The Reality Of “Predatory” Lending

Over at my personal blog, I wrote earlier today about a Washington Post article about the rising number of foreclosures in the D.C. Metropolitan area. Along those same lines, Tim Cavanaugh writes in the July issue of Reason Magazine about the current focus on so-called predatory lending and its connection to the state of the real estate market.

As Tim points out, there was once a time when it was difficult for people to get loans, and that was considered a crisis too:

The conventional wisdom used to say the poor didn’t have enough access to debt. One of the earliest products of Franklin Roosevelt’s New Deal was the Home Owners Refinancing Act, which provided mortgage money to more than a million borrowers over a three-year period. Harry Truman’s record shows a consistent effort to expand the amount of debt available to willing borrowers.

My favorite artifact of the period’s pro-lending mood is Fredric March’s great “collateral” speech from the 1946 film The Best Years of Our Lives. March, playing a rising bank middle manager who has just returned to his job after serving as an Army NCO in the Pacific, reads a rambling riot act to a banquet of porcine small-town bankers who have criticized him for providing loans to bad-credit-risk veterans. If we’d fought like bankers, seeking collateral for every risk and a guarantee on every expenditure, we’d have lost the war, he argues.

We can dispute the wisdom of federally guaranteed loans and mortgage purchasing, but it’s notable that the new economy March wanted helped to create one of the greatest booms in the country’s history: the postwar suburbanization of America, which is now derided by our own bien pensant classes, who claim there’s too much ready credit out there. The difference now is that it’s coming from the market rather than a package of government guarantees, from an industry that expanded to fill a demand and is now contracting as the demand shrinks.

Which is, when you think about it, how it should be. You can question the wisdom of some of the decisions that people made in going with unconventional mortgages, but the truth of the matter is that without these types of financing options that the market created, most of those people never would have been able to obtain a mortgage to begin with. They’d still be renting, or living with family, and the idea of the home of their own would be nothing but a dream that would probably never be fulfilled.

Did some lenders make the mistake of lending to bad credit risks ? They probably did that too. But they have learned the lesson of those mistakes as well. That’s what the market is about.

Besides, as Tim points out, things aren’t nearly as bad as the politicians would have you believe:

In a sane world, we’d say this is a market behaving as it should, and marvel at an economy where so many people who were once locked into the renters market have gotten a chance at homeownership. Some of them have blown their chance by exhibiting the same kind of behavior that made them bad credit risks in the first place. But most have not. In fact, about nine out of every 10 sub-prime borrowers are still making their payments.

Sounds like mostly a success story to me.

Originally posted at Below The Beltway

  • Oliver Peters

    This is an interesting article. If what you report is true, that nine out of every 10 sub-prime borrowers in the USA are still making their payments, then that is very good news. It is a shame though that many ‘sub prime’ people with bad credit ratings are looking for mortgage finance and are being exploited and misled by disreputable firms and then let down when it comes to the crunch of getting the mortgage. And the issues you raise are relevant to people all over the world who are in this situation. When I’m talking to people in the UK who are looking for a mortgage I usually recommend a company I know from personal experience, called Interesting Mortgages. They have special schemes for all kinds of people, whatever their circumstances. They’re very helpful and reliable and have a good reputation:

  • T F Stern

    “…who claim there’s too much ready credit out there.”

    Perhaps the credit that is being made available for mortgages would not be at risk to such a degree were it not for the near collapse of disciplines in the area of other credit; limitless credit to purchase anything from a meal at McDonalds, a fancy new set of rims to go on the new car with a 72 month note and the vacation to Disney World. The desire to spend above the means to repay is where I have seen the use of predatory financing, a way to entice long term debt under the “you deserve it now” emblem.

  • Fred Red

    You guy are way lost!

  • Fred Red

    You haven’t lived till you’ve been hit by Predatory lending…

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  • trumpetbob15

    There is nothing wrong with a private company making loans that turn out to be stupid, but doing title research, I found quite a few mortgages from either the federal or local government to people that shouldn’t have been approved. That is the real issue.

  • Fred Red

    That’s part of it for sure.


    Predatory-Loan Suit Could Hit Ameriquest Founder
    by Chris Arnold

    Morning Edition, June 19, 2007 · Roland Arnall, the U.S. ambassador to the Netherlands and the founder of mortgage lender Ameriquest, may soon get pulled into a lawsuit over predatory lending.

    Ameriquest customers say the company steered them into predatory loans — and many involved in an ongoing class-action suit wants Arnall, a billionaire who is currently the U.S. ambassador to the Netherlands, held personally liable.

    Related NPR Stories
    May 30, 2007
    Ameriquest Faces Lawsuit by Borrowers
    May 14, 2007
    Former Ameriquest Workers Tell of Deception

    NPR : Predatory-Loan Suit Could Hit Ameriquest Founder

  • Aaron Krowne

    “… the truth of the matter is that without these types of financing options that the market created, most of those people never would have been able to obtain a mortgage to begin with. They’d still be renting, or living with family, and the idea of the home of their own would be nothing but a dream that would probably never be fulfilled.”

    RENTING?! For the love of God, not that! Anything but that! I’m a renter; I guess I must be sub-human. It’s too late for me, but the rest of you–save yourselves! You can still get pay option ARMs with FirstFed!

    To me the original post represents a bizarre, contradictory perspective. We’re to congratulate government-piloted initiatives to “expand home ownership” and pat ourselves on the back for the concomitant economic boom (wait, is that still the free market?); but we are not to acknowledge that this policy could lead to any sort of over-stimulus, and an economic “boom” that is simply an illusion?

    You’re right, the story isn’t “predatory lending”. That’s only a small part of it. Much bigger is the popular greed that the plethora of foolhardy loan tools of recent years abetted: first-time buyers bought even earlier, flippers flipped with greater ease, and the “working poor” got to flaunt the trimmings of prosperity before actually achieving it.

    Government needs to stay out of housing. Home ownership isn’t a virtue or a right. It’s a market transaction, like any other (except bigger and more serious). No more fake regulation. No more tax incentives. No more propaganda. It has only driven us to ruin (and you ain’t seen nothing yet).

    Of course, the deeper problem is our centralized banking system. In the short term, it’s always easier and more profitable to extend loans (little or no questions asked), because extending loans is simply creating money out of thin air, an intrinsic operation of our Federal Reserve banking system. If there’s a mass financial disaster, the banks can always rest assured that the government will “bail them out” (with the public’s money), because we wouldn’t want a banking crisis, you know.

  • Fred Red

    The Predatory lender that hit us did bait and switch, they didn’t pay what they had promised in the mortgage contract.

    Lucky for me I could afford to still make the payment of the truck they didn’t pay off as promised and make mortgage payments so not to get behind or default, They didn’t pay the insurance on the home but they did pay the taxes, they can’t answer questions about what happened to the money that’s missing from the closing since they didn’t pay off things as promised. They change the interest rate, they changed the cash pay out from 6 thousand to 3 thousand, all this after the signing/closing.

    I would think it would be better to rent forever then to put your dreams and money in to a home you can never own. If some one can’t afford a home that’s one thing, but when you get hit by a lender that only wants your home at any cost and they do every thing they can to get you up to your eyeballs in debit by not paying off you other bill. So the next thing you know instead of just having one payment you not have 3 or more still.

    Predatory lending is a night mare that you can’t find any help to recover from. no help from the government, the FTC sucks, try getting help from HUD, that’s a joke. ask the AG for help, get no reply. we have no one that will enforce the law. I know I tried.

    The only right we have is to sue the lender, IF you can fine a good attorney or do it yourself that was a full time job!

    That’s just a very small part of my nightmare with predatory lending.

  • Fred Red

    Wall Street is at the top of the scam, like you said, >money out of thin air

  • Fred Red

    Wall Street is at the top of the scam, like you said, (money out of thin air) I would say Pooling fraud is part of this crime, Fitch is adding in the scam, Poors and the moody report are also adding and abetting the scam. Zillions of dollars made from borrowers that have false equity in their homes cause by appraisers and the lenders. appraisers that either got paid to up the vale of the home or they were threatened to not get business or get paid at all.

    If you asked me I would say that the people that are really getting screwed are the borrower and the stock market investors. Some of them might even go to jail. it not going to be pretty!

    What’s in your wallet?