Predatory Lenders
Oct 3, 2008 General Nonsense |
I watched the candidates for Vice President debating last night. Sarah Palin said the credit problem was caused by predatory lending. In other words, the evil banks made loans to people who didn't have good credit.
This raises an interesting question: What did the lenders know about the borrowers that the borrowers did not know about themselves?
In theory, the people who got loans from the so-called predators had enough monthly income to pay the mortgage plus their other living expenses. The real risk was that the borrowers would become sick, unemployed, unlucky, or irresponsible. Apparently we expect lenders to be better judges of the strangers asking for loans than the would-be borrowers are of themselves. How did the conversation between lender and borrower go in the old days, before predatory lending?
Banker: "Well, Billy Bob, you can afford this loan now, but based on that dumbass hat you're wearing, I give you two weeks before you drink a case of beer and drive your Chevy into a silo."
If a potential borrower has the monthly income to repay a loan, how much external risk should the banker accept? I think it's somewhere in the 2% range. In other words, a good banker should turn down a loan for someone who has a 2% or greater chance of being doomed during the early years of the mortgage, before any equity has built up.
Lenders should be required to assign a doom factor to all loan applicants, like a fortune teller. It would be interesting to know, for example, that Wells Fargo has assigned a 20% doom factor to you. Then you could find out on the same day that you aren't going to own a house, and you have a 1-in-5 chance of becoming a hobo by 2010.
In one of my earlier career incarnations I was a banker. My job for a few years included reviewing and approving commercial loans for doctors and dentists. One day I declined a loan application for a dentist who, according to his recent tax returns, didn't have enough cash flow to repay the loan. My boss at the time reviewed my work and turned the decline into an approval without even looking at the financials. When I asked why, he explained that the borrower had a Chinese name. I questioned the wisdom of this lending procedure and he directed me to the files of delinquent borrowers, challenging me to find any Chinese names in there. There weren't any. I'm not judging, just telling you what happened.
Votes: -1
Comments
User Name: Lisa_P
Nov 10, 2008
0
Election Day is behind us, and America has a new leader. The U.S. has chosen “change†by electing Barack Obama. There is no doubt that change is in store for the United States. Whether the United States changes for the better or for the worse is yet to be seen. It’s obvious that Americans believe Obama will bring a positive change to our country. Obama has promised the U.S. a lot of things like lower taxes for the middle class, putting a timeline on the war in Iraq, and !$%*!$%* the federal budget “line by line.†What many Americans don’t realize is that Obama has also supported the elimination of the payday loan industry. Obama thinks doing away with the payday loan industry will protect low-income, and often minority, families from being victimized by predatory lenders. However, getting rid of the payday loans is a violation of our financial freedom. Maybe Obama will give America what it needs, but taking away our financial freedom isn’t a great start to creating positive change.
Click to read more on <a title="Payday Loans" href="http://personalmoneystore.com/moneyblog/2008/11/06/obama-to-bring-change-how-will-payday-loans-change/">Payday Loans</a>
Click to read more on <a title="Payday Loans" href="http://personalmoneystore.com/moneyblog/2008/11/06/obama-to-bring-change-how-will-payday-loans-change/">Payday Loans</a>
User Name: tpcoyote
Oct 7, 2008
+1
Sensitivity with a lisp, anyone? Someone earlier raised their eyebrow at your comments wondering if they were racist regarding Chinese? How sensitive can they be? I too have chinese blood floating through my veins. Please do not mention facts that you witnessed first-hand regarding how responsible chinese homeowners are or the fact that lenders target responsible groups of people to lend to. HOW RACIST YOU ARE, SCOTT! Also, please do not mention dim sum or Charlie Chan, otherwise I might cover my mouth, take offense, and write the New York Times that Dilbert is...gulp...racist.
People wake up! You don't have the right to be overly sensitive because your Grandmother twice removed has a drop of Mohican in her. Nor do you have the right because you are Quaker from Nairobe or a Camel Driver from France. We all have a little of this and that in us. Let's drop the racist banner as It's getting quite old, Yes? It's about time that people are PEOPLE and not this race or that pointing our beige little fingers at each other, for Christ's/Allah's/Buddha's sake!
People wake up! You don't have the right to be overly sensitive because your Grandmother twice removed has a drop of Mohican in her. Nor do you have the right because you are Quaker from Nairobe or a Camel Driver from France. We all have a little of this and that in us. Let's drop the racist banner as It's getting quite old, Yes? It's about time that people are PEOPLE and not this race or that pointing our beige little fingers at each other, for Christ's/Allah's/Buddha's sake!
User Name: thatnerd
Oct 7, 2008
0
Slate has a word on this.
http://www.slate.com/id/2201641/pagenum/all/#page_start
http://www.slate.com/id/2201641/pagenum/all/#page_start
User Name: bubba jones
Oct 7, 2008
0
Maybe the dentist's tax forms were not fully indicative of his cashflow...
User Name: erik_the_guy
Oct 6, 2008
0
See Adam's there are crazy people on your blogs. In fact, I think your theory that one nut/stalker is making most of the comments under different names is correct.
User Name: Cpt. A Clown
Oct 6, 2008
0
CINDYWHO POETRY:
(Snippets of comments woven together:)
"Stop creating a logical chain of logic. Stop empowering women to take back control of their own families. It makes no difference to me if the average police person is polka-dotted. I have a MENSA level I.Q. Just now, I fed my son a non-organic banana. These kids are more likely to be available for such "sex services".
We can profit from the poor, I watched my Grandmother lose an amazing job. Screw families. What do I know. I am a racist, angry, hysterical, confused, misguided, drug-addicted child abuser. ROTFLMAO!!!!"
(Snippets of comments woven together:)
"Stop creating a logical chain of logic. Stop empowering women to take back control of their own families. It makes no difference to me if the average police person is polka-dotted. I have a MENSA level I.Q. Just now, I fed my son a non-organic banana. These kids are more likely to be available for such "sex services".
We can profit from the poor, I watched my Grandmother lose an amazing job. Screw families. What do I know. I am a racist, angry, hysterical, confused, misguided, drug-addicted child abuser. ROTFLMAO!!!!"
User Name: Treetrunk123
Oct 6, 2008
0
I raised my eyebrows after reading your post, wondering if it was anti-Asian. Having an Asian grandparent, but understanding your history of non-racism, I had to pause for a few days before responding. From what I understand, you did not bring up the issue of the Chinese name, but brought up the issue of looking at the borrower's financial history. You took issue with your boss because he considered the Chinese name. So your original impression of the borrower was not racist. Yet you stepped out on a limb by mentioning this detail in your post. I guess it really depends on how upset you are over this issue. If you are angry over it, I would say you were racist, but since you tend not to get angry at people, I will assume that you are simply observing what had happened.
Concerning the doom factor, we already have credit scores. In the past, when you were a banker, they looked at credit scores and determined the doom factor from that score. These subprime loans, I believe, were a way to get around the doom factor, by giving people a loan with a variable rate. I'll admit that human nature is predatory anyway, and some people probably weren't concerned about the borrowers at all.
Concerning Sarah Palin, she was echoing the sentiments repeated by the media. As a fiscal conservative I cringed at this part of the debate, though otherwise she did well during the debates. I don't understand why there are so few vice presidential debates anyway. There used to be more when Dan Quayle was vice president.
Concerning the doom factor, we already have credit scores. In the past, when you were a banker, they looked at credit scores and determined the doom factor from that score. These subprime loans, I believe, were a way to get around the doom factor, by giving people a loan with a variable rate. I'll admit that human nature is predatory anyway, and some people probably weren't concerned about the borrowers at all.
Concerning Sarah Palin, she was echoing the sentiments repeated by the media. As a fiscal conservative I cringed at this part of the debate, though otherwise she did well during the debates. I don't understand why there are so few vice presidential debates anyway. There used to be more when Dan Quayle was vice president.
User Name: bakuteh
Oct 5, 2008
+3
Jeepers... I now know why I keep paying my loans promptly. Curse this Chinese genes of mine!
User Name: kartikv07
Oct 5, 2008
0
I dont know if someone has pointed this already -
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1
User Name: kbellmck
Oct 5, 2008
+1
Here's what the bankers knew that the new homeowners didn't know - the bankers knew that their financial institution was going to bundle that loan up at an increased value and sell it immediately AS AN ASSET to
another division of their great institution, and then they were going to use that as a basis to get yet more money, guaranteed by AIG or another insurance giant with superb AAA rating to leverage a LOT more money out of foreign investors, and everyone was going to get RICH!
The original bank who made the loan could care less about how well it performed - they were out of the picture in the first month.
We bought a property in 2000 and then refinanced it twice as rates came down. Each time the payment coupon book arrived to send our money to a different company than where the loan originated. The bank tried each time to talk us into some pretty creative financing. Thank god I wouldn't hear of it and my husband is the morgage bankers worst nightmare - a person obsessive with detail who is excellent at math. (Yep, he's an engineer).
I'm sure the bankers did not totally explain the ramifications of each interest rate hike to people who were so excited to own their own home and could have no concept of the fact that the bankers wouldn't care about their ability to repay. It flies in the face of what we've always believed about banks and how they operate.
That is the immoral aspect to all this. It uses our trust in the government's fundemental concern for the American public and uses that against us. Like this bailout. Very soon, many more of us are going to realize we've been played.
another division of their great institution, and then they were going to use that as a basis to get yet more money, guaranteed by AIG or another insurance giant with superb AAA rating to leverage a LOT more money out of foreign investors, and everyone was going to get RICH!
The original bank who made the loan could care less about how well it performed - they were out of the picture in the first month.
We bought a property in 2000 and then refinanced it twice as rates came down. Each time the payment coupon book arrived to send our money to a different company than where the loan originated. The bank tried each time to talk us into some pretty creative financing. Thank god I wouldn't hear of it and my husband is the morgage bankers worst nightmare - a person obsessive with detail who is excellent at math. (Yep, he's an engineer).
I'm sure the bankers did not totally explain the ramifications of each interest rate hike to people who were so excited to own their own home and could have no concept of the fact that the bankers wouldn't care about their ability to repay. It flies in the face of what we've always believed about banks and how they operate.
That is the immoral aspect to all this. It uses our trust in the government's fundemental concern for the American public and uses that against us. Like this bailout. Very soon, many more of us are going to realize we've been played.
User Name: rj100rj100
Oct 5, 2008
+1
Reading some of these comments, perhaps the world would be a better place if people could tell the difference between being Chinese as a race rather than being Chinese as a nationality. Supprises me to this day that people expect because I have slitty eyes and yellow skin that my thoughts must be aligned with China the nation.
User Name: tkwelge
Oct 5, 2008
+1
Kosmo60 wrote: "I received this interesting idea in an e-mail. I'm sure it would never get past Congress, and there would probably be some unintended consequences, like inflation, but it is nice to think about:
"I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend. To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18 .
Our population is about 301,000,000 /- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up. So divide 200 million adults 18 into $85 billon that equals $425,000.00."
I almost fell over a chair while reading this. 85,000,000,000 divided by 200,000,000 is only 425 dollars. That is about enough money to last a poor person a month. Congratulations on your math skills.
I find this rediculous because people are willing to believe that less than 1 percent of GDP can make everyone wealthy. Even if you take the 14 trillion (approximate) US GDP and divide by 200,000,000; you only get $70,000.
Yes, there is enough money out there to feed, clothe, and house everybody, but there isn't enough money to make everyone independently wealthy long term.
"I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend. To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18 .
Our population is about 301,000,000 /- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up. So divide 200 million adults 18 into $85 billon that equals $425,000.00."
I almost fell over a chair while reading this. 85,000,000,000 divided by 200,000,000 is only 425 dollars. That is about enough money to last a poor person a month. Congratulations on your math skills.
I find this rediculous because people are willing to believe that less than 1 percent of GDP can make everyone wealthy. Even if you take the 14 trillion (approximate) US GDP and divide by 200,000,000; you only get $70,000.
Yes, there is enough money out there to feed, clothe, and house everybody, but there isn't enough money to make everyone independently wealthy long term.
User Name: rhump
Oct 5, 2008
+1
Hi Scott,
So the banks need to be protected form themselves and forced to implement something like Basel II (more information here: http://en.wikipedia.org/wiki/Basel_II )
So the banks need to be protected form themselves and forced to implement something like Basel II (more information here: http://en.wikipedia.org/wiki/Basel_II )
User Name: vixie
Oct 5, 2008
+1
Hi Scott,
maybe that is because most Chinese people I know here in America have a type of family lending where everyone contributes to the common pot, and then they lend it out to family members in time of need.
by the way, have you seen this: http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12342127
Thought you would be interested.
maybe that is because most Chinese people I know here in America have a type of family lending where everyone contributes to the common pot, and then they lend it out to family members in time of need.
by the way, have you seen this: http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12342127
Thought you would be interested.
User Name: FredB2009
Oct 5, 2008
-1
So far Palin has been photo'ed as an attractive 40 lady. All the photos I've seen have her smiling (does she not frown or 'snarl' from time to time). Now she has gone on the attack with 'connections' between terrorists and (you know who). They must be getting really worried!!!
BillG2009
BillG2009
User Name: RayKremer
Oct 5, 2008
0
A large part of it was the push by Democrat-controlled government !$%*!$%* and laws to push mortgage lending to minority families, and non-discrimination is nice, yes, but they indeed where higher risk loans than the banks would have otherwise made left to their own druthers. And look what happened.
To be fair, some of it was people flipping houses trying to cash in on the real estate boom, so they lost their shirts but not the homes they were actually living in.
To be fair, some of it was people flipping houses trying to cash in on the real estate boom, so they lost their shirts but not the homes they were actually living in.
User Name: tragicmishap
Oct 5, 2008
+1
"What did the lenders know about the borrowers that the borrowers did not know about themselves?"
They knew they could turn around and sell the bad loans for a profit to somebody else so they weren't actually going to be responsible for getting the money from the debtors.
They knew they could turn around and sell the bad loans for a profit to somebody else so they weren't actually going to be responsible for getting the money from the debtors.
User Name: siddielou
Oct 4, 2008
+2
This is partially true. Problems started when many loan officers in the field offices began to fake documents - stating an applicant had a higher income or speculating on the income that other people in the household (including children) would contribute - or would change the interest rates to an escalating scale in the very fine print of a legal document.
But what really brought down the whole industry was when financial firms began buying and selling the debt on the market. Banks have always bought and sold debt (my student loans have changed hands three times and a large medical bill I was paying in agreed installments was sold to a bank) but when they began to bundle these subprime mortgages and sell them like stocks.... Anybody remember the dot com bust? Only this time, the banks or lenders that set up the original mortgages didn't have a vested interest in the original venture: they lent the money upfront and then sold the mortgages off as quickly as possible. So long as the housing market was growing through artificial inflation the scheme worked. When the economy took a hit and people were no longer able to pay, it wasn't the original lenders that were in trouble - the ones with their shady practices - but the reputable and respectable financial giants who left holding a very holey bag.
But what really brought down the whole industry was when financial firms began buying and selling the debt on the market. Banks have always bought and sold debt (my student loans have changed hands three times and a large medical bill I was paying in agreed installments was sold to a bank) but when they began to bundle these subprime mortgages and sell them like stocks.... Anybody remember the dot com bust? Only this time, the banks or lenders that set up the original mortgages didn't have a vested interest in the original venture: they lent the money upfront and then sold the mortgages off as quickly as possible. So long as the housing market was growing through artificial inflation the scheme worked. When the economy took a hit and people were no longer able to pay, it wasn't the original lenders that were in trouble - the ones with their shady practices - but the reputable and respectable financial giants who left holding a very holey bag.
User Name: n_krishna_kumar
Oct 4, 2008
0
Just in case, nobody has posted these links yet: http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12342127 and http://www.economist.com/ecsurvey/.
User Name: Kosmo60
Oct 4, 2008
-2
I received this interesting idea in an e-mail. I'm sure it would never get past Congress, and there would probably be some unintended consequences, like inflation, but it is nice to think about:
"I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend. To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18 .
Our population is about 301,000,000 /- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up. So divide 200 million adults 18 into $85 billon that equals $425,000.00.
My plan is to give $425,000 to every person 18 as a We Deserve It Dividend. Of course, it would NOT be tax-free.
So let's assume a tax rate of 30%. Every individual 18 has to pay $127,500.00 in taxes. That sends $25,500,000, 000 right back to Uncle Sam. But it means that every adult 18 has $297,500.00 in their pocket. A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads.
Put away money for college - it'll be there.
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs.
Invest in the market - capital drives growth.
Pay for your parent's medical insurance - health care improves.
Enable Deadbeat Dads to come clean - or else.
Remember this is for every adult U S Citizen 18 including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( 'vote buy' ) economic incentive that is being proposed by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18 ! As for AIG - liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can 'never work.' But can you imagine the Coast-To-Coast Block Party! How do you spell Economic Boom? I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC. And remember, The Family plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam."
"I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend. To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18 .
Our population is about 301,000,000 /- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up. So divide 200 million adults 18 into $85 billon that equals $425,000.00.
My plan is to give $425,000 to every person 18 as a We Deserve It Dividend. Of course, it would NOT be tax-free.
So let's assume a tax rate of 30%. Every individual 18 has to pay $127,500.00 in taxes. That sends $25,500,000, 000 right back to Uncle Sam. But it means that every adult 18 has $297,500.00 in their pocket. A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads.
Put away money for college - it'll be there.
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs.
Invest in the market - capital drives growth.
Pay for your parent's medical insurance - health care improves.
Enable Deadbeat Dads to come clean - or else.
Remember this is for every adult U S Citizen 18 including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( 'vote buy' ) economic incentive that is being proposed by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18 ! As for AIG - liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can 'never work.' But can you imagine the Coast-To-Coast Block Party! How do you spell Economic Boom? I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC. And remember, The Family plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam."
