.blogspot.com
It is a very simple but incredibly moving account of what this subprime thing was all about.
Asset bubbles are driven by people, and people are always the victims.
Comment by Wesley Jones — March 23, 2007 @ 2:34 pm
I hope there are no bailouts. Fast and loose lenders deserve to be victims of the froth they created.
Comment by Marc — March 23, 2007 @ 11:45 pm
Survival of the smartest or survival of the more fortunate? Just because someone isn’t well versed in home lending finance trickery doesn’t make them stupid. Or deserving of being taken advantage of. What a terrible thing to say…
Some people are raised in an environment where things that are common sense things you need to know to you or I aren’t exactly a priority due to living circumstances. So they fight and scratch their way out of the situation and the first thing they want to do is live the American dream and buy a home. You’re saying it’s a good thing to stick it to them one more time and teach them a lesson by robbing them blind with a predatory loan?
This isn’t a darwinian experiment dude. It’s people’s lives, their homes, their families. If you were forced to meet face to face with every family that lost everything behind one of these loans, look them in the eye and hear their story what would you do? Would you pat them on the back and ask them if their glad they learned this lesson?
Comment by GeorgeB — March 28, 2007 @ 9:48 am
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Comment by Jason Kaminski — March 30, 2007 @ 2:11 pm
No one is saying that people are stupid because they don’t know about home lending. They are stupid because they didn’t bother to find out about it. You are probably making the biggest investment in your life and you didn’t bother to do a little research??? You didn’t think that maybe a mortgage lender who is basically just a salesman might have his best interest and not yours at heart??? You deserve to lose your home!
I am tired of hearing people call this “predatory lending.” I hope there are no bailouts or help for anyone losing their home. The lender is there to make the sale. It is your job to decide if it is appropriate for your situation. This is just like anything else in a free country. You are free to choose and it is your responsibility to decide if food, cars, and anything else that you purchase is appropriate for you.
Everyone needs to start taking responsibility for themselves. Otherwise nothing will change and history will repeat itself.
Comment by Kevin — June 13, 2007 @ 10:02 am