December 06, 2007

Kathleen Pender: Victims of predatory lending are junkies

To be fair, she didn't say it. She just quoted some risk analyst favourably immediately after saying that `subprime borrowers ... made bad, greedy or uninformed decisions.'

Pender's piece is on a proposed rate-freeze to prevent thousands of families from being forced to default on their subprime mortgages. The freeze would prevent the rates on these loans from rising for five years. (I'm not sure whether that's up to five years, or five years whatever happens.)

Beyond unsavory comparisons and non-argument insinuations that this is some sort of inappropriate bailout, subsidy, or other government interference in the market, Pender has some arguments, presented in the form of rhetorical questions. We'll take a look at a selection below the fold.

How do you define a subprime borrower?

Pender argues that there's no perfect definition. I think the point is supposed to be that an arbitrary decision has to be made, to decide who to help and who to not help. But so what? We have all kinds of arbitrary decisions built into our laws and policies -- what side of the street people are to drive on, how old you have to be to consent to sex, to drink alcohol, to vote. It seems weird to think that, because the decision to drive on the right or the left is arbitrary, there's something wrong with laws requiring drivers to stay on the right side of the road.

Maybe the argument is, instead, that however the line is drawn, there will be lots of people close to it on the other side, and shouldn't we help them too? Then the comparison is to Medicaid and the status of the working poor. But this is no reductio of the rate freeze. It just suggests that something more sophisticated might be needed -- a system of rate freezes whose caps and lengths are determined by family income, for example.

Is this simply prolonging the pain? "Some people who would qualify for this supposed assistance are probably better off defaulting," Whalen says.

Now, fortunately, I have never had to default on a loan or declare bankruptcy. And I don't know these things in great detail. But I do know that defaulting on one's mortgage or declaring bankruptcy basically means your ability to get credit is destroyed for a long, long time. So a family that defaulted or declared bankruptcy would lose their house as well as their access to credit, leaving them with basically no resources to turn to in case things got even worse -- say, unemployment in an uncertain economy, or a severe injury or illness with no health insurance.

Remember that your credit rating isn't just used to determine your access to credit. Landlords will often insist on running a credit check on a potential rentor, especially in middle-class neighbourhoods of large cities.

Perhaps some borrowers with subprime mortgages would be better off defaulting. But it's hard for me to imagine who these people like me. At the very least, the statement needs to be parsed out in much more detail.

Will this make it harder to borrow in the future? "The American way is, a deal is a deal. Not a deal is a deal until it hurts and then we'll change it. If the government forces one side to break a contract, it could easily have unintended consequences. Lenders might not be there the next time," Shoven says.

I don't see how the government is forcing one side to break a contract here. Defaulting, I would think, amounts to breaking the contract: I agreed to pay you back X amount of money, and now I'm not going to. Capping loan rates for a period of time seems more like modifying the terms of the contract: I agreed to pay you back X amount of money, but now I'm only paying you back Y amount of money instead. And I suspect that, in most cases, the latter is preferable to the former for lenders, as it means they're still collecting interest on the principal rather than just getting a house whose market price has seriously dropped since the loan was made.

People choose ARMs [adjustable-rate mortgages] because they are gambling that interest rates won't go up or because they can qualify for a bigger mortgage with an ARM than a fixed-rate mortgage. That lets them buy a larger house or take more cash out of their existing house.

Or because of racism.

Were some misled? Undoubtedly. Suing or prosecuting brokers or lenders who made false statements seems like a better remedy than a blanket rate freeze that treats all lenders and borrowers the same.

Mutatis mutandis for racism, presumably. But how will suing and prosecuting brokers or lenders who made subprime loans on a racist basis help the families who took these loans?

The junky analogy is especially disturbing once race is factored in. The finance `industry' is one of the most powerful sectors of the American economy. Just how does that industry see Black and Latin@ people?

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