Part I: Making the Borrower Pay for Deeply Flawed & Predatory Lending System
Originally & fully posted at TexasKaos.com
George Bush likes to brag about how his administration has seen one the highest levels of home ownership ever. That fact, like everything else Bush has ever said, needs to checked further. There is a crisis brewing, one that he and his administration has been aware of for some time but have done nothing to stop.
In fact, by downplaying financial warnings and by optimistically pumping up home ownership like its some big party, he has misled the American consumer into jumping into economic waters they simply weren't prepared to swim. But like Iraq, Bush will leave this mess for someone else to clean. Roll up your sleeves because that's going to be you, me and every American who doesn't have a rich daddy to save them.
| Last month, the nation had the largest number of foreclosures ever recorded. Over 176,000 Americans lost their homes. That's double last year's rate - and it is expected to get worse. Much worse.
The source of most of the foreclosures are subprimes loans, or loans to borrowers with poor credit typically using Adjustable Rate (ARMs) loans. Two MILLION ARMs are coming up for "adjustment" over the next two years. Some analysts predict over 1-2 million people will lose their homes due to rising mortgage rates.
Think about those numbers. That's 1 in 656 homes going under. One in Five subprime loans will end in forclosure. That's an American Family being thrown out of everything they love. |
The crisis is so large that it is threatening the economy of the United States (and therefore the world) and can push us into a recession. Ok, did I get your attention, now?
But who is responsible for this mess? Well, that's a bit complicated but it wouldn't be a stretch to say EVERYBODY! From home owners who bought more home than they could afford to brokers who just wanted to close the deals to lenders and bankers who turned a blind (and greedy) eye to what they knew would create a financial crisis.
And of course to Congressmen, politicians like Bush, and regulators who are in bed with the lending industry's lobbies.
Everybody in the lending system owes some responsibility, and when the crisis gets this bad, it affects EVERYBODY. Y'all better start paying attention or go home. Provided y'all still got one!
So who is reponsible?
Personal responsibility definitely, but don't stop there.
It would be very easy to blame the homeowner, and frankly there is definitely some fault there. We Americans love to live on more than we can afford - from maxing out our credit cards to maxing out on the home we can afford. The borrower should have done the math more carefully and honestly before signing the contract.
So let's just acknowledge that part right away. There is a level of personal responsibility we just have to maintain.
But it doesn't help when your President and leaders mislead American consumers into thinking the economy and situation is much healthier than they actually are. When your President's response to the staggering national and consumer debt is to "encourage everyone to shop," the typical cosumer can't be blamed for being too optimistic about the economy. And it's also ludicrous to believe that there aren't shady practices and scams which the typical consumer couldn't possibly know - without having a real estate law background or a relative in the industry.
The FTC has a site of common home scams and "fine print" techniques used by mortgage brokers and disreputable lenders that could con most consumers.
These however are just the illegal scams. I would add the practice of pushing borrowers into subprime loans even when they were qualified for standard loans as another scam. Brokers made more money from these subprime loans and many irresponsibly misled their clients towards these subprime loans. I would hope that when (if!) Congress reviews the lending industry as some are calling for, that they find a way to prevent these brokers from misleading their clients.
Working class families foreclosing.
Typically, we associate these unfortunate consumers with low-income or minority borrowers who don't have the education or the family history of home ownership (and therefore someone to advise them) to prevent them from falling into a lending trap.
But there is a disturbing trend in the demographics of borrowers facing foreclosures. It's not just low-income or unemployed families who are losing homes. What's disturbing about the trend is that thousands of working families with decent income (and all ethnic groups) are losing their homes as the adjustable rate period expires and their notes go up hundreds of dollars in a single month. Especially vulnerable to rising costs are retirees on fixed incomes and anyone hit hard by medical bills.
Jayne King, of Delray Beach, battled cancer, diabetes and other illnesses during the past few years. Last year, she and her husband fell behind on the monthly payments on their adjustable-rate mortgage, as she was trying to make a dent in her hospital bills and he was out of work after two car accidents only weeks apart.
They filed for bankruptcy, promising to repay as much of their debts as possible. A lawyer worked out a plan with their lender that allowed them to keep their house. "I’m just one of many people caught up in this whole cycle," said King, 55, a retired teacher and native Floridian. - South Florida Sun-Sentinel
So white, black, Asian, men, women, single mothers, working families, the poor - it's can affect anybody.
It would be lazy - and wrong - to blame the borrower and leave it at that. There is a real danger also in scapegoating the borrowers because a crisis this large can devastate entire regions affecting every business and every one of us. And if we don't resolve the underlining conditions which created the crisis, we're doomed to repeat it over and over.
The Lending Industry Pushing Americans Over
A crisis this large does not happen overnight or simply because of individuals. Something drove or aided those individuals in jumping over the cliff. Something swept American borrowers into their tempting currents and sent them barreling towards a huge financial fall to smash into bankruptcy's rocks below.
That something is the whole mortgage lending system which relied too heavily on irresponsible loans for the past several years. You expect scams to exist but when the system itself is gaming you, what then? Lenders, brokers, and banks knew they were playing with dynamite (and people's lives) but saw the profits they were making and just shrugged it off.
| And provided it doesn't get too large, the lending industry can shrug this crisis off. Just this year, six of the largest high-risk lenders filed for bankruptcy. The companies and the executives who ran the companies into the ground will be protected from creditors, which will make the creditors only come that much more harder after...you guessed it...US, the American consumer.
And thanks to the awesome "bankruptcy reform" that Congress, with the help of George Bush, the Republicans, and some Democrats, the American consumer will not have the protection from this crisis that the lenders who knowingly created this mess will have.
Give Joe MBNA Biden a big Thank You next time ya see him! |
Again, consumers should have been more careful, but the system of lending that relies on mortgage brokers and predatory lenders who sell the loan to a larger lender is inherently flawed and corruptable. These brokers and lenders held the loans for too short a time (1-2 months) to care about the long-term impact of the loan. And since they made more money from subprime loans, they had every incentive to push these subprime loans - even when the borrower was well-qualified for standard loans.
And there was no incentive for them to make sure the borrower could afford the loan past the past two years of the loan. The broker and origianl lender colluded to get approval of subprime loans (often by purposely avoiding simple verifications or by outright lying) and they pushed the long-term interests of the loan to the final lender.
And this lender who finally would be responsible for any defaulted loan couldn't say no to the loans because the money was too good to pass up. Ultimately, many of them must've decided that they would just collect from the borrower or, as at six of them have done, declare bankruptcy and can escape their creditors. Executives who ran these companies into the ground can "retire" early to a healthy severance package. The employees and company, like ENRON, aren't their problem. That's someone else's problem?
And whose problem is it? That's right. The borrower who is the only one without bankruptcy protection or the financial means to fight the creditors coming after him.
The entire system will press down on the borrower in an attempt to make the borrower pay for the inadequacies of a deeply flawed system.
Lenders knew they were taking a big risk with these subprime loans and instead of facing the music, they want the consumer to dance. They want to make the consumer pay for the fact that they got burned.
So everyone screwed up. The borrower, the broker, the high-risk original lender, and even the final lender - but it's going to be the borrower who is going to get squeezed.
Now does this affect you if you're not a subprime borrower? Yes. It's YOUR problem. It's the whole nation's problem.
The foreclosure and housing crisis cooled by 1% the national economic growth and we have yet to reach bottom.
If 1-2 million foreclosures occur over the new few years, as some analysts predict, that growth will slow even more and can send us into a recession.
It is that alarming prospect that has mad even this administration finally pay attention and acknowledge the seriousness of the problem. And Wall Street is even beginning to notice.
Because, you can stroke yourself all you want for that high flying stock you got on Wall Street, but when the whole economy crashes or goes into a recession and jobs are harder to get or your wages drop because of foreclosures and a depressed housing market, you may need those paper stock certificates to sleep on!
So to conclude Part I, yes, the borrower has some responsibility for the crisis. However, I would contend that given the complexity of the lending industry and mortgage loans, the borrower is least responsible of all elements in this crisis.
There were bigger players who knew what they were doing and still walked us into this mess.
Those players are the brokers, lenders and regulatory agencies which should have known (and did know) better, and yet they did - and are doing nothing.
Let's not scapegoat borrowers or get lazy with our analysis or we'll repeat this crisis again.
Tomorrow, I'll have Part II. Hope to see ya then. And if you've got some points to add, please do.