28 April 2010

Predation

Step 1: Arnold Kling claimed "predatory lending" is a non-issue.
What about predatory lending? As I understand it, the idea of predatory lending is to saddle the borrower with an expensive mortgage so that you can foreclose on the property and sell it at a profit. How many times did that happen? Have you read of a single instance in the past three years where the bank made a profit on a foreclosure?
Step 2: The Economist::Democracy in America blogger M.S. called him out on that claim here.
In other words, predatory lending isn't about lenders trying to get their hands on people's houses anymore. It's about lenders convincing people to take out big mortgages, so they can pocket the fees, and then passing the mortgage along up the food chain, until somebody gets stuck with it. Probably you and me.
Step 3: Kling responds here, doing a very admirable job of defending his position.
Is it preying on the borrower to make a bad loan? Not so much. The borrower gets a free option. If the house price goes up, it doesn't matter whether the borrower can make the payments or not--the borrower can sell the house at a profit. If the house price goes down, the borrower loses his down payment, plus moving expenses, plus a ding on his credit rating. As down payments approached zero, the total down side of this was pretty small.

The "prey" of the predatory lending in recent years was not the borrower. It was the investor. Investors turned into suckers. I don't feel sorry for them. If you want me to feel sorry for the borrowers, you have to convince me that they lost more than I understand they did.
As I said, I think Kling defends himself perfectly well, but I want to highlight two points in M.S.'s piece that he skips over.

First of all there's this idea that mortgage originators issue loans and then throw them all on the conveyer belt where they get amalgamated and aggregated and sliced and diced until an MBS pops out.  M.S. says mortgage originators "don't care whether the buyer will ultimately be able to pay, and they don't care how much the house is really worth, because by the time of any foreclosure, they'll be long gone."

If they don't care if the loan ever gets paid then it's awful hard to sell the loan up the ladder to the next guy. It's no different than any other supply chain. Did the guys who were next in line — Fannie Mae, Countrywide, etc — get a little soft in their diligence? Yeah. Did they suffer from being on the wrong side of an information asymmetry? Yeah. But they were big boys. They knew (or damn well should have known) what kind of fire they were playing with. They conducted a lot of audits and honed a lot of standards. It's not as simple as just originating a loan and then passing the buck to Fannie.  Obviously there were a lot of lenders with a lot of different standards, but it was rarely as simple as "here buddy, have a huge loan, I don't care if you ever pay it back."

Secondly there's the notion than originators tricked borrowers into taking out bigger loans than they could afford to pay. I'm sure this happened. Quite a lot. But I'm also sure it happens on the car lot and at the elctronics store and on sales floors of all kinds everywhere. Salespeople are always trying to talk their customers up above their initial price range. But just like buying a used car or a new TV, it's the customers' responsibility to say "no, thank you, that's more than I want to spend."

It is not the loan officer's responsibility to watch out for you. In fact the only person with that responsibility when the rubber hits the road is you. You are on your goddamned own. Welcome to life as an adult. Now try to stand on your feet and step lively avoid getting eaten by tigers. Good luck.

(Jesus that last paragraph makes me feel like the other Jeffrey Lebowski, but it needs to be said. I'm not trying to say people shouldn't try and help each other, but at the end of the day you're all you've got.)

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