Subprime predatory practices.....

[Cali Coug]

Originally Posted by ERCougar

I'm not trying to argue with you, but I honestly don't see how this would work. On every loan I've taken out, I've never met the actual lender--it's gone through a broker. I've never checked a race box anywhere. How do they know I'm white?

Assuming they meet the person and thus figure out their race, how does the scenario play out. Assuming the lender has some racist stereotype that black people don't pay back loans, are you telling me that instead of offering the prime loan, they instead offer some riskier ARM loan? It's not like they WANT the person to default--how on earth does that benefit them?

I just don't buy that this is widespread--the profit motive is just too strong.

The profit motive was exactly what was driving all of this mess. To understand the process, you have to realize that many loans (including most of the subprime loans) are sold and securitized shortly after they are made. The lender doesn't hold the risk of default for very long, and the purchaser has all kinds of ways of profiting from the high risk loans (including purchasing the collateral- a home- at auction for far below market value). It is exceptionally profitable to offer the subprime loans, so long as they don't all start collapsing concurrently (which drives down the value of the securitized loans to almost zero, destroying the market for such securities, requiring banks to hold their subprime loans because nobody will purchase them, etc.- which is exactly where we are now).

In the end, fewer subprime loans will default than are predicted to default, and the hedge funds that are buying up the securitized loans for pennies on the dollar will make a fortune (I think) as the price on those securitized loans rises.

[ERCougar]

Originally Posted by Cali Coug

The profit motive was exactly what was driving all of this mess. To understand the process, you have to realize that many loans (including most of the subprime loans) are sold and securitized shortly after they are made. The lender doesn't hold the risk of default for very long, and the purchaser has all kinds of ways of profiting from the high risk loans (including purchasing the collateral- a home- at auction for far below market value). It is exceptionally profitable to offer the subprime loans, so long as they don't all start collapsing concurrently (which drives down the value of the securitized loans to almost zero, destroying the market for such securities, requiring banks to hold their subprime loans because nobody will purchase them, etc.- which is exactly where we are now).

In the end, fewer subprime loans will default than are predicted to default, and the hedge funds that are buying up the securitized loans for pennies on the dollar will make a fortune (I think) as the price on those securitized loans rises.

Good analysis and I can agree with that. The racism question was sort of a detour.

The overall questions remain--is the government obligated to bail people out who went into this arrangement willingly? Like you said, hedge funds are sort of doing a bailout anyway, and probably making some money for it (which they should, to compensate them for their risks). And I'm not necessarily against the government stepping in (as minimally as possible) to prevent a total collapse--the recent decrease in the emergency funds rate is a good example of this. I'm not crazy about it, but I can see the logic behind it. But I do think you have to let market forces operate, even if it hurts a little.

The second question--should the government regulate ARMs? Here, I say absolutely not. If there is proof of widespread fraudulent lending (which I have yet to see), then regulate to the extent of making terms very clear to consumers, i.e. don't hide it in the small print in the middle of 50 pages of documents to sign.

My personal experience with two different ARMs I've taken was that the terms were extraordinarily clear. I can see how someone would go in with the attitude that "oh, the interest rate won't go up very much", but I don't think they can honestly plead ignorance about the possibility. I can also see how a loan officer would present two different loans--one an ARM, one a fixed-rate--and say look how much cheaper your house payment will be, or look how much more house you can buy. I suspect this happened frequently. But unless the buyer's literally retarded, that's not predatory lending. That's just the free market.

[ERCougar]

Originally Posted by MikeWaters

Loan officers should not be able to hide the terms in complex contracts. The terms should be out-front, in plain English, on a form that is required by law.

I can agree with this. But my experience has been that they're fairly well laid-out. Maybe others have been different.

[Solon]

Originally Posted by ERCougar

I agree with you in that if people are lied to, or even deceived, that should be prosecuted under fraud legislation. But I'm not convinced the lending practice itself needs to be regulated.

Regarding your first point...
If I'm a lender and I have this suspicion that black people won't pay me back, and I know that ZIP code ***** is mostly black, no way am I going to try to make loans in that ZIP code. And I'm sure not going to make higher risk ARMS in that ZIP code. Or, to take it a step higher, I'm not going to buy loans that others have made to residents of that ZIP code.

I have no idea if you're right that black people don't get the same low interest rates that white people do. But we're discussing something different--i.e. were minorities targeted with LOWER interest rate loans that will catch them later, in some weird attempt to make them default (why they would want to do this, I have no idea). Or are you arguing that blacks were being lied to more frequently than whites? If so, why on earth did this happen? Who benefits?

Maybe I'm misunderstanding the whole argument here, but I just don't get it. If people were being lied to, different story--there should be prosecution and some government help. My experience tells me that greed, with an inability to see past next week, is the much more likely culprit.

Good point. If "predatory lending" means fraud, then throw those bastards in jail. If it only refers to picking on the stupid or uninformed, my sympathy wanes (on a case-by-case basis).

I recently read an article on CNN.com about a guy in Southern Cal. who felt "really betrayed" that the bank wouldn't negotiate lower payments. He had cashed out the equity in his home and bought a bunch of other properties to flip. Now that he lacks the cashflow to re-pay his home equity loan, he feels "betrayed."

People like this guy need to learn about risk.

[Solon]

Originally Posted by MikeWaters

Loan officers should not be able to hide the terms in complex contracts. The terms should be out-front, in plain English, on a form that is required by law.

I think this is law in some places.

[JohnnyLingo]

Originally Posted by Solon

People like this guy need to learn about risk.

It's the society of victimhood. Many adults today were raised being told that nothing was their fault. Anything bad that happened to them was because of forces outside their control.

It's only going to get worse.

[myboynoah]

Originally Posted by Solon

Good point. If "predatory lending" means fraud, then throw those bastards in jail. If it only refers to picking on the stupid or uninformed, my sympathy wanes (on a case-by-case basis).

I recently read an article on CNN.com about a guy in Southern Cal. who felt "really betrayed" that the bank wouldn't negotiate lower payments. He had cashed out the equity in his home and bought a bunch of other properties to flip. Now that he lacks the cashflow to re-pay his home equity loan, he feels "betrayed."

People like this guy need to learn about risk.

This was happening 6-7 years ago and is one of the key underpinnings of this recent downturn that gets swept under the carpet in favor of stories on supposedly predatory lenders. Like the guy in your example, so many folks saw their home equity expand so quickly that they decided to take that money out to pay for new cars, home improvement, etc. thinking the gravy train would continue. Now prices have gone down and they owe more than their homes are worth or as you noted above, lack the cash flow to make their payments.

I say let the correction begin; the sooner we start the sooner it will be over.

[BYUTexan]

Originally Posted by ERCougar

Yeah, I'm sick of that phrase as well. I took out one of these balloon loans, and I knew very well what the risks were. It's really not that complicated.

For the most part, I think these "victims" were victims of their own greed, not predatory practices.

[8ballrollin]

Originally Posted by myboynoah

This was happening 6-7 years ago and is one of the key underpinnings of this recent downturn that gets swept under the carpet in favor of stories on supposedly predatory lenders. Like the guy in your example, so many folks saw their home equity expand so quickly that they decided to take that money out to pay for new cars, home improvement, etc. thinking the gravy train would continue. Now prices have gone down and they owe more than their homes are worth or as you noted above, lack the cash flow to make their payments.

I say let the correction begin; the sooner we start the sooner it will be over.

I think this is correct. In CA about 1/3 of the houses in foreclosure are NOT primary residences. In parts of AZ, FLA and Vegas the number is near 60%. These are flippers. Another large part of the foreclosures are people like this guy...

A Discovery Bay man who asked not to be identified said he is "upside down" on his house by about $260,000…

"I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool," he said. "Now I've got this fabulous pool and fabulous house, but it's not worth anything."

The man said he has not made a mortgage payment for five months.

http://www.sfgate.com/cgi-bin/articl...&sn=005&sc=713

[UtahDan]

Originally Posted by Cali Coug

The profit motive was exactly what was driving all of this mess. To understand the process, you have to realize that many loans (including most of the subprime loans) are sold and securitized shortly after they are made. The lender doesn't hold the risk of default for very long, and the purchaser has all kinds of ways of profiting from the high risk loans (including purchasing the collateral- a home- at auction for far below market value).

I think you may be in the ivory tower on this particular line of thought. I, for example, am upside down on my house as so many in my area are. If I allow my first to foreclose it is true that I could show up on the court house steps and bid on my home. Banks, however, nearly never sell the property for less than they are owed. They would rather sell it to themselves and then put it out on the market which is what almost always happens because no one comes to the auctions. They would be over paying.

The real deals are to be had once the bank puts the property back on the market. But even assuming that I could get them to sell it to me for less than I owed them, since I am now in a foreclosure and my credit is destroyed, who is going to loan me the purchase money? Oh, and when they do sell the home at a 100K loss, guess who is required to show that as a capital gain?