Monday, October 29, 2012

Blaming the Victim

Every week brings a new billion dollar settlement against the banks that supposedly rammed this stuff down the throats of the noble savages who couldn't afford the homes they bought.  Luigi Zingales notes a study on how culpable banks were:
Predatory lending is commonly defined as lending that imposes unfair and abusive loan terms on borrowers. The immediate effect of this mandatory counseling was to discourage almost half of the loans. ... While the paper calls it predatory lending, the better term would be crazy lending, because it is not clear that the banks were forcing these loans on ignorant consumers, and not the other way around. In fact, the reason why the program was suspended only 20 weeks after its beginning was that the local population complained with the legislators for the negative effects this law had on the availability of mortgages.
I wonder what happened to all those community organizers aligned with ACORN who advocated more no-down payment loans?

The head of CountryWide continually bragged about how they were easing mortgage requirements in the name of increasing minority homeownership when he was doing it. So, their public stance went from being admirable to brazen. This same government that applauds excess and piles on when things go wrong is supposed to moderate financial cycles.


Anonymous said...

Eric, your point is correct and by and large under-emphasized, so I see why you point it out. However, I do think you underestimate a few things. I wonder if do to your academic background and work experience, you never came in contact with the side of finance that uses "finance" as a pretext for what amounts to legalized theft. Grifter finance hides in he shadow of "growing companies" "funding business" etc, or what we see as the productive purpose of finance. The intent of usury is neither of these things, but rather to create an indentured population that is unable to discharge debts, and as such it is usually reliant on state action or the threat of force. It is a real, historical problem and in my opinion not be taken lightly.

Eric Falkenstein said...

I've worked in two banks for almost 10 years, so I think I understand its culture. There's no conspiracy! Workers just want to make money, and don't have a devious plan: few are around long enough for that to have much incentive. Like any salesmen, they hide costs, but that's standard stuff.

It is true that they like people who have $5k on a revolving credit card bill, and I agree such people would be better if they didn't have access to credit, but their advocates would complain most if we cut that off.

Mercury said...

In debt to the bank: residential mortgage. No indentured servitude here. You can walk away from your house if you can no longer afford the payments and go live somewhere cheaper - minus a temporary ding to your credit rating and plus any time you lived in the house for free…you’re a free man.

In debt to the government: most commonly in the form of non-dischargeable student loan debt backed by the government (which is almost all student loan debt these days). You can’t hide, they will come after you and use violence if they think you are standing between them and their money.

Aaron Brown said...

I think there is such a thing as predatory lending, but the key is the lender makes money while the borrower suffers.

One example was the old (illegal since the 1970s) "revolving credit" consumer loans where everything bought from the merchant was security for every loan drawdown. So a family would build up household furnishings over five years, and lose them all for a missed $5 payment on a table lamp. There were abusive lenders who specialized in collecting large payments, then inducing defaults, seizing and reselling the goods to the next victims. A pure libertarian wouldn't consider this a problem, but I'm a soft enough libertarian to accept courts imposing a reasonability criterion on repossessions (but not soft enough to support prior restraint by the government, or civil or criminal penalties, just refusal to enforce claims).

Most of the recent allegations of predatory lending do not meet my criterion. They were loans arguably disadvantageous to the borrower, but certainly disadvantageous to the lender. They might be described as predatory intermediation, but not predatory lending.

The main exception is companies that pushed home equity loans to replace unsecured loans the company had extended previously. I think these could be reasonably described as predatory. While I wouldn't call them illegal per se, I would be willing to see lenders held to a high standard for disclosure. Moreover, if there were no possible benefit to the borrower, for example if there were fees and no reduction in interest rate, I would not object to a court voiding the contract for want of consideration.

Josh said...

I think we underestimate the degree to which productive citizens can be completely incompetent at making one-off high-stakes financial decisions. There is not much opportunity to learn here, and what is learned, is unlikely to be the right lesson. Perhaps mortgage products should have 401K-type restrictions until a person passes a financial literacy exam.

Mercury said...

The edict of big bank infallibility and any number of programs designed to prevent the market from clearing and ~0% down “homeowners” from actually being forced to live somewhere else means that the ultimate predator here is the government and the ultimate prey is the taxpayer and anyone else whose livelihood is tied to the broader economy.

Evan said...

What settlements are you talking about?

At least in the case of the 2.4B BAC settlement, the amount was not due to fraud against borrowers, but against shareholders: