Predatory lending used to mean making loans to customers who the banks knew would default, for some "advantage" to the bank. But after banks followed the edicts of race hustlers and started making loans to people with poor or little credit it came to mean charging higher interest to poor credit risks, thereby increasing the payments and thusly the risk of default.
It's all about forcing banks to lose money rather than make evil profits.

This is the worst business model fix I have seen in a long time. I sure wish I could default on anything and not feel the consequences. Compassion has nothing to do with this. If they cannot afford a home, go to an apartment until you can. Like millions of others. ww

(2)has a bit of a chicken or egg answer. While the expansion of the subprime loan market may have had something to do with the political pressure, the loans themselves weren't targeted to particular 'areas', but were rather aimed at individuals who didn't qualify under more stringent standards. Interestingly, one of the defenses in favor of redlining was it would unprofitable to loan to these areas... a hypothesis supported by the high number of defaults in the subprime market.

(4) It was easier to get a subprime loan and subprime loans usually carried lower (upfront) interest rates. Thus, anyone who got and has been paying a traditional mortgage had better credit and has had less trouble paying their mortgage and thus wouldn't be eligible for a bailout. Their 'suffering' is the higher price they had to pay for a house as a result of the number of unqualified buyers bidding up housing prices, but even here, as a lot of home buyers trade up, they would have also gotten a higher price for their original house, so there's a bit of a wash.

(5) another parallel is with health care, where society allows people who don't take care of themselves and who don't sign up and pay for insurance to make the rest of us - those who have played by the 'rules' - to pick up the tab for their medical care.

What exactly is "predatory lending?"

a) A concept that allows one who went in debt beyond their means to pass the blame, and the responsibility for their actions, on to someone else.

b) A way to demonize corporate America during an economic downturn, fomenting as much hostility and resentment as possible, thus making people more sympathetic towards Marxism.

c) both (a) and (b).

The correct answer is...

I've always thought of "predatory lending" as the legalese synonym for what most people call "loan-sharking." The only difference is that "predatory lenders" don't typically threaten your life and health if you default, they just take your property.

There doesn't seem to be any formal legal definition of predatory lending, but there is a list of lender practices that are considered signposts for it. The Department of Housing and Urban Development has an informal definition on its website.

For borrowers who knew what they were doing, I have no sympathy -- whether the loan in question is for a house, a car, or anything else. But for borrowers who were first-time homebuyers who were ripped off by lenders who lied to them or falsified the loan papers -- what happened to them is not their fault. We all know how hard it is to adhere strictly to "get it in writing" and "read all the fine print" when faced with a pleasant, charismatic salesman who talks fast, fluently mixes truth and lies, and readily tells us what the fine print "really" means.

To the extent that the so-called victims were buyers who didn't have the assets and/or income to support their purchase, why should they be offered relief that lets them keep what they never should have had in the first place?

In answer to your question, Steve: to what extent should buyers who didn't have the necessary assets or income but were told by the lender that they did be held responsible for the lender's deceitful acts?

I think of predatory lending as, at its worst, situations where loan originators tried to 'bury' the negative terms of a particular program and focused only on the teaser rate payment. This is unfortunately difficult to prove, and often the bank that now holds the loan wasn't the perpetrator, so who do you hold to account? However, I don't believe there is much evidence that this is the cause of most subprime problems.

I think most subprime problems are due to originators looking the other way on statements of income and/or assets, largely because they planned to sell the loan anyway... because this was abused, the buyers have dried up. The market is correcting the bad behavior.

I was responsible. I got a 30-year fixed, and only as much house as I can afford. People who were less responsible seem to be getting a do-over. I want one too... read on. http://realityblogz.blogspot.com/2007/12/let-me-see-if-i-got-this-straight.html

"Predatory lending" is to borrowers what "over-serving" is to drunks - it uses spin language to shift responsibility. One area where lenders have aggravated the problem is the exclusion of lawyers from the home-buying process. As pointed out, this may be the biggest purchase of the buyers' lives, yet lenders have increasingly told borrowers that they need not hire their own lawyers to review and explain the documents - just rely on the lenders and their lawyers. (Guess who the loan officers and lenders' lawyers are looking out for.) By saving a few hundred dollars on legal fees, buyers go through the closing process with no professional on their side. This is hardly the sole explanation, but it's one area where the lenders can be tagged with some real responsibility for the current subprime mess.

In any predatory lending they count on the buyer not understanding that something that sounds too good to be true usually is. They can be downright deceptive by not disclosing certain terms of the loan as well, because after all, the burden lies with the buyer to read and understand the legalese in the contract. They call it predatory because they know damn good and well that some people are ignorant.

Here's some of the "creative" schemes they came up with to sell homes. If someone has carefully planned and nothing arises to throw a crimp in your plans, then there's nothing inherently wrong with any one of them. But anyone who takes combinations of some or all of these financing schemes indicates a desperation and desire to own a home which overrides common sense.

My husband and I got screwed on our first mortgage. Many years ago we signed a contract stating a higher interest rate than we were verbally given. We figured it out after our first couple mortgage payments were higher than we thought they'd be and proceeded to refinance at a much lower rate and discovered a pre-payment penalty in the contract as well.

It was an expensive lesson to learn. But not as expensive as some people have learned. However, we didn't blame the bank. It was our own fault.

Let's just put this into perspective. Something like a million American households are in the process of foreclosure, and something like three million mortgage loan defaults will occur in the next two years. Banks are going under and the global market is being slammed, and all you want to bitch about is "people who've made bad choices."

The extreme damage to our economy doesn't seem to register with you; the effects of this crisis on the global economy and on the credibility of Wall Street are not an issue with you. Jesus, Jay.

Your problem is an ideological objection to the idea of government helping distressed Americans. (The idea of government subsidizing agribusiness and oil companies doesn't bother you in the least, does it?) Tell me: when the government wants to come to the aid of those banks and mortgage companies that are going under, what will the official neocon line be then? Did those businesses make bad choices, hmmm? Look at what's happening (for a change), think about it (ditto).

As to predatory loans: You talk about mortgages as if all this is about is people buying houses on a sunny day in the marketplace: one person chooses a good loan, one person chooses a bad loan. Nice try.

Most of those subprime loans went out as refinanced second mortgages, based on equity - by people who are trying to survive in an economy that is increasingly hostile to the middle class, by people who couldn't find any other way to pay for Life in These United States.

And the overwhelming majority of those loans were taken out by people who couldn't get any other kind of loan, who nevertheless desperately needed the money, and felt like they would get out of this hole in three years and refinance when the time come - and that is exactly what the lenders promised those people, to a man, to a woman.

I'll tell you what I think this is, Jay: orders were handed down in the Republican neocon echo chamber: Shift the blame from the lenders to the borrowers. You're doing your best, as usual, to comply, by being the biggest asshole you can be.

This time I think you've succeeded.

Let us not forget that many of the homes in question are not primary residents but investment properties. All investments carry risks and risk/reward ratios must be duly considered. At least that's the theory.

WW: Notwithstanding your attempt to relieve the buyer from the responsibility of knowing for themselves what they were and were not capable of paying for, by giving up the house, they're not being held responsible for whatever the lender may done wrong/illegal, they are giving up what they never should have in the first place.

Put another way, had they not been lied to, or had they done their homework, or had there been no such thing as a subprime market, they would never have been able to buy the house - so giving up the house restores them to their previous condition (in most cases, renting).

To the extent the lender lied, or even to the extent to which they loaned money to someone incapable of paying it back, they suffer (as they should) by having to re-pop a house that was inflated in value as a result of unqualified buyers bidding up the prices.

WW: Notwithstanding your attempt to relieve the buyer from the responsibility of knowing for themselves what they were and were not capable of paying for, by giving up the house, they're not being held responsible for whatever the lender may done wrong/illegal, they are giving up what they never should have in the first place.

Put another way, had they not been lied to, or had they done their homework, or had there been no such thing as a subprime market, they would never have been able to buy the house - so giving up the house restores them to their previous condition (in most cases, renting).

To the extent the lender lied, or even to the extent to which they loaned money to someone incapable of paying it back, they suffer (as they should) by having to re-pop a house that was inflated in value as a result of unqualified buyers bidding up the prices.

Short story, rising home values convinced banks that lending money to people they wouldn't normally lend to (due to questionable credit, and/or low income) was still a good bet because the equity in the house was continuing to climb.

When the housing market leveled out, and interest rates started climbing again, these people (most with arms or balloon payments) are getting their a$$es kicked.

The people who bought the houses were stupid. The banks that loaned them the money were stupid. Now we all get to pay for it.

What I don't understand is that there is still value in those houses. The banks should be fine. The people - we - there is a price for stupidity.

I for one didn't read my mortgage but I sure knew what they meant by adjustable rate and what climbing interests rates would do to me.

Then I held off out of laziness to refinance my loan and just happened to get around to it at just about the bottom. I wound up paying a little more but it will be paid off much quicker.

I think the people who took these subprimes knew the terms but were hoping to cash out on the huge run-up on housing costs.

I don't see anything good coming out of a bailout in this case.

The homeowners can go back and live where they were before and the finance institutions can sell the properties on the market and learn from the experience.

Buyers/borrowers had at least THREE opportunities to review the terms of the loan, when it adjusts, how it adjusts, how much it adjust, etc etc.

Anyone who has bought a house has seen a Truth in Lending, which besides showing you the APR of the loan, calculates maximum possible payments, as well as lets you know if this loan carries with it any prepayment penalties. Additionally, a much more specific document, an ARM Disclosure was signed at least once, and maybe twice.

Anyone who said they never knew the loan terms is a liar, unless they can prove their signature on loan docs is a forgery.

Up to 70 percent of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to the FBI's Mortgage Fraud Report. Also, "The study found that mortgage defaults were largely concentrated in adjustable rate mortgage (ARM) loans, but were present among other loan types, too. The report also revealed that seven of the top 10 states with the highest concentration of mortgage fraud were also in the top 10 states for foreclosures, namely California, Florida, Georgia, Indiana, Michigan, Ohio and Texas."

Most people bought more than they could afford, and now, their 'bet' is turning out to be a loser.

Does anyone have an answer for this, from a previous Wizbang thread?

"Is there anyone/where that tracks totals on things like foreclosures, # of privately owned homes, etc?

Tell ya what I'm thinking, maybe it'll make more sense - we're going to be seeing for a while now the "RECORD NUMBER OF FORECLOSURES!" blah blah blah for a while from the press and talking heads, but I'm pretty sure we have a record number of homeowners around, too. It's like the inflation deal, I can look at the cost of a barrel of oil and use an inflation calculator and see what the inflation-adjusted price was in 1980 or whatever. Is there somewhere I can go to see the number of foreclosures in 1965 vs. the number of privately owned homes to put this in perspective? Anybody?

5. Posted by Falze | December 6, 2007 4:33 PM |"

1) At the bank I work at at least, we generally don't stalk our potential loan customers. If we were to, however, it would be done individually rather than in a pack.

2) It's been awhile since I did my training on the CRA, but I believe that it does not require banks to offer loans that pose a significant risk of loss to the bank. The fight against redlining may have played a role, but only a very minor one in my opinion.

3) Though it is certainly possible, I doubt that it's the lenders who aren't following the terms of the loan. Banking is a very heavily regulated area, and if the auditors (internal even, but especially the FDIC or OCC) caught wind of it, that bank could well lose its right to give out loans until it could prove it had cleaned up its act.

The problem is you are all right, to a degree. (I have been in the real estate industry for 20 yrs. At closing the stack of documents is typically an INCH thick, if you have a HELOC or second mortgage, you about double the paperwork.))
A) There are lenders that used straw buyers to turn houses. The "buyer" agrees to buy the house at an inflated interest rate, thus increasing the lenders/mortgage brokers profit. (I have listings that the "owners" made 0 to 4 payments before foreclosure began.)

B) There are lenders that lied to buyers about how ARMs work. Now the payment is double/triple what it was at the start.

C) There are buyers who lied about their income, using the stated income process (normally for self employed, was pretty well used by anyone the last year or two.)

D) There are real estate sales people that lied about values and property conditions and when investors tried to flip the house, uh oh, no buyers and no increased value.

E) There are investors that didn't have a clue whot bought houses, remodeled them and them couldn't sell for a profit.

F) Lenders had company appraisers that would inflate home values so that the Buyer had no out-of-pocket expense in purchasing. (Seller pays some costs and the Buyer gets 100-103% loan.) Buyer has no money invested in the property and thus feels no monetary loss in foreclosure.

My advice:
1) Stay away from mortgage BROKERs, use a mortgage BANKER. IF your credit is so bad you must use a mortgage BROKER, don't buy. ie, use a reputable lender---ask the realtor, closing company, etc. Ask for references.
a) Never use a lender that will not provide a good faith estimate (est $'s needed to close) upfront. THIS IS A GOLDEN RULE. You will get screwed if they are "unable" to provide one. (I can provide a generic one in about 10 minutes, so there is no excuse.)

2) Use a Realtor: If you are really clueless them hire a Buyer's broker or Single party broker to represent/work for you.

3) Attorneys have little liability in reviewing real estate contracts (and typically all they review is the PURCHASE contract not the loan documents) AND it will cost you sustaintially more than a few $100s to have an attorney at the closing with you.

4) Always close at a closing or escrow company (not the lenders office or real estate office, etc) This adds a third party to review items.

5) NEVER get an ARM for your first mortgage.

6) Shop the mortgage companies. It really is like buying a car. Different companies offer different deals.

There is a lot more, but I figure no one will read all this, just like they won't read all the documents at a closing.

If you have never bought a house, you have NO idea the amount of forms required

Cstmbuild,

That is a great post. Thank you.

Cstmbuild,

I, like you am a Realtor. You are right in that the blame can be passed on to so many people. Whatever did happen, though, I hope more and more people are getting educated about what is really involved in buying a home. Many of the people who are upside-down now never should have been buying in the first place, turning them into sellers now when they should be buying for the first time or still renting. We have to be willing to tell people straight up that they should wait to buy or, frankly sell. It might mean less business now, but it would lead to healthier markets down the road.

Steve, I believe you'll find you're wrong on both counts.

First, the buyer is not simply returned to the status they had before they bought. Bankruptcy or foreclosure automatically drops your credit rating by a huge amount. Some evicted families might not be able to find other living quarters at all. Some might find that the only available apartments cost more in rent than their mortgage payment was. They've probably lost work time. In some cases they might have lost their jobs completely -- in jobs that require a security clearance, being deeply in debt or foreclosed can affect your clearance and therefore your job status. They've probably lost savings. They've certainly lost any down payment they made.

Second, the bank that performs the foreclosure and takes the property now has a property that it can re-sell for book value, thus recovering most of the money it "lost" on the bad loan.

As a related issue, I was astounded when I saw this report from Ohio that lenders are foreclosing on properties they don't legally own. (I know it's an NYT report, but I crosschecked with other sources and I believe the article is trustworthy.) Apparently, for some of these mortgages, nobody knows who actually owns the loan note, and therefore the property. Some of these buyers might have been able to save themselves by renegotiating, but how can you renegotiate a loan if you don't know who to negotiate with? And nobody in or out of the banking/mortgage industry thought there was anything wrong with that. When this level of sloppy bookkeeping is considered normal, there's something radically wrong with the entire industry.

CST,

Over 15 yrs in the mortgage business, Ive worked for both bankers and brokers. In fact, my preference is to work for a broker is because its better all-around for my clients. Besides, most mortgage bankers actually broker loans. Thats right, very few shelve their own paper, they broker them out.

Mortgage bankers are always more expensive(even when selling paper to the same outlets), very seldom do bankers have more choices or more flexibility than brokers.

Think of it in insurance terms. You can go to State Farm or Allstate, for instance, and only have access to their single product line, or, you can head to Miller's Insurance Agency, where they have access to maybe 10 or 15 markets/carriers. More choices always leads to a 'better deal'.

Bankers slam brokers every chance they get, because they can seldom compete on equal pricing. Is the reason you say dont use brokers is because bankers are ALWAYS more expensive? Bankers try to claim the ethical high road, BUT, if they were 'so honest' how come they dont disclose what they make off of the loan?

Brokers arent the problem here, although, yeah, there are scumbag brokers, scumbag bankers, realtors, builders, lawyers, appraisers, etc. IMO, anyone associated with loan fraud should either make good on any financial damages, or do jail time.

Possible 70% of delinquencies were because of borrower fraud, and, from what Ive heard, 2 out of 3 problem loans are in non owner occupied homes, meaning these people most likely were trying to flip a home, and the real estate market turned before they could.

Borrowers had at least 3 chances to review loan terms prior to closing. If they chose not to, who's really at fault?

If it sounds too good to be true, you can bet that it is. "Subprime" implies that you pay a rate at which the lender is losing money, which ain't gonna happen. You'd think that after the savings and loan collapse in the 80's that the lenders would be more careful, but apparently not. Those were loans given assuming the double-digit inflation of the Carter era would continue, and property values would increase and outgrow the debt. Oops, Reagan screwed that up for them.

Bad decisions by the lenders, I hope they have to eat the losses because they knew what they were doing. Bad decisions by the borrowers, but it was their decision and I don't want to pay for it. They will have to pay what Dave Ramsey calls the "Stupid Tax," from which, hopefully, they will learn something.

Oh, and : 11. Posted by astigafa | December 7, 2007 8:47 AM

If you want to help bail out irresponsible people, knock yerself out. But don't drag me into it.

#25 Subprime is for less than prime borrowers, in most cases, it means less than prime credit. (Also programs such as all of these 100%, 103%, 107% LTV loans have been called subprime). I never understood why anyone would lend money with $0 down to someone with a bad history of paying past credit obligations.

Mortgage lenders didnt create these programs, Wall St, etc needed new ways to earn greater returns, so they created these programs in transferred all interest rate risk to the borrower. ARMs should be a 'financial planning' tool, best used when someone knows that loan will only be used for a short term, maybe where they expect to move before the 1st adjustment.

Know that the highest market rate out there, in whatever program you want, is the 30 yr fixed. Why? Simple, the lender/investor assumes all interest rate risk. If rates go to 20%, I'm still at 4.75%. If they were to ever drop low enough to refi, I can, as Fannie Freddie loans have no prepayment penalty.

astigafa:

You apparently didn't didn't read (and comprehend) Jay's entire post. Specifically paragraph 3 of part 3. Or you wouldn't have made this statement:

Your problem is an ideological objection to the idea of government helping distressed Americans.

Just for the record, most conservatives are against most subsidies. The government does not earn money, they take it. ww

OK, like you, I've never bought a house. But I've thought about it. Five or six years ago I went as far as to talk to some lenders, see what I qualified for. And it was astounding. I qualified for a loan with a payment that was about double what I'd have been comfortable paying. When I said something about that, and mentioned not wanting that big a payment, he actually suggested that I go towards the bigger end of the payment, because houses always go up in value. That way I could sell it in 5 years at a tidy profit, and then turn around and have a much smaller payment.

That may not be what people classically think of as predatory lending, but if I'd followed his advice I'd have been able to save no money at all during that time, and any setback would have probably resulted in me losing the house.

Thank you for that insightful economics lesson, WW. It's really hard for me to keep my political binaries straight.

#24 From my experience in Oklahoma, Mortgage Brokers have higher fees, make more money off each loan, disclose less and they are the ones who refuse to provide Good Faith Estimates. Several Mortgage Brokers in the "Big City" recommend not using a Realtor. Why? Because we provide Good Faith Estimates and can suggest that they shop around. Are all Mortgage Brokers bad? No, but the possibility of finding the good ones is pure luck.

Yes, very few Mortgage bankers keep their own loans. Most end up being sold to Countrywide, Wells Fargo, Washington Mututal, etc. (Which is one reason that those in the "know" were terrified that Countrywide was going belly up.)

As a note: By Oklahoma law I could not tell you not to use someone and I can't even recommend anyone. We are required by law to provide several options and we can make suggestions, but we cannot steer someone to a specific company. (Although there are some that do. Like I say we all have bad apples.)