Daniel Gross blows a gaping hole in the argument that borrowers are to blame for the housing bust and subsequent financial crisis.
Writing for Newsweek, he reports on a part of the subprime lending industry that’s actually doing great. Why? This small corner of finance actually treats its customers right.
What sets the “good” subprime lenders apart is that they never bought into all the perverse incentives and “innovations” of the late subprime lending system—the fees paid to mortgage brokers, fancy offices and the reliance on securitization. Like a bunch of present-day George Baileys, ethical subprime lenders evaluate applications carefully, don’t pay brokers big fees to rope customers into high-interest loans and mostly hold onto the loans they make rather than reselling them. They focus less on quantity than on quality. Clearinghouse’s borrowers must qualify for the fixed-rate mortgages they take out. “If one of our employees pushed someone into a house they couldn’t afford, they would be fired,” says CEO Bystry.These lenders put into practice the types of bromides that financial-services companies like to use in their advertising. “We’re in business to improve people’s lives and do asset building,” says Linda Levy, CEO of the Lower East Side Credit Union.
Who are these counterintuitively successful institutions? Credit unions and community-development banks, and they have a 3 percent delinquency rate on their mortgages, compared to 19 percent for the overall subprime industry. Whoda thunk a rate that low was even possible in this environment?
Gross (and others, like Aaron Pressman of BusinessWeek, Thomas Frank of the WSJ, and Barry Ritholtz of The Big Picture) has written before about the utter wrongness of blaming borrowers and regulations like the Community Reinvestment Act of 1979 for “forcing” banks to lend to people who couldn’t afford to pay back the loans. It would be funny to see the free-marketeers tilt at windmills if their ideas didn’t still have outsized weight with policymakers and the press.
This is an enlightening story that ought to be required reading in finance, Congress, and at certain organs of market-worship. These success stories can provide a template for what the next iteration of the financial industry ought to look like.
And this story shouldn’t be one and done: There’s plenty of room for more reporting by the rest of the press.
Weird -- I just filed a story about this very topic (how the CRA is not to blame for the recession and, in fact, counteracted some of the effects). It focused on Chicago's Shore Bank, whose founder was the only banker to testify in favor of the CRA.
Posted by Katie on Mon 17 Nov 2008 at 05:37 PM
Excellent. The more the better. And don't forget to send us a link: dean@deanstarkman.com
Posted by Dean Starkman on Mon 17 Nov 2008 at 06:07 PM
As a first-time borrower, I didn't know my mortgage could be resold, so I was surprised when a slimy mortgage company sold my mortgage to Citibank, a company I'd already refused to do business. Angry, as I was not willing to give them hundreds of thousands of dollars over the next thirty years, I search Chicagoland for a non-mega-bank that wouldn't resell my mortgage and ended up at Shore Bank, which I'm happy with.
Posted by chitown on Tue 18 Nov 2008 at 12:51 AM
I don't see how this proves that borrowers aren't to blame for the subprime mess. Picture a company that was careful to only sell junk food to customers who exercised. Would we look at the lower body weights of its customers and say this proved that individuals bore less responsibility for the obesity epidemic?
Posted by Chris Corliss on Tue 18 Nov 2008 at 12:57 AM
Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.
Sub-prime Crisis: A simple primer
Posted by Sunderapandyan on Sun 23 Nov 2008 at 07:20 PM