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The Reality Of “Predatory” Lending

by @ 3:19 pm on June 30, 2007. Filed under Economics, Real Estate, Sub-Prime Mortgage Crisis

I wrote earlier today about a Washington Post article about the rising number of foreclosures in the D.C. Metropolitan area. Along those same lines, Tim Cavanaugh writes in the July issue of Reason Magazine about the current focus on so-called predatory lending and its connection to the state of the real estate market.

As Tim points out, there was once a time when it was difficult for people to get loans, and that was considered a crisis too:

The conventional wisdom used to say the poor didn�t have enough access to debt. One of the earliest products of Franklin Roosevelt�s New Deal was the Home Owners Refinancing Act, which provided mortgage money to more than a million borrowers over a three-year period. Harry Truman�s record shows a consistent effort to expand the amount of debt available to willing borrowers.

My favorite artifact of the period�s pro-lending mood is Fredric March�s great �collateral� speech from the 1946 film The Best Years of Our Lives. March, playing a rising bank middle manager who has just returned to his job after serving as an Army NCO in the Pacific, reads a rambling riot act to a banquet of porcine small-town bankers who have criticized him for providing loans to bad-credit-risk veterans. If we�d fought like bankers, seeking collateral for every risk and a guarantee on every expenditure, we�d have lost the war, he argues.

We can dispute the wisdom of federally guaranteed loans and mortgage purchasing, but it�s notable that the new economy March wanted helped to create one of the greatest booms in the country�s history: the postwar suburbanization of America, which is now derided by our own bien pensant classes, who claim there�s too much ready credit out there. The difference now is that it�s coming from the market rather than a package of government guarantees, from an industry that expanded to fill a demand and is now contracting as the demand shrinks.

Which is, when you think about it, how it should be. You can question the wisdom of some of the decisions that people made in going with unconventional mortgages, but the truth of the matter is that without these types of financing options that the market created, most of those people never would have been able to obtain a mortgage to begin with. They’d still be renting, or living with family, and the idea of the home of their own would be nothing but a dream that would probably never be fulfilled.

Did some lenders make the mistake of lending to bad credit risks ? They probably did that too. But they have learned the lesson of those mistakes as well. That’s what the market is about.

Besides, as Tim points out, things aren’t nearly as bad as the politicians would have you believe:

In a sane world, we�d say this is a market behaving as it should, and marvel at an economy where so many people who were once locked into the renters market have gotten a chance at homeownership. Some of them have blown their chance by exhibiting the same kind of behavior that made them bad credit risks in the first place. But most have not. In fact, about nine out of every 10 sub-prime borrowers are still making their payments.

Sounds like mostly a success story to me.

3 Responses to “The Reality Of “Predatory” Lending”

  1. T F Stern says:

    Here is the comment I left to this same article over at the Liberty Papers:

    who claim theres too much ready credit out there.

    Perhaps the credit that is being made available for mortgages would not be at risk to such a degree were it not for the near collapse of disciplines in the area of other credit, limitless credit to purchase anything from a meal at McDonalds, a fancy new set of rims to go on the new car with a 72 month note and the vacation to Disney World. The desire to spend above the means to repay is where I have seen the use of predatory financing, a way to entice long term debt under the you deserve it now emblem.

  2. brimur says:

    This is kind of like saying “Last year you were complaining cause there was a drought, now this year yer’ bitching and moanin’ about a little flood.” Yeah, I dare to expect the industry to provide loans on fair terms. And I do expect some standard of ethics – if they won’t self-impose them as doctors and lawyers have – we can do it for them.

  3. brimur says:

    TF- Yeah those poor poor credit card companies. How do they get by? And so innocent too, they never hurt nobody. Just minding their own business.

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