Because most philosophies that frown on reproduction don't survive.

Tuesday, September 04, 2007

The Darwins: Sub-prime Lending Victims?

Catching up on my blog reading while taking the day off yesterday, I saw that Fr. Martin Fox had a great post up about the sub-prime lending crisis.

I've been keeping my head down and my mouth closed lately at work, as some of my more vocal colleagues have been wandering the aisles lately demanding to know what the lending industry was thinking and why the government didn't put safeguards in place to make sure they wouldn't lend money to people who could afford to pay their loans.

As Father Fox says, maybe it's time to re-write It's A Wonderful Life with George Bailey as the predatory lending villain and Mr. Potter as the man of virtue, who knows not to lend all those simple little poor people money they can't afford to pay back.

Not to say that there weren't predatory lenders out there, I'm sure that there were places out there seeking to give loans out on terms likely to reap lots of short term interest while paying off very little principle, and then packaging those loans up and selling them off to other institutions before the chickens came home to roost. (One of the reasons this whole thing is such a problem is that mortgages are now routinely packaged and traded as commodities, just like bonds, which means that it's by no means only the places that originally gave out bad loans which are now having problems.)

But at the same time, there are a lot of people who may not look like a good credit risk who want (and can pay for) the chance to own their own houses.

When we moved out here four years ago, we fit the bill exactly. Indeed, far better than our lenders could have realized. My California employer (which was going to miss me) had agreed to keep me on for a month after I moved in order to tie up loose ends. I didn't have a job in Texas yet, though I thought I might be able to get freelance work if I couldn't find a job right off. So I bought a house based on the job I knew was actually going to end within a month -- and we put down less than 10% because I wanted to keep some of our savings in case the job thing took a while to work out.

Not only that, but we did indeed get a 5-1 ARM, a loan with a very low initial interest rate which goes adjustable rate after five years. I figured that in five years we might be ready to move, and if we weren't, that I'd be making a lot more by then.

As it turns out, I was right. Though as the sub-prime crisis suggests, there were a lot of people who weren't.

So yes, lenders should be careful, and of course people seeking to borrow sums equal to 2-5x their annual income should read the fine print, and then read it again, and then think hard. But I certainly am not going to start wandering the aisles demanding to know "who would be stupid enough to lend money to 'those people'" any time soon -- because I'm rather glad to have been one of "those people".

The world has gotten rather to big for George Bailey's, I guess. Your lender isn't going to be able to know, "This looks like a promising young family. I think they'll be making twice as much in four years." So short of that, I'm glad I was able to slip through the system without anyone looking too closely.


Anonymous said...

Easy credit tend to benefit poor people, and tight credit tends to hurt the poor. With all the talk about the sub prime mortgage market, the vast majority of the loans are being paid on time. Congressional intervention will simply convince lenders to steer clear of all but "sure-thing" borrowers.

Literacy-chic said...

Of course, there's also the fact that being promising and young doesn't mean anything in terms of net worth.

Literacy-chic said...

That is, in terms of FUTURE net worth.

Anonymous said...

There is a difference between the George Bailey style of lending where you know your neighbors, can look them in the eye, talk to them and come to the decision of whether the loan is best for them and the bank, and an anonymous phone bank of sales people cold calling bad credit risks trying to sell them high interest loans with long interest-only payment periods and pre-payment penalties.

These people are not like the philanthropic George Baily, but are more like the evil Potter, trying to make sure that the people are on the hook for as long as possible and can't get out.

These lending institutions should not be bailed out, and this sort of predatory lending should not be encouraged.

Sometimes the biggest favor a bank can do for you is to refuse you a loan. Especially when your "eyes are bigger than your bank account".