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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.

 
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Oct 3, 2008
scott, your comment ignores the interest-only loans that were given without the risk being explained.

are banks to blame? yes.

are people to blame? yes.

is our governemtn to blame? i guess, if you want the government to fix your problems for you.
 
 
Oct 3, 2008
Wait a minute there, Scott.
Gov. Palin also acknowledged the role that bad personal decisions have played in today’s financial mess. Her exact words: “Let’s do what our parents told us before we probably even got that first credit card: Don’t live outside of our means.”
There's plenty of blame to go around, and I think she should have sprayed some on Congress too. Go back to the 2004 hearings when Barney Frank, et. al. were saying Freddie's Fannie was not dangling over the fire. (I think they said there was no need for additional oversight, but you get the drift.)
 
 
Oct 3, 2008
A great deal of the predatory accusation lies in the deception of balloon payments. People are always hopeful that their financial status will continually improve. Lenders sell these loans at 1 lower interest rate for the first few years & then the payments go up as the loan balloons, based on this hopeful mindset.
Problem is most people's status doesn't change sufficiently to pay the fees. The biggest problem in this mess is personal irresponsiblilty. Caveat emptor still applies, but people don't take time to learn what they are getting themselves into.
 
 
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Oct 3, 2008
Predatory Lending:
http://www.mortgagenewsdaily.com/mortgage_fraud/predatory_lending.asp

I'm a big fan of Mrs. Palin, but the credit problem was clearly not caused by predatory lending.
 
 
Oct 3, 2008
I am one of those so called terrible people who have a subprime loan. No we are not in default. We make our payment every month, on time. We demanded a fixed rate loan and we didn't buy more house than we could afford. (ended up 200 a month cheaper than our rent)
We also put 15% down.

Some of the subprime problem is greed. House buyers hoping to flip the house a make money. Banks and brokers taking advantage of a hot housing market. There is enough blame to go around.

We had to triple verify everything when we took out our mortgage. Pages upon pages of documentation. (I believe the company that owns our loan is Merrill Lynch) Very exacting. There was no fudging of the information because they verified everything.

Let's not forget that the VAST majority of subprime mortgage loans are paid on time and are not in default.

 
 
Oct 3, 2008
I would highly recommend NPR's This American life episode title "Giant pool of money". It does a great job of explaining how the lending mess happened.

The whole thing was driven by humoungous demand for mortgage securities. Interest rates have been so low for so long that government bonds are not a great investment anymore.. Mortgages have always been the next safest thing. So massive amounts of money wanted to be in mortgage securities, but there where not enough mortgages. Thus, companies lowered their standards to get product on the shelves for the investors.

The banks that wrote these loans had no intention of holding them. They would sell them withing weeks to get more money to loan. They wrote loans to the specifications of what their buyers where willing to buy, but eventually that got to be pretty much anything.
 
 
+5 Rank Up Rank Down
Oct 3, 2008
I think you were just looking for a way to use the word DOOM again! It brings to mind the movie Ice Age, when the Dodo birds get in your face chanting "Doom on you, Doom on you".

I agree with some of the other comments that indicate Ms. Palin doesn't really get what predatory lending is. It is not giving someone a 300k mortgage when they can only afford 100k. I see it as giving someone a 300k ARM that has payments that they can just barely make, but not bothering to tell them that in 3 years, if they didn't get a magical 30% raise at work, they would not be able to make payments because they will increase significantly. I see predatory lending as the mortgage brokers that "ignore" limitations to "creatively" finance people into houses they cannot afford (getting a 2nd mortgage to get past that pesky 20% down and then ignoring the house payment/income ratio guidelines used to help keep folks from overstepping their limits).

Just because someone will loan you the money doesn't mean you should TAKE it!
 
 
Oct 3, 2008
The folks making the loan didn't care if the borrower could pay it back or now since they turned around and immediately sold it. There was no incentive to be selective.
 
 
Oct 3, 2008
This is a term more used by mortgage brokers who loan to people, then immediately sell the loan to someone else (like banks), while making a killing. It isn't direct loans by banks to people that was the problem, it was the formation of mortgage-backed securities that were bought and sold to eager investors on a massive scale.

See the link below, it's an amazingly useful podcast explaining the mortgage-related causes of the current financial crisis.

http://www.thislife.org/Radio_Episode.aspx?episode=355
 
 
Oct 3, 2008
"Predatory Lending" is a term used to define unfair or abusive loan lending practices (high interest rates, unreasonable fees, etc.). In other words, predatory lenders use tactics that are in their interest.

If a bank lends money to a borrower who is likely to default on the loan, this is not in the best interests of the bank. The bank becomes saddled with a property that they must pay a broker to sell, often at foreclosure prices, which are below market value.

So Ms. Palin appears unaware of the actual nature of predatory lending.
 
 
 
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