An ugly bit of blame-the-borrowers

Predatory lending is real, contra RealClearMarkets, and it particularly targets minorities

John Tamny of RealClearMarkets and Forbes really didn’t like my take last week on that awful Bloomberg BusinessWeek cover.

Here’s his headline:

The Ongoing, Hideous Lie About ‘Victimized’ Mortgage Holders

And his argument:

Though it apologized for the alleged offense, Bloomberg BusinessWeek should have stood firm. It did nothing wrong. Though the cover would have likely been more accurate had it included people of all races, the notion that those who borrowed to buy houses they couldn’t afford were the ones victimized is laughable, and it’s Chittum who should apologize for promoting such an offensive falsehood.

Considering the individuals who bought houses they couldn’t afford with the money of others, they were the self-destructive victimizers. In most instances well aware that they were taking on mortgages they couldn’t afford, they with great dishonesty accepted the loans on the assumption that, if they couldn’t make regular payments on them, it would be easy to pay them off in full by virtue of selling the underlying home for an amount greater than the purchase price. Far from deserving our sympathy, these people deserve our disgusted scorn.

I’ll pass, thanks.

Tamny’s is the old blame-the-borrowers line, vehemently expressed (as it tends to be). It’s nasty, but beyond that, it completely misses the point.

In any rational placing of blame in a foreclosure—even assuming an eyes-wide-open borrower—the lender gets the bulk of it, because of its unique role in the economy and because of the decidedly uneven power relationship between subprime borrower and lender (read my former colleague Elinore Longobardi’s excellent 2009 piece on the usage of the terms predatory lending and subprime). One has capital and the power to actually create money; the other doesn’t. One has appraisers, underwriters, lawyers, brokers, analysts, marketers, etc., on the payroll; the other has a Realtor, maybe, who gets paid only when she signs for the loan (in other words: an agent whose incentives aren’t really aligned with their own).

In a borrower-lender relationship, the lender holds most of the cards. The lender created and named the product “liar loans,” you know, and we know borrowers weren’t the only ones doing the lying on those loans. In any case, as the former regulator Bill Black has shown, banks were directly or indirectly complicit in most instances of fraud committed by borrowers. And almost always, lenders who put borrowers into loans they couldn’t afford knew they couldn’t afford them or intentionally looked the other way. If you underwrite a NINJA (no income, no jobs, no assets) loan, you are asking the borrower to lie to you.

Of course, not all people who got mortgages (it’s worth noting that most subprime borrowers were refinancing houses, not actually buying them for the first time) during the bubble were victims, particularly the ones who knew what they were doing. No one has any sympathy for them.

But it’s just a matter of historical record that many, many borrowers were either financially unsophisticated and taken advantage of or actively defrauded. And defrauded borrowers were no exception to the rule. Broker and lender fraud was an epidemic.

And it wasn’t even a newfangled thing. It was the third or so subprime push in fifteen years—one that happened to be supercharged by Wall Street innovation unmoored from any sense of propriety and—unlike the previous flare-ups—unchecked by any real regulation.

This is from the Financial Crisis Inquiry Commission’s report:

But many borrowers do not understand the most basic aspects of their mortgage. A study by two Federal Reserve economists estimated at least 38% of borrowers with adjustable-rate mortgages did not understand how much their interest rates could reset at one time, and more than half underestimated how high their rates could reach over the years. The same lack of awareness extended to other terms of the loan—for example, the level of documentation provided to the lender.

Subprime mortgage brokers, to put it very mildly, were not known for their morals or ethics, and these . Ninety percent of appraisers surveyed in 2006 said they were pressured to artificially inflate home values, mostly by mortgage brokers.

Countrywide dangled serious monetary incentives in front of its brokers to put borrowers in subprime loans even when they qualified for better mortgages. That was because Countrywide itself made twice or three times the profit margin on subprime as it did on prime. New Century paid its brokers a 2 percentage point cut if they were able to put borrowers in loans 1.25 percent higher than its listed rates.

New Century went bust in 2007, but Countrywide (now part of Bank of America) settled predatory lending lawsuits for $8.4 billion a year and a half later. That settlement covered 400,000 borrowers.

Wells Fargo coughed up $175 million for predatory loans to 30,000 minority borrowers. Countrywide settled another lawsuit for $335 million covering 15,000 minority borrowers. Then there was the $26 billion settlement reached with JPMorgan Chase, Wells Fargo, Ally Financial, Bank of America, and Citigroup for egregious foreclosure abuses. Black and Hispanic borrowers were twice as likely to go through foreclosure or be seriously delinquent, according to a 2011 study by the Center for Responsible Lending.

I’ve barely touched all the evidence that borrowers were victimized and that minority borrowers were disproportionately the marks:

In light of all this, the one ongoing certainty is that the mortgage walkers naively sanctified by Ryan Chittum will never be the victims. Instead, they’ll remain what they’ve always been: the irresponsible, imprudent, revolting victimizers of their prudent fellow citizens who have been, and will continue to be forced to pay for their egregious errors committed with money not their own. Chittum owes Bloomberg BusinessWeek, taxpayers, and prudent savers an embarrassed apology.

“Revolting” victims. Where have I heard that before? Ah, yes. My Rick Santelli post from 2009, with a nod to Mel Brooks.

CNBC is also home to a bunch of well-compensated talking heads who don’t believe there’s such a thing as predatory lending.

I hear they’re hiring.

Further reading:

Power Problem: The business press did everything but take on the institutions that brought down the financial system

Boiler Room: The business press is missing the crooked heart of the credit crisis

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,