I Am a Predatory Borrower

by Tim King 11-21-2008

Sen. Gramm has been credited with coining the term “predatory borrowers.” Like Reagan’s “welfare queens,” the caricature of the “predatory borrower” falls into the same category for me as Santa Claus. They are all interesting fictional characters that make for some good stories but have long since lost their resemblance to reality. “Welfare queens” were a tall tale based on the fact that there are some people for whom our social safety net becomes a dependent crutch. “Predatory borrowers” are based on the fact that there are some people who signed papers and entered into financial agreements that they did not read or understand (I have even heard a few accusations of planned bankruptcy). Santa Claus — well, the real St. Nick –probably had a beard and might have even handed out a few presents.

While I don’t think I can be blamed for the collapse of our entire planet’s economic system (I do hope our readers extend me this grace), by Sen. Gramm’s thinking, I’m a big part of the problem. Yes, I am probably a “predatory borrower,” or at least I can relate with them. While my tale of woe will not cause my economic devastation, it very well could cost me several thousand dollars over the next few years, and I have learned my lesson.

It happened about a year ago. I got a call from the bank that holds my student loans. The kind woman on the other end of the phone asked me if I would be interested in consolidating. It would be the simple process of bunching all my loans together and slapping one interest rate on them. “If you consolidate today, sir, your monthly loan repayments will drop by $50 a month! Would you like to consolidate?” I asked about possible fees, I asked about interest rates, I asked about my various repayment options. She answered every question cheerfully and in no time my loans were consolidated.

The next month, I found out why. I got my student loan statement and, just as promised, it was $50 less a month. What I hadn’t expected, however, was that the term of my loan had been extended by five years. My 10-year repayment schedule had become a 15-year repayment schedule. With the interest extended over those extra years, my total repayment amount would be thousands of dollars more.

A few weeks later I got a phone call from another bank explaining that they had just bought my loan. “Don’t worry,” I was assured by another kind woman on the phone. “Nothing has changed.”

But something had changed. Me. I’m lucky that I learned this lesson with my student loans instead of a house. My payments are less, so I will not default. There is no penalty for paying early, so I can simply increase my payments and avoid much of the interest. But my naiveté is gone. I thought that the woman on the other end of the phone was there to help me. I thought she was providing me with all the information I needed to know to make a decision about what was in my best interest. I thought I was in a long-term relationship with my bank. I thought the interest that I was paying on the loan was not only for the money borrowed but for the help of a financial expert who would help me navigate my first significant debt. They work for a bank; they must know more than me; I should listen to their advice. I was wrong.

I am endowed with enough “street smarts” to be wary of the guys who peddle goods on the subway, but I did not have the smarts to be wary of an S&P 500 company. I did not realize that the person I was talking to had no interest in anything that happened to me after she made the deal and hung up the phone.

I have to imagine that many of the “predatory borrowers” out there who are now getting kicked out of foreclosed homes were in the same place as me. They walked into an office and assumed the person on the other side of the desk cared about what happened to them after the deal was closed. “Certainly,” they would assume, “I could repay this loan. If not, why would they offer it? I came to a professional. Wouldn’t they know? If I fail, wouldn’t they be hurt, too? It’s in both of our interests if they set me up to succeed, right?”

Tim King is the special assistant to the CEO for Sojourners.

Categories: Economics

Tags: bankruptcy, credit crisis, Debt, economic crisis, Economics, economy special focus, loans, money, predatory borrowers, predatory lenders, Senator Gramm, student loans, subprime mortgages, Welfare, welfare queens

letjusticerolldown

"Most will think what I'm saying is alarmist."

I don't. I am not worried. But I think the frogs in the hot water on the stove have just had the heat cranked up on us a whole lot and if we can't notice this temp change we are in pretty sad shape.

This is all about the spiritual foundations of our economics--"Who owns what?" And if the Church can't get this answer right before God we will bring zero wisdom and a whole lot of foolishness to the table. All the Kings horses and all the King's men are trying to put Humpty back together again--if you haven't noticed. They are grasping at thin air--tens of billions up in smoke. Puff!!

jurisnaturalist

Earlier on this same thread I explained how competition makes cooperation work better. I thought I gave a pretty good example.
Fraud is bad. But if I defraud you, will you buy from me again? And how can I get to the place where I have enough power in the market to force you to buy from me if I have been defrauding you?
Monopolies do not persist without the assistance of the government.
You are mistaken.
ndsnow@gmail.com
Nathanael Snow

erbe

"Competition is the best way for unregenerate people to get along with one another."

Cooperation works much better.

"In order to sell more of my product I must make it as best as I can"

Or I can fool you and your neighbor into thinking it's a good product.

Or I can create a monopoly where you have to buy the food from me or simply die.

If we lived in a world where pure competition counted for everything, most of us would probably be enslaved.

jonabark

This is a good American example of predation, and obviously not Tim's. His story is one small capillary in a monstrous flow of wealth away from the people who generate all wealth. What we are seeing is a world -wide war on the poor. The rich and powerful are running out of acceptable scapegoats, native peoples, and enslavable races. We are running out of exploitable resources with acceptable profit margins. The abiding and remaining resource is the economically vulnerable. Where Capitalism is growing the fastest, China, Africa, Russia, South Pacific, India and the US and European subcontractors, it is in these places the displacement, toxic dumping, land theft, political disempowerment, sexual and economic exploitation are the most severe.
America is in the pivotal position to reverse this global phenomena, but Obama's appointments and the Democrats unwillingness to demand reform, transparent investigation, and oversight of the failing banks and industries are all signaling a structure that favors the continued rule of a powerful elite who, having mastered the art of externalizing environmental costs to the public, and will now externalize speculative losses and restart their failed enterprises with taxpayer money. Taxpayers will be giving money to banks so they can,if they are acceptable risks, borrow it back at interest. They will be financing well over 50 percent of these institutions and have virtually no say in lending policy, and dubious return on investment.
Obama is selling out the small donors whose votes elected him for the big donors whose money paved the way to victory and turning the world over to the Clintonites who are as implicated as the Republicans in the financial meltdown. He will not be able to turn the crew of ra-ra deregulators and privatizers he has hired from their predation. The first and best line of defense is for progressive democrats in the house and senate to demand better plans than this team will put on the table, to force a Roosevelt style change.

This will only happen if there is massive discontent with these Obama choices. Americans are running out of wiggle room. the stability of the society is at stake. Time to turn away from the football games and the other crap on TV and think about organizing to demand change. Most will think what I'm saying is alarmist. Time will tell.

Right now all that ranting at Shane Caiborne looks pretty dumb. So far what I see is a replacement of red foxes with blue foxes. As a Chicken I am not entirely thrilled. I honestly hope I am wildly wrong about all this. I desperately want to start eating my words.

jurisnaturalist

Your question deserves a serious answer. Jesus did not preach to the world about the best way to be the world. He preached to His disciples about how to be different from the world.
Competition is the best way for unregenerate people to get along with one another. It takes people as they are, self-interested, and works that nature to everyone's advantage. I want to sell my product to you. In order to sell more of my product I must make it as best as I can, otherwise my competitor will sell to you instead. You get my best efforts, and my competitor gives his best efforts. The person most able to pay buys the best product.
As so it goes, along its Darwinian path.
But as regenerate souls, we are capable of pure altruism. So it is given to us to give, and it is given to us alone! For one must receive before one is able to give, and who is the one who has received except he who has accepted Christ? Therefore, giving is our responsibility exclusively, and I am loathe to advocate any policy which depends on the good-will of unregenerate souls, for to them it shall be like an idol.
Jesus had a great deal to say about our responsibility as His disciples. As to the government, He basically said, "Pay your taxes, just don't expect them to do any good." In no way did He ever legitimize the state, or admonish His disciples to utilize the state in accomplishing thier peculiar mandate - the Christian Ethic.
For illumination seek out Dietrich Bonhoeffer, Stanley Hauerwas, John Howard Yoder, Jaques Ellul, Greg Boyd, Friedrich von Hayek, Ludwig von Mises, the Acton Institute, Thomas Sowell, Frederic Bastiat, and Rose Wilder Lane.
Nathanael Snow

JeanM

And then there's that poor sod known as the "unlucky borrower." They're the ones who had a great first mortgage, took a second, almost as good mortgage to replace the siding, windows, roof, and furnace on their 25-year old house, lost their job and was unable to find another for nearly two years, and, as the coup de grace, had their house value plummet $10,000 a month for the past year (considerably more than the second mortgage was for). To pick an example entirely at random...

Sigh.

erbe

Jesus preached about the way we relate to other people, n'est-ce pas?

So where did he preach or mention competition? I don't recall a passage that states; "To the victor goes the spoils."

kevin47

The problem with your argument is that the question of WHETHER government should be involved, and the DEGREE TO WHICH government should be involved are pivotal to answering the question of what constitutes good governance.

There are valid counterarguments to the notion that government should have no involvement in our economy, but this is not one of them.

jurisnaturalist

Has Jesus preached about carburetors?
Governments and markets are both made up of people. This is precisely the point. For government to work well, the decision makers have to have other people's best interests in mind. For the market to work, each person only has to have their own best interests in mind. The market works whether or not people are altruistic. Government only works well if the dictator is beneficent.
In theory a good business exists to make as much money as possible. The irony is that he does this by satisfying as many customers as possible. This leads to the best possible social benefit.
This is how the market works.
Inasmuch as there is interference with the market process by force, these results fail to hold.
In theory a good government can judge and execute the law. A good read on this subject is Bastiat's The Law, available for free dnld onlne.
If the law can enforce contracts, prosecute torts, and protect property rights, it is enough.
NS

mscynthia

I have heard about the paper work that goes into buying a house and how some of the fine print was changed.
I have concluded that the first thing you have to do before signing anything is retaining your own personal lawyer and a photo copier with print enlargement.

jkc1944

My wife and I like to take little drives into the country two or three evenings a week i used to shake my head in wonder as we drove through exclusive housing additions, streets lined with houses in the 350,000 - 600,000 range, with BMW's in the drive, and a swing set in the back yard! What, I would ask myself, was wrong with this picture?
Now we are finding out. Come on folks, the problem is us!! We have done this to ourselves. No lenders dragged our young-married kids with two little ones into their office and held a gun to their head while they borrowed 97% of a mortage for a house they never should have thought of buying. They did that. They signed the papers. If they didn't read them first, whose fault is that?
Where has individual responsibility gone? And lastly, why are we whining now that the chickens have (inevitably) come home to roost?

erbe

Has Jesus preached about the need for competition?
Are not governments and markets made up of people?
Are people in government more or less concerned about others than people in markets?
How does one judge effectiveness?
In theory, for what primary purpose does a "good" business exist, usually?
In theory, for what primary purpose does a "good" government exist, usually?

duhsciple

Senator Gramm is old.
How old is he?
He first name is Cain, son of Adam.
His favorite question is, "Am I my brother's keeper?"

Come on.
How long are so-called Jesus followers going to be asking this question!

I pray that more and more people will give up the "Cain ideology".

Duhsciple

jurisnaturalist

Show me someone who is not self-interested. Human nature is what it is and it cannot be changed except through regeneration. This is my ideological bias.

That it leads to something similar to libertarianism, as nebulous a term as that is, is lucky for the Libertarians, not me.

The facts remain:
1. Competition and creative destruction work.
2. People are self-interested.
3. Christians are regenerated (otherwise, why bother?)
4. Government is less effective than the market at most operations.
If we do not make specific arguments the discussion becomes unfruitful.
NS

kevin47

In fairness to the borrowers, every news cycle was dominated by stories about the Fed slashing interest rates. Brokers were showing buyers Good Faith estimates at 3%. Should they have known it was phony?

Further, many of the loans that were sold as "interest-only" (which isn't all that bad of a way to get into a house if you know what you're doing) actually had borrowers making payments that were insufficient to cover the interest owed. As such, they were accruing further debt.

Banks had no business selling these loans to anyone other than business owners. But, then, most "stated income" loans actually claimed that the borrower was a business owner.

What I find depressing is that mortgage brokers and servicers are getting off the hook, simply because they do not make a good ideological whipping boy. They are presented as the "street corner dealers" with banks as the overlords, which is a highly inaccurate analogy.

Congress would rather see three or four symbolic figure heads go to prison than authorize the feds to do the actual work of prosecuting cases of mortgage fraud. Employees of the worst offender, Countrywide, will almost assuredly walk away without so much as a slap on the wrist. As such, I find it difficult to take either party seriously on this issue.

kevin47

This is not the point that Gramm (who, it should be noted, coined the phrase long before the present downturn), or congressional conservatives are making. Nobody is asking Americans to believe that banks are simply the victim of unscrupulous borrowers.

That said, across the street from us, a fellow took a job in South Dakota. Instead of waiting and selling his house, he just let it go into foreclosure. Again, predatory might not be the right word, but neither is "victim".

Many of the seedy mortgage lenders who played a large role in creating this mess took out mortgages to fund their strawbuying schemes. In those instances, banks were duped by predatory borrowers, and in grand fashion.

As long as a strong risk remains that people will take out debts they do not intend to repay, banks won't lend money. If banks won't lend money, our economy stops.

The housing crisis has multifarious causes, but has little to do with conservative ideology. Nobody passed a pro-fraud bill in the last twenty years, and banks give plenty of money to congressional Democrats, and I have yet to hear what it is that Congressional liberals wanted to do that would have averted this crisis.

justintime

...Gramm has long been a handmaiden to Big Finance. In the 1990s, as chairman of the Senate banking committee, he routinely turned down Securities and Exchange Commission chairman Arthur Levitt's requests for more money to police Wall Street; during this period, the SEC's workload shot up 80 percent, but its staff grew only 20 percent. Gramm also opposed an SEC rule that would have prohibited accounting firms from getting too close to the companies they audited—at one point, according to Levitt's memoir, he warned the SEC chairman that if the commission adopted the rule, its funding would be cut. And in 1999, Gramm pushed through a historic banking deregulation bill that decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms—setting off a wave of merger mania.

But Gramm's most cunning coup on behalf of his friends in the financial services industry—friends who gave him millions over his 24-year congressional career—came on December 15, 2000. It was an especially tense time in Washington. Only two days earlier, the Supreme Court had issued its decision on Bush v. Gore. President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown. It was the perfect moment for a wily senator to game the system. As Congress and the White House were hurriedly hammering out a $384-billion omnibus spending bill, Gramm slipped in a 262-page measure called the Commodity Futures Modernization Act.
"Nobody in either chamber had any knowledge of what was going on or what was in it," says a congressional aide familiar with the bill's history.

It's not exactly like Gramm hid his handiwork—far from it. The balding and bespectacled Texan strode onto the Senate floor to hail the act's inclusion into the must-pass budget package. But only an expert, or a lobbyist, could have followed what Gramm was saying. The act, he declared, would ensure that neither the SEC nor the Commodity Futures Trading Commission (CFTC) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

It didn't quite work out that way. For starters, the legislation contained a provision—lobbied for by Enron, a generous contributor to Gramm—that exempted energy trading from regulatory oversight, allowing Enron to run rampant, wreck the California electricity market, and cost consumers billions before it collapsed. (For Gramm, Enron was a family affair. Eight years earlier, his wife, Wendy Gramm, as CFTC chairwoman, had pushed through a rule excluding Enron's energy futures contracts from government oversight. Wendy later joined the Houston-based company's board, and in the following years her Enron salary and stock income brought between $915,000 and $1.8 million into the Gramm household.)

Phil Gramm should be investigated for his collusion with Enron and Wall Street in executing the most massive white collar crime spree in the history of the planet.

NMRod

Definitely Phil is in the midst of a mental recession. Here's hoping our economic one isn't as intractable.

justintime

Besides his "predatory borrower" quip, Gramm is also known for these quotes:

"Most people don't have the luxury of living to be 80 years old, so it's hard for me to feel sorry for them." - (in response to a statement that a Social Security proposal would hurt people over 80.)

"We have sort of become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness."

"This is just a mental recession"

NMRod

It's not much of a compelling answer to pronounce facts that one disagrees with, because of ideological bias, as nonsense.

I suppose one might as well say that putting depositors' money behind locked doors, with access through tellers watched by security cameras and storage in a safe (the equivalent of oversight, accountability and responsibility - yes, regulation) couldn't prevent bank robbers from walking in and scooping up as much wads of cash from a trusting bank without those precautions as their predatory instincts allow.

One might even allow, that such a bank (and it is now without doubt that such ersatz banks exist in mid-Manhattan) must actually be run for the benefit of such scoundrels.

Lack of oversight and regulation don't happen by accident - it was all for a purpose, but not to serve the likes of you or me.

Only to serve the well-connected greedy, of which I must insist not all of us are, not even among non-Christians.

If one falsely insists that all of us are greedy, that being a particular sin, one might as well posit that all are child molestors, too.

Libertarianism becomes a reductionist fallacy, when carried to absurd extremes. Next you will be arguing for the abolition of traffic laws, so that the flow of traffic can "adjust freely, quickly, though often catastrophically." The results would be shocking, and the victims would need more than band-aids. All that broken glass I see at intersections is the spoor of those who didn't believe in red lights.