Sub-Prime Mortgages and the Limits of Personal Responsibility
Posted by
tgirsch
This whole sub-prime mortgage crash has me thinking, about some things I’ve been thinking about a lot lately. If reports are correct, you could have some 7 million Americans losing their homes. This is, of course, a Very Bad Thing. But it raises a lot of questions concerning what, if anything, to do about it.
Invariably, when stuff like this happens, the “personal responsibility” crowd always starts chiming in about how these people shouldn’t have bought homes in the first place, shouldn’t have taken loans with these oppressive terms, etc. And they’re probably right, as far as it goes. But what really bothers me — what just does not sit right at all — is this tendency to put essentially all of the risk and all of the blame on the people who took out the loans, while effectively giving those who made the loans a free pass.
Sure, it’s stupid to take out an interest-only loan with 0% down and a low teaser rate that balloons into an oppressive variable rate. But to make such loans — especially to the low-income people most likely to take them out — isn’t just stupid, it’s criminal. As bad as it is, it’s even worse with the credit card industry. Between ridiculous interest rates — in some cases 30% or more — and exorbitant service charges for all sorts of things, it’s an industry whose entire profit model is predicated on ripping people off. They’re not just allowing people to make bad decisions, they’re counting on it. More than that, they spend untold millions every year actively encouraging that behavior. That, too, is just plain criminal, whether or not it’s technically illegal. There was a time, not all that long ago, when we used to call predatory lenders “loan sharks.” Now, we call them “banks.”
And lest you think it’s just the people directly involved who are victimized, think again. Lenders raise rates and fees elsewhere to compensate for the percentage of people they lend to who they know will inevitably default. When some of them file for bankruptcy, everyone pays, not just them. Worse still, with personal debt at record highs and personal savings at record lows, our entire economy is artificially buoyed by these wholly unsustainable business practices. Sooner or later, something’s got to give, and the entire economy is going to suffer for it.
My argument is, it ought to be illegal to engage in these business practices. I just don’t see why “personal responsibility” only ever applies to the exploited, and not the exploiters; and I don’t see why “freedom” has to be equated with “the freedom to rip people off,” still less the freedom to rip poor people off. To my mind, this is exactly the sort of regulation of commerce that the government ought to be involved in. When an entire industry exists to take advantage of people, and the entire economy stands to suffer greatly as a result, why shouldn’t the government step in and do something? What ever happened to an ounce of prevention?
All of this brings me to an even larger point: Why is it that “personal responsibility” types are so unwilling to look at these problems in the aggregate? It’s all well and good to say that people should behave in a personally responsible manner — they’re right, they should — but what happens when we know that as a rule, the majority of them (or even a large minority of them) won’t do so? At some point, personally irresponsible behavior becomes everybody’s problem, not just the problem of those engaging in it. So why are we so allergic to taking proactive steps to prevent it, or at least to prevent profiteers from taking advantage of it? You know that the profiteers are thinking about these things in the aggregate: they have a pretty good idea of how many people are going to default after how long / how much paid, and they’re budgeting accordingly. (And, when their estimates turn out to be wrong, they hide behind bankruptcy and other such corporate protection.) If they’re allowed to think in such terms, why can’t we as a society do the same?
Before anyone accuses me of it (as someone inevitably will), I’m not suggesting that we tightly regulate and control all aspects of an individual’s every day life. Nor am I some sort of anti-capitalist. Far from it. I’m all in favor of making an honest buck. I just put a lot of emphasis on the “honest” part of the equation. What I advocate is, for lack of a better term, supply-side regulation. If you want to solve problems like these, you need to attack the predators, not their prey. Put strict regulations on high-risk loans, and prohibit the kind of predatory marketing these lenders often engage in. Put mandatory caps on variable interest rates. Require the lenders to carry default-insurance on the high-risk loans they do write.
If banks can’t stay in business without resorting to such despicable practices, then in my estimation, they don’t deserve to stay in business. I’d widen that beyond banks, too: If your business model relies on ripping people off, you’re a criminal, plain and simple, and the law ought to recognize that.
[…] Lean Left is pondering the crash of the sub-prime mortgage world and just who should be held responsible.. This whole sub-prime mortgage crash has me thinking, about some things I’ve been thinking about a lot lately. If reports are correct, you could have some 7 million Americans losing their homes. This is, of course, a Very Bad Thing. But it raises a lot of questions concerning what, if anything, to do about it. […]
Pingback 8/9/2007
Yes, it’s truly horrifying that anyone would dare try to offer money to those who had sub-620 credit scores and were willing to deal with harsher rates. Their evil, vampiric, and forceful nature somehow managed to override the free will of these victims and forced them to sign several dozens pieces of paperwork despite their own ability to read, write, and think.
Last I checked, the lenders are dealing with their consequences. They knew that they were risking their money on these lenders, and some of them have gone under. Gasp, it’s almost like they dealt with the results of their risky behavior, albeit risky behavior that they choose with slightly less negative potential results.
And, hey, we all know folk in Washington DC with a degree in law (or in the case of a Kennedy, booze) are much better than economists are predicting loan values, the free market’s ability to actually run successful businesses and operations aside. It’s not like government regulation is part of the reason less favorable loans are offered, or ever offered proof of truly sucktastic economic knowledge (”This bridge created 459 jobs” is to economics as “the internet is a series of tubes” is to telecommunications).
I’m sorry, tgirsch, but your ’solution’ to the problem is about as effective as price caps. You’re going to outlaw high interest rates and require expensive insurance on top of that? Well, jeez, in that case why don’t I just jump into that market, then; it sounds like it’s really worth the economic risk.
Comment 8/9/2007
Both lender and borrower are to blame. During the housing boom, most of these homeowners wouldn’t have been able to afford to purchase a house without the low adjustable rates. Every American should be able to afford to own their own home. At the same time, these consumers should have done their research to understand the risks. Was there an appropriate amount of disclosure on behalf of the banks/lenders? Doubtful. I hope congress looks at this issue as well as the credit card industry. These guys have been hiding their policies behind the republican congress but now its time to face the music.
Comment 8/9/2007
Well, it’s common knowledge that increased risk is, err, risky and therefore a premium is charged. I can’t really fault the lenders here in general, per se. However, there are a few, err, shady lending agents who kinda cook the books for the person doing the borrowing. Stuff like that should be punished. I think Les Jones had a bit on an actual prosecution for someone doing just that.
In other news, Americans aren’t that responsible when it comes to personal finances? Who knew?
Comment 8/9/2007
And cooking the closing documents is, in fact, illegal or so my real estate friends tell me.
Comment 8/9/2007
BTW, (and sorry for the triple comment) but it seems that quite a few lenders are the ones going under over this.
Comment 8/9/2007
For those with a short memory, there were Federal caps on interest rates up until 1980. Since that time, rates have moved higher and higher in real terms. For whatever that is worth.
Comment 8/9/2007
I’m not quite sure what the defense of sub-prime lenders actually is here. Is it that what they’re offering isn’t a scam? Or that there’s nothing wrong with them offering that scam? Neither one seems particularly plausible to me.
Precisely my point. If there’s no money to be made in ripping people off, or if the legal risks aren’t worth the potential profits, then maybe fewer companies will engage in blatantly ripping people off.
Comment 8/9/2007
Except for a good number of these lenders, this isn’t ripping them off.
None of these folk are being forced into a deal. They have multiple potential lenders, and the option of not borrowing money. Unless you believe subprime lenders are able to brainwash a large portion of society, in which case their rates are not the biggest problem, people are making these decisions with no fraud and of their own free will.
There are some cases where the folk involved are actually being ripped off, but it’s hard to call it ripping people off when they’re given a choice and every detail involved in the actual costs and similar. Unless the lender is violating the Truth in Lending Act, a felony, that much has to have been done.
Some of these folk are idiots, and some of them agree to things I’d objectively call a questionable deal, but they’re quite willing to try them. At least from the part where most of these companies stay in business and have folk work with them, I’d consider it far from a bad deal for them, compared to nothing.
We can just close the entire portion of the market if you’re going to define anything with specific interest rates as ‘ripping people off’, saying you don’t mind revoking the CRA (:racshists!:). Then you either end up with no available money for those with sub-620 credit scores (and probably a load of underground loan sharks), or/and government subsidized versions that don’t ‘rip off’ their borrowers at the cost of everyone that actually makes money.
Comment 8/9/2007
gattsuru:
I think we’re hung up on semantics here. You and I seem to have different ideas of what it means to “rip someone off.” In my lexicon, the definition would include actively encouraging people to make terrible decisions and enter into contracts with extremely unfavorable terms, whether or not you’re up-front about what those terms are. In yours, it clearly wouldn’t.
In your world, no loan can ever be a predatory loan if the terms of the loan are disclosed.
You also still seem to think that I would absolve the borrowers of responsibility — I would not, except perhaps in egregious cases of abuse on the part of the lender. I just can’t buy into the idea that banks who knowingly lend money to people who are obviously overextended bear no responsibility for what happens next. It underscores a problem I have with libertarianism: its focus on personal responsibility to the exclusion of organizational responsibility.
Comment 8/9/2007
In your world, no loan can ever be a predatory loan if the terms of the loan are disclosed.
And there were competing lenders, and there were no movements by the loan company to force the individual to sign with them.
But, yeah, pretty much.
You also still seem to think that I would absolve the borrowers of responsibility — I would not, except perhaps in egregious cases of abuse on the part of the lender.
I disagree. The entire point of your argument is that folk with bad credit in the first place shouldn’t deal with one of the consequences of having previously made poor choices — having future loans be far less favorable.
Unless you’re willing to completely prevent folk who are, what a coincidence, conveniently and disproportionately poor urban and black, from getting a loan that they may very well want, you’re advising that we significantly reduce the negative results involved in every failed loan.
Comment 8/9/2007
But the lenders are the ones who what the government to pass and enforce laws that criminalize the repayment of the loans. That’s the problem. Taxpayer money being wasted enforcing the loan agreement when no such criminal enforcement should be necessary. These are civil matters, the loan company’s should be held responsible for making better choices in who they lend money so we don;t have to go through the expensive process of court proceedings to get the borrowers to pay up.
It used to be where bad credit was all the enforcement you needed but since bad credit is no longer a barrier to getting a loan the lenders require the assistance of government to be their muscle. That’s what is wrong.
Comment 8/10/2007
One question I’d have is what percentage of the people with sub-prime mortgages don’t default?
Comment 8/10/2007
and there were no movements by the loan company to force the individual to sign with them.
Aggressive marketing certainly doesn’t rise to the level of “force,” but it ain’t all altruism and puppies, either.
The entire point of your argument is that folk with bad credit in the first place shouldn’t deal with one of the consequences of having previously made poor choices
WTF? I’m arguing that they absolutely should have to deal with those consequences, a huge one of which is their inability to get a decent loan.
When someone has already dug themselves into a deep hole, selling them a new, more expensive shovel doesn’t constitute “help” in any meaningful sense of the word.
Unless you’re willing to completely prevent folk who are, what a coincidence, conveniently and disproportionately poor urban and black, from getting a loan that they may very well want
Nice attempt at spin. What I want is to prevent unscrupulous lenders from taking unfair advantage of folk who are, what a coincidence, conveniently and disproportionately poor urban and black. At the end of the day, we’re talking about people with credit problems. Do you know anyone who ever solved a credit problem by borrowing more money? At exorbitant interest rates? How is taking out such a loan anything other than yet another bad decision? How will it result in anything other than even more, worse consequences?
You’re arguing as if the lenders in these cases have entirely altruistic motives, just trying to help out a poor soul in need, rather than trying to take advantage of someone who’s desperate. I’ll assume you’re being facetious with that, because you can’t possibly be that dense.
Comment 8/10/2007
Stormy:
According to this 2005 study, a little over 2% of subprime mortgages went into default, a rate about ten times that of prime mortgages. Roughly 91% were “current,” and the rest were in some level of delinquency. But these figures are quite misleading. For one, according to the study, subprime lenders are less aggressive about pursuing delinquency (presumably because they’d rather rake in the penalties and extra interest, but that’s just my cynicism).
But far more important is the data you’ll find in Table 4. The mean age, in months, of the subprime loans that are current is less than 16 months, while the mean age of the loans that defaulted is around 27 months. The number of “current” subprime mortgages looked better at the time because the overwhelming majority of the loans were new loans. (I expect that part of the reason for the current crash is because the default rate went up dramatically, although I don’t have figures to back that up.)
The other factor that plays in is what’s called “distressed repayment,” which is when a loan that 60+ days delinquent is paid off to avoid foreclosure. It’s left unsaid how the borrowers come up with the money to pre-pay, but one has to assume they do so by selling the house — which is a great deal for the lender, because they get the loan repaid, plus all that interest, plus whatever late fees were incurred. In many cases, they also get prepayment penalty fees. And, of course, the borrower winds up in much worse shape than when they started.
Comment 8/10/2007
To me, one of the clear places the line gets drawn is when you see commercials that basically say, no credit or bad credit, no problem, just come down here and leave with the keys to your new place, or luxury car.
Anybody who has ever experienced a salesperson trying to you something that you can’t afford knows the deal. Just assuming the majority of lenders will be ethically responsible for the sake of it is probably naive - it also is a convenient way of not having to deal with the fact that they won’t be.
Generally, I differ with libertarians as to the extent to which any of us actually make our own decisions. That’s not to say that we are brainwashed, per se - but our preferences, desires, and behaviors are heavily influenced by social norms, pressures, etc. To say that these people entered the home-buying deal of their own free will denies the symbolic nature of the home with the picket fence, the pressure of making it, the metaphorical passing from “outsider” to “insider” that comes with home ownership, etc. Many of these poor minorities are really trying to buy “acceptance” into American society.
Do all the midtown chic women just happen to choose to buy the same three handbags completely of their own volition? I guess there’s something about interlocked Ls and Vs that is just inherently beautiful…
Personally, I think that the libertarian view is based upon a combination of entitlement, delusion of grandeur, and a heaping serving of cognitive dissonance - to convince yourself it’s not based on the former two. The everybody chooses freely argument basically neglects all contributions of social science.
Comment 8/10/2007
wait, wait, wait — how does a loan default before it becomes delinquent? do that many people (90-plus percent of defaulters?!) simply realize they can’t come up with next month’s payment, and just plain call the lender saying “we give up”?
Comment 8/10/2007
Nomen:
I think you’ve misunderstood my statistics. No loan defaults before it goes delinquent. The statistics I gave were just showing the two extremes: 91% current and 2% default. The delinquent loans (the remaining 7%) are in-between. Some of them will get caught back up (although I suspect this isn’t very many), some will default, and some will end in distressed prepayment.
The 91% figure refers to the percentage of subprime mortgages (as of the 2005 study’s data) that were neither delinquent nor defaulted.
Comment 8/10/2007
Not always — a good number of us are quite capable of understanding enough about relativity to comprehend that we must be completely incapable of free will, at least unless you’re smart enough to prove Einstein wrong on that matter.
That doesn’t really change much. Without free will, what’s actually the truth doesn’t matter so much as the influences of a belief, and it’s statistically quite clear that an internal ‘locus of control’ (as easily represented and influenced by belief in free will) is directly correlated with improved success and psychological health.
Comment 8/10/2007
Step into any “payday loans” storefront and ask about terms. In the fine state of Washington there must be information stating effective interest rates for various cash-in-advance propositions.
The poster from ACE Cash Advance shows up to 391% APR (!!??#@!!) for a few hundred bucks a week or so before payday. Three hundred and ninety-one per centum !! That’s usury, no??
Comment 8/10/2007
Gattsuru, in comment #2: “Their evil, vampiric, and forceful nature somehow managed to override the free will of these victims”
digglahh, in comment #16: “the libertarian view is based upon … a heaping serving of cognitive dissonance”
Gattsuru, in comment #19: “a good number of us [libertarians] are quite capable of understanding enough about relativity to comprehend that we must be completely incapable of free will”
Game. Set. Match. Digglahhh wins.
Comment 8/11/2007
[…] It’s explicitly a liberal point of view, but some good conversation has cropped up surrounding this post of mine over at Lean Left. […]
Pingback 8/11/2007
It’s good to remember that if you owe the bank $10,000 then you have a problem. If you owe the bank $10,000,000 then the bank has a problem.
This is multiple stupidity on the part of both the Lenders and the Borrowers.
Comment 8/11/2007
Game. Set. Match. Digglahhh wins.
Only if you don’t understand the concept.
Absence of free will doesn’t mean that the illusion of free will — as noted by “locus of control” studies a major indicator of psychological health and future success — doesn’t apply.
Basic compatibilism, far from a logical inconsistency.
Comment 8/11/2007
Sorry, but I don’t see how a lack of free will and personal responsibility can be anything other than mutually exclusive concepts. If you have no free will, you can’t be responsible for your actions, because you don’t control them. Illusory free will does nothing to change that basic underlying fact.
Also, compatibilism holds that free will does exist. It’s incompatibilism that holds that free will is an illusion. [Not strictly true, but close enough for our purposes. Incompatibilism states that free will and determinism are mutually exclusive — an incompatibilist could take one side or the other in the free will debate, but not both — whereas compatibilism disagrees. In your context, you seem to be talking about incompatibilism, and you seem to come down on the side of “determinism is true, therefore free will is false.”] In fact, Libertarianism and incompatibilism walk hand in hand; Libertarianism insists that free will must exist and that therefore the universe cannot be deterministic.
Comment 8/11/2007
[…] I’ve blogged about this before, and it’s only getting worse. But what I wonder is, does this really surprise anyone? Further, is it really a good idea for the Fed to cut interest rates at this time, thereby encouraging even more borrowing in an economy that’s already too heavily loaded with debt? (Yes, I know that the prime interest rate doesn’t directly impact consumer interest rates, but it does indirectly, and a great deal of consumer debt is tied to it.) […]
Pingback 9/18/2007