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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
Hey Scott, what bank was that?

To do list:
1. change name
2. apply for loan
3. never pay it back...oh wait, I can do this at any bank
 
 
Oct 3, 2008
I think Sarah Palin has a unique grasp of the financial problems facing this country.

She said she's developing a plan for restructuring Freddie Mae and Bernie Mac.
 
 
+1 Rank Up Rank Down
Oct 3, 2008
Personal experience -- 5 yrs ago before the predeatory lending policies got really out-of-hand. I applied online for a home loan from a lender know "across the country " (hint hint). I never even had to meet the lender in person, just answered a few simple questions on the phone. Even though I already owned a mortgaged home in the city where I had previously lived (sometimes rented out but not always). I did report this fact but nevertheless my loan application was approved. I was told that I could qualify to borrow twice as much as I knew that I could afford to pay. "You can have a much nicer, bigger house than those you are looking at," they said. But I lived alone back then, and did not need more space or higher payments. I was also told that the company would approve mortgages costing up to 50% of your monthly income. What -- how unwise!!??? I turned down the big loan and took a small one that was within my true economic means. Therefore I do not have a problem and don't face foreclosure or bankruptcy. But I can tell you -- they were literally throwing money at me!
 
 
Oct 3, 2008
You would be right, except that in the depths of this bubble, there was so little accountability for the actual mortgage lenders (since they would immediately turn around and sell the mortgage to someone else anyway) that they approved so-called NINA loans - No Income, No Assets - by the truckload, giving millions of dollars to anyone, without even asking if they have a job.

I don't know about you, but if I'm broke and destitute, and someone tells me they can give me a million dollars, I'm going to take it.
 
 
Oct 3, 2008
Scott,

When you order checks - you get 500 shipped. You don't write them all out at the same time.

If people live above their means with credit cards and mortgages, they are not the victims. Neither are the stupid @$$ banks that gave them the means to go to bankruptcy.

The only victims are the dopes who borrow money - to quote Lee Iacoca, the old-fashioned way, and pay it back; and the dopes who have to foot the bill at the end.

And yes - I count myself as one of those dopes.

 
 
Oct 3, 2008
jjsavage,

to use the phrase predatory lending is WRONG... it was BAD lending. Trust me, when the borrower comes in and says "How big a house (truck) can I get?" you can NOT expect the house (truck) salesman to say "We'll you really don't need a McMansion (F350 super duty), and you can't afford one. Buy a starter home (focus)."

Sales people sell. Mortgage brokers and banks sell loans, and if people read their contracts, they know the cost. If you paid for a truck and didn't bother to check and see if it had A/C or not.... shame on you.

The ratios used to make loans historically still hold true today, and anyone with access to a public library could have read about them and figured out what they could afford. Instead they asked the salesperson "How much House/Loan/Truck should I buy?"

Now, they (and we) suffer the consequences.
 
 
Oct 3, 2008
Predatory lending mostly happens when you have idiotic borrowing... it rarely happens that you have only the lender to blame. It happens when the lender LIES about the conditions of the loan (which has certainly happened). Other than that, you have to be ask the people buying the biggest purchase of their life to please read all the fine print, even if it takes so long that you miss the new episode of LOST. But people WANT to believe that something that is too good to be true is true, and so they don't bother with the fine print that would rain on their parade. I

In general, i think that yes, lenders did too good a job selling products to the wrong people, but you don't get mad at Ford for selling gas guzzlers to americans who are oil dependent, and yet can't produce their own supply... If right now there was a Ford Explorer Repo-Crisis, would you blame Ford for selling Trucks?
 
 
Oct 3, 2008
How strange the modern world has become.
America is nationalising banks, and Russia is full of oil rich capitalists.
Life used to be simpler.
 
 
Oct 3, 2008
KevinKunreuther's comments typify everything wonderful about the left. Those who disagree aren't philosophically opposed to his agenda, they are "stupid."
He also confesses how frightened he is by conservatives. This is a common theme coming from the left. I'm glad I don't have to live in fear of people I disagree with.
 
 
Oct 3, 2008
I suggest listening to this NPR/Chicago Public radio program on This American Life for those of you who question the "predatory lending".

It is a generally good overall program on the whole fiasco and our whole banking mess as well.

The title is "The Giant Pool of Money"

http://thislife.org/Radio_Episode.aspx?episode=355


 
 
Oct 3, 2008
In theory, a bank would only make a loan if they felt the person could repay. The other way isn't advantages to a bank. Now if a bank is allowed to sell those loans to another investment house, then why should they care if a loan makes it or not. They just need to tie the mortgage to the market rate and then it looks like these people can pay the mortgage and pass it off for a cool profit. This is made possible by by congress having removed road blocks between different types of banks that were put there during the Great Depression.

Although I'll still point out that this attitude that any idiot can afford a home was started by the Federal Government who started insuring the loans of people who were considered credit risks by banks. This pushed housing prices up, but then eventually crashes when the economy tanks and the people the banks knew couldn't repay have to foreclose.
 
 
Oct 3, 2008
Government regulations required lenders to loan to high-risk people who couldn't afford it, but the loans were then "guaranteed" by the government, which sold the mortages to others. They misled those they sold the loans to into thinking they were a safer investment than they really were. Now the chickens have come home to roost.
 
 
Oct 3, 2008
Palin was simply appealing to her Christian conservative base with an attack on predatory lenders. http://www.newsweek.com/id/114407 Christian population centers across the country have overwhelmingly disporpotional amounts of pay-day loan shops. So, if you want to put the crisis in terms that your average target voter can see, you blame the problem they pass to work every day, not "Wall Street" bankers which is an abstract and entirely foreign concept to most of their daily existances.
 
 
+2 Rank Up Rank Down
Oct 3, 2008
I was a real estate broker in the 80's. When people were getting help from their parents or anyone else on the down payment a letter was required from the donor saying the money was a gift and would not be repayed. Now I have seen programs on TV where people are buying their first house and there is a first mortgage and then the down payment is a second mortgage. They also are getting interest only loans for the first 5 years. If this is in a state like California where the value of the house has dropped, they are left with a house that is worth much less then what they owe on it, so why not just let it go back to the bank. I don't know what you call this kind of lending but I think we can just call it stupid.
 
 
+3 Rank Up Rank Down
Oct 3, 2008
I was a real estate broker in the 80's. When people were getting help from their parents or anyone else on the down payment a letter was required from the donor saying the money was a gift and would not be repayed. Now I have seen programs on TV where people are buying their first house and there is a first mortgage and then the down payment is a second mortgage. They also are getting interest only loans for the first 5 years. If this is in a state like California where the value of the house has dropped, they are left with a house that is worth much less then what they owe on it, so why not just let it go back to the bank. I don't know what you call this kind of lending but I think we can just call it stupid.
 
 
Oct 3, 2008
The problem, as some have pointed out, is that the predatory lenders didn't care if the mortgagee could repay the loan. In fact I have read some stories of applicats sitting down with a loan officer and the loan officer turns to them and says "Congratulations you now work for me." He said that because the only way the person could meet the minimum income requirements for the loan was for the applicant to have another job. Now if that had been me I would have gotten up and walked out of the room as quickly as possible, but some people were blinded by the notion of owning a home.

The bottom line is that the applicants should have been more careful, the banks should have paid closer attention to their loan officers and other people involved in the loan process to spot odd applications like that. Many people are at fault here and the bailout is not the solution.
 
 
+2 Rank Up Rank Down
Oct 3, 2008
I think that interest only loans are a bank fraud, and that people weren't properly educated about them.

Also, the banks had more than a funny hat to go on. The subprime lending crisis refers to the loans that were made to people with subprime (or suboptimal) credit ratings.

I'm assuming you already know all this and are just ignoring it for the sake of humor, but I felt like commenting anyway.
 
 
-4 Rank Up Rank Down
Oct 3, 2008
I'd like to point out the Ms Palin did a really bad job of answering that question.
See apparently it was the lenders fault, which is why we have to pay them now.
Yeah, that makes sense.
 
 
+2 Rank Up Rank Down
Oct 3, 2008
Scott, Scott, Scott...pretend for a moment that you have a basket full of cash and you are paid a commission every time you can convince someone to take some of that cash out of the basket as long as they promise to put the cash back some day. The more unscrupulous basket holders of the human race really don't care if you pay it back, because they are paid the same (one time all up front) if you do or if you don't. Heck, they may even dip into that basket themselves! Then, the real smart guys figure out that the ENTIRE basket can be sold to other real smart guys and the next thing you know, baskets became very valuable because the real smart guys believed that the people taking the money out of the basket would actually put it back! Fast forward a few generations of baskets and it isn't refilling like the real smart guys thought, and all of the sudden, those baskets are worth so much and the real smart guys aren't so smart after all.

So, who's fault is it that the baskets didn't return to full status? The basket weavers? The basket holders? The people who took the cash? The people who sold the baskets?

At the end of the day, we ALL are responsible. We elect people to represent us and keep things like this from happening. We trust, but didn't verify. Now we ALL will pay the bill and hopefully future baskets of cash are better monitored.

Thoughts anyone???
 
 
Oct 3, 2008
Geez, I guess the blog doesn't like curly quotes. Sorry about that. The first paragraph should read:
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."
 
 
 
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