This spectacle has brought forth recriminations from politicians who picture the lenders as James Bond villains, cackling at the chance to toss hard-working families out on the street. In fact, this course is almost as bad a deal for lenders as it is for borrowers. They typically lose up to half the value of the mortgage on foreclosures.
From listening to the critics, you’d never guess that. Barack Obama denounces “predatory lenders” for “driving low-income families into financial ruin.” Barney Frank (D-Mass.), who chairs the House Financial Services Committee, blames everything on an epidemic of “abusive lending.”
But lenders who made bad decisions are already paying the price. Many mortgage companies have gone bankrupt. And if these loans are so unconscionable, the question is not why the foreclosure rate is so high but why it’s so low. …
The remedies urged by Hillary Clinton, John Edwards and the like include placing a moratorium on foreclosures, freezing teaser rates for five years or more, and forcing lenders to reduce loan amounts to reflect deflated home values. These options are conspicuous for a couple major defects.
The first is that they punish lenders for the failings of borrowers. Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn’t? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they’d be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.
I wrote about the issue in the Wall Street Journal in April.
9 Comments
The people that I have met who are hit with this crisis are those who were speculating and flipping houses not poor, low income folks. These “investors” bought huge, expensive houses and hoped to resell them at a huge profit in a year or two. Instead, the marked slowed, they got hit with increased payments and can’t sell the house. Government bailout just doesn’t seem fair.
I live in a poorer agricultural area, and we do have people who were tempted into refinancing at apparently low rates (or, rather low current payments) in order to meet their current needs, and encouraged by brokers who provided assurances that it was soooo unlikely that their payments would go up very much even if they papers suggest they could, and if the payments went up they could just refinance to a different low rate loan. Do I think people should be responsible for reading the fine print–absolutely. However, I do think there is a problem when loan brokers have an incentive to pressure the less sophisticated/more desperate into taking on loans with payments likely to reach an unmanageable level for the particular borrower. Unfortunately, I don’t know how you deal with that problem without providing an unwarranted out to the speculators.
Given your history of argumentative tennis matches with Bizarro-Justinian, I do hope that you’ve cc’d him on this post to begin what could be a delightful debate.
The mortgage problem may be so severe because lenders followed a [flawed, incomplete, self-contradictory] computer model rather than experience and {un}common sense –
“Of course not everyone was caught by surprise, though many of the smartest firms were. Morgan Stanley got caught. Its CFO said, referring to the extensive computer modelling that the firm had done, `no stress model in the world would ever have had it.` Goldman Sachs, previously one of the prime purveyors of subprime paper, fared much better. It apparently was well aware of what it was shoveling into the marketplace, and was not fooled by computer models. Goldman made money from precisely the same circumstances that caused Morgan to lose money.”
query: was Al Gore[y] a bellweather here?
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http://www.dinocrat.com/archives/2007/12/09/phases-of-a-credit-crunch/
You have GOT to be kidding…expect people to live up to the words of a contract… NOT while there are “Praise Me” attorneys, attorney generals, and politicians around! Havent you seen the antics of Scruggs, Gene Taylor, Jim Hood, etc. in the Katrina fiasco? This is just another example of liberals trying to buy votes by “sticking it” to those mean old businesses.
It seems to me that existing laws are more than sufficient to deal with this problem. If lenders were misrepresenting the terms of a loan, that’s illegal and they can be prosecuted.
Like every scandal or big news event, we have this need to create new laws. I always felt that the Enron case actually proved that the system worked, but instead we got Sarbanes-Oxley. I fear we’re headed for SOX for lending, and that will be much worse for the economy than anything these so-called predatory lenders have done.
I represent borrowers in predatory lending cases. Once, when talking with the bank’s counsel, I commented to him that it was his client who was the mark of the scam (and scam it was, as the lender’s counsel readily agreed). Real predatory lending cases (and they exist, and are very predatory) are really aimed at the lenders. Willy Sutton was asked why he robbed banks – That’s where the money is. Often, in a true predatory loan, the originating broker is looking to close the deal ASAP, knowing he/she/it will never have to live with the consequences. The lender, often because of poor procedures and safeguards, ends up with a garbage loan. The bank loses a valuable asset, the borrower loses the house and the broker goes to the Bahamas.
Whenever I am able to convince the lender that it was the real target of the scam, and the borrowers were mere collateral damage, both my clients and the bank invariably end up in a better position, than if we treat each other as adversaries.
In terms of the effectiveness of existing laws, I think this entire mess could have been avoided if the lender had liability for the acts of all of its agents in the origination process. Those agents include the broker (sorry, they don’t really work for the borrower), the title agent and the appraiser. Had that liability been in place, the lending industry would not have allowed the unrestricted hyperactive growth of the practices which led us to this juncture.
Mahlon’s solution is to make one victim liable to the other victim for the acts of the scammer? Typical plaintiff’s lawyer.
I read Mahlon’s position as both victim’s getting together in order to end up better off than they would had they taken an antagonistic stance towards each other.
That is the crux of mitigating the mortgage situation. There are essentially 3 types of borrowers:
1) Borrower’s that can get refinanced to something that they can pay with no help.
2) Borrower’s that cannot make their current payments, let alone adjusted payments.
3) Borrower’s with a reasonable change in terms can pay the lender back more money than the lender would get in foreclosure.
group 1 can take care of itself, group 2 is screwed no matter what. The goal then is to keep as many people in group 3 as possible out of foreclosure. In this real estate market there is no gain in foreclosure for a lender as there may have been 4 or 5 years ago.