I Am a Predatory Borrower

I don't think that makes you a predatory borrower, but I am glad that you wrote this post.

When I graduated college, those of us with student loans had to go to a one-time class on paying it back. The guy there told us to consolidate every chance we got so we could pay it off at one low interest rate. That was the worst advice I've ever gotten.

When those student loan consolidators call, hang up. You're signed up before they send you the paperwork, and they are NOT looking out for your best interest. They are looking to make money off of you.

My dad had always told me that banks will qualify you for more you can afford -- and that your lodging should only cost you one week's pay. That was the cardinal rule forever, but in the last 20 years or so, they've tossed that rule, and housing prices sky-rocketed. All that's to say, I didn't go over my head with my house payment, but no one warned me about the student loan thing.

This is troublesome. I have just entered graduate school, and am having to borrow heavily to do this. Luckily, I'm studying economics, so I know that the cost of the loans is much less, even with interest, than the value that going to school is adding to my earning potential. I'd be more skeptical if I were studying in the humanities! ;)

There seems to be a set of deeper underlying problem here which vilifies the lending agency.
1. To be sure, the lender should find it in their own best interest to share with borrowers the exact conditions of the agreement, so that there are no hard feelings. But many college loans are federally subsidized. The competitive environment that should keep the lenders friendly, and customer-conscience have been eroded. The transaction becomes less about pleasing the customer by attracting her away from other potential lenders, and more like paying your taxes.

2. Present-Value discounting. Do a wikipedia search on it. The idea is quite simple, which would you rather have: a. $1000 a year from now, or b. $950 today? If you answered b. it is because you know that if you put that $950 into the bank today and earn 5% interest you will get the $1000 out in a year. If you get better interest than 5%, you get more than $1000! Extending your loan is the same idea, in reverse. You are not paying more, you are paying later. If you expect long-run earnings to increase you would actually do best to extend repayment of college loans as long as possible. Get an economist to explain it to you.

3. Absolution of responsibility. For a very long time Americans lived by the motto "buyer beware." This meant that before you bought something you would do your homework, talk to trusted friends and relatives or experts, then wait a month before making a serious decision. Today it seems we want the government to do our homework for us. The question then becomes, why do you trust the government? But you all know where I stand on that one!

Many times I find that advocacy for government action can be replaced with advocacy for personal responsibility, with much better results. I find Christian assumption of responsibility for the least of these much more ethically plausible than safety-net programs. I find Christian responsibility for lending to the poor Biblical. I find Christian care of needy mothers and their unborn children preferable to manipulating the legal system to outlaw abortion. There is a consistency to this ethic: renounce force and eliminate privilege.

Nathanael Snow

If you got a lower interest rate (which you said you asked about), then you can offset the lengthened term simply by paying extra toward your principle, and come out ahead. Alternately, you can use the flexibility of a low interest rate to manage your debt. I don't see the problem. If you default on your loan, using this as an excuse, you might not be predatory, but I would certainly not be impressed.

This is nothing like what fraudulent mortgage brokers have done to sell horrendous loans. Phony amortization schedules, fake TILA's, and bait and switch schemes have trapped a number of borrowers. That's fraud. You were not a victim of fraud.

And neither are many of those who are simply opting not to pay off their home loans. In some communities, people are securing loans for foreclosure properties, moving, and then foreclosing on their own properties.

Others have profited handsomely by flipping houses, but are bailing out of their loans once caught in an investment that is losing money. Still others are using foreclosure as a cost-saving measure, knowing that their property is years away from a profitable sale, and knowing that banks will take years to reclaim their asset.

Believe me, the phenomenon exists. A homeowner bailout will exacerbate the problem, as the government will have created an incentive to foreclose. If you have a $200,000 loan on a house now valued at $150,000, wouldn't you be tempted to default and get a write-down. Less-scrupulous people wouldn't bat an eye before doing so.

A proper approach would target those homebuyers who went into their purchases with good credit, and were victims of fraud. Alas, federal government doesn't deal in nuance, so we get these all-or-nothing options.

But predatory borrowing is very real, and we're paying for it. Don't pretend otherwise.

There are many rational reasons to use debt--and most of them, in the end, put people in bondage (has put the world economy in bondage as far as that goes). I suggest going debt-free for ten years and taking one common debt payment (e.g. $350/mo car payment); save half of it to invest in persons' lives as God leads and the other half towards building wealth.

If after ten years it looks like, "Wow, I could serve others and advance my capacity to serve, better by taking on debt"--then I might affirm the decision.

Thanks for the 'ordinary' story. Let me tell you another 'ordinary' one I see.

Down on the corner from my home congregation in Minneapolis is a long-troubled duplex. Long owned by the worst slumlord/investor in Minneapolis who worked at the local post office by day. He was a master of working the system against itself. Finally, about eight years ago he got his license yanked and the city forced a sale. As he liked to do, he convinced a tenant to buy the property on contract at a price he expected the tenant would eventually fail on.

Interestingly, in this case the prices really escalated. And the new owner's property value went from about $75,000 to $225,000 in a few years.

This part of Minneapolis was full of both fraudulent activity and subprime loans. Things started collapsing in 2006.

Somehow this duplex was sold in Summer 2007 for $270,000. Apparently someone fronted as a buyer. Got a mortgage. The owner/seller walked with the sale money. The front buyer likely got some kind of kickback.

One year later it is in foreclosure. If you are interested in buying, it is on the market at $43000 which means you could probably have it for $25000 cash.

It's just an old duplex in lousy condition on a corner long infested with drug trade. Who will buy. The most likely contender will be the landlord-investor or one of his friends snatching these up by the dozens.

And most homebuyers from our church and others in the community who bought since 2000 are now severely upside-down in their mortgages. We will again have hundreds/thousands of investor-owned, badly managed, properties in this one neighborhood. At best this will take 20 years to climb out.

I think this is incredible insight for us. Thanks!

The Snows of the world don't trust the government as much as they trust private enterprise - and then by making their highest ethic "Buyer Beware" they elevate the presumption of fraud and unethical behavior by the private sector to the only morality or justice we can expect - a utopia of social darwinism, where the strong consume the weak without restraint, might makes right and Greed is God.

"Predatory Borrowers" is a ideological fiction created to avoid having to admit to any blame on the part of all the financial finaglers who profited handsomely by making, selling, packaging, securitizing and insuring loans and debt instruments to the tune of trillions of dollars.

No one "forced" these billionaire entities into making their enormous profits, though we are now supposed to believe that they were innocent victims being tricked into making all that money and knowingly passing the leaky bags to the next unwitting but greedy sucker down the line.

Some of the cleverest yet cynically bankrupt intellectualism is being expended to hype up this canard. Why not? The writers from various right-wing think tanks, magazines and blogs are funded by thoe same special interests, and if they can put it over, the investment is worth another trillion or so of "No Billionaire Left Behind" bailout money.

This is the capitalism of reward for the few when successful and the socialization of risk for the many when it fails.

I'm afraid that as attractive as some conservative ideology has sounded in theory, in practice by its adherents it has proven thus far to have been the most egregious exercise in blatant hypocrisy - as well as enormously destructive in its consequences.

Such arguments amount to contempt of court of public opinion.

"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?"

Very simply put, people have to do the math for themselves. It is one thing about the student loans, but housing is something all together different. Anybody with any due dilliegence can find out what is a good deal or not. I got priced out of the housing market and didn't buy because I couldn't afford a payable loan. I saw an advertisement that said "$300K mortgage for $900/month)". I took a look at it. It was interest only. I read some columns explaining interest only loans. I deteremined it was a bad deal. Why can't we expect other people do the same thing?

People have to do a budget and determine if they can make the payments. Really, shouldn't people who were getting $800K loans while they only made $4K a month have known something was up? They were predatory in the sense that they were being just as greedy as anybody else. "I want a house, and I have to have one. I need one." Pretty materialistic. Me, I would like a house, but I don't have to have it. In many cases, people were trying to buy them to flip them for more money later.

Throw the book at these lenders - they've gotten us into a big mess. But don't bailout the homeowners - that is rewarding the people who were unwise and punishing people like me who were wise. It also may well keep housing prices propped up, pricing other first-time buyers out of the market.

Using the term "predatory borrower" to refer to anyone who got themselves into a bad loan isn't an accurate term. It should be reserved for the few people who actually knew what they were getting into and hoped to make a quick buck off of it.

However, there is a term for people who didn't do their homework or just assumed that housing prices were going to continue going up for ever: irresponsible borrower.

A clever turn of rhetoric, NMRod. If it's any consolation, not all the Snows agree, my sister thinks I'm nuts!
"Buyer beware" is not the ethic, it takes a good spin-meister to get that out of "be responsible". As for social darwinism, I don't even know what you are talking about. I believe in fair competition in the market place. I am against any kind of government-provided favors or privileges to corporations or individuals.
If you and I were to try to do a job together, how would we divvy up the labor? We would try to find out who could do what best. Suppose we we renovating a room, say, painting. It turns out you are better at cutting in, and I am better at rolling. If equally divide both tasks, it will take us 10 hours. If each of us does what we do best it will take 8 hours. But how are we to discover who does what best? If we had some sort of competition to demonstrate the skills, then we could find out where each of our comparative advantages lies. This is what competition in the market does. It tells us who does what best. If one firm puts another out of business, the losing firm disappears, but the people in that firm go do something else, until they discover that which they do best.
I suppose it is Darwinian in the sense that it involves what Schumpeter called "Creative Destruction."
But if the proposed alternative is government planning, the case has been proven for a long time now that such a method just won't work.
We are all greedy. The only thing which can overcome greed is a regenerate nature. Therefore charity is the full and exclusive responsibility of the regenerate.
NS

Former Senator and economics professor Phil Gramm is a predatory legislator.

Tim,

No you are not a predatory borrower. Phil Gramm was not referring to you, and hardly anyone would confuse you with the sort of person Gramm was talking about.

At worst you were a bit naive: you presumed you could trust a respected financial institution (whatever happened to the left's suspicion of capital? Never mind.) but you acted in good faith throughout, and from what you say you have both the means and the intention of making good on your loans.

Not everyone acted with that level of good faith. As loan criteria were loosened irresponsibly, there were borrowers who acted recklessly (Thinking "If they gave me the money, they must figure I'll be able to repay somehow.) and others who acted dishonestly (Free money! Woo Hoo!) Those are the people that Gramm was talking about. It was never people like you.

Political rhetoric can be confusing, so I'll give you some benefit of the doubt that you were unclear on the concept. It is possible that the number of "predatory borrowers" was not as great as Gramm believes. But even a Christian Socialist should be able to recognize the difference between honest miscalculation and bad faith, and understand that bad faith on the part of borrowers is every bit as bad as bad faith on the part of lenders. Please do not repeat this mistake.

LV

What has recently been proven, beyond all doubt, is that competent governance by those who don't believe in it, just won't work.

Therefore, if one wants good governance, the only solution, as we have just seen, is to vote into power who believe in being responsible and accountable.

Certainly one wouldn't place in charge of the space program those who were sure that if man were meant to fly, the good Lord would have given him wings - to use just one example of successful government planning.

Gramm's usage did highlight that bad transactions, by their nature, involved at least two willing parties.

And the whole fiasco involved many different willing parties. Each gradually escalated risky behaviors while attempting to minimize their own risk--hopefully passing any costs of collapse onto someone else.

A hard lesson we are learning is that systemic corruption ends up with systemic consequences. This argues both for and against public bailouts. On the one hand there was a systemic involvement in the creation of the crisis and hence should be systemically involved in getting us out. But with such serious ramifications to financial behavior how can we limit such behavior in the futue if we do not allow those who risked so much to bear the consequences of their behavior??

A key to me is to watch the behavior of those seeking bailout funds. Do they appear genuinely sorrowful and repentent? Are they seeking teh changes that would create a transparent and accountable sysem? Or just rushing to exploit a new pool of funds?

That's just utter nonsense. What has recently been proven is that governance can't prevent the market from shifting. If we try to regulate the market we just change the field of competition from the market to the boardroom, or the senate chamber. Competition is ubiquitous. Change is inevitable. The question is, what framework is most efficient for resolving changes and bringing things closer to equilibrium? (Notice, we never actually get there!)
Governance introduces increased lags, gaps, and interference. Markets adjust freely, quickly, though often catastrophically.
The shocking change will emerge, recent events have shown that band-aids don't work.
I don't care who is in office. The incentive structure of government is the same for everyone. I'd rather not have to base my optimism on the character of the individual in power. I'd rather that person have relatively less power to begin with. FYI I did not vote. My car has two stickers: Nobama and McCain't.
NS

2008 Nobel Laureate in Economics Paul Krugman ...
...described Gramm as "the high priest of deregulation," and has listed him as the number two person responsible for the economic crisis of 2008 behind only Alan Greenspan.[

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, 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 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 you or I.

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 is a reductionist fallacy, when carried to absurd extremes.

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"

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

...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.

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.

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.

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