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.
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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.