Friday, December 21, 2007

Predatory Lending

Is George Will being deliberately obtuse?
Clinton is fluent in the language of liberalism, aka Victimspeak, so, denouncing "Wall Street," she says families were "lured into risky mortgages" and "led into bad situations" by those who knew better. So, lenders knew their loans would not be fully repaid?

Jesse Jackson speaks of "victims of aggressive mortgage brokers." But given that foreclosure is usually a net loss for all parties to the transaction, what explains the "aggression"? Who thought it was in their interest to do the luring and leading that Clinton alleges?
This should be a no-brainer. Mortgage brokers, who received a hefty commission when they connected borrowers with subprime loans, had no incentive to worry about whether the loans would be repaid. They had an incentive to steer borrowers to the loans which returned the greatest commission, regardless of whether it was the best loan for the borrower. Similarly, lenders who intended to sell their mortgages as soon as the ink was dry had little cause for concern that the mortgages would go into foreclosure - they made their money when they sold the mortgages, and the risk was passed along to the buyer.

I'm not absolving borrowers of responsibility. In a lot of these cases I have the reaction, "What were you thinking?" I'm not one to max out the loans on my home, spending every penny of equity (and then some) with the notion that real estate will inevitably appreciate by 10-20% per year. I'm not one to look at an interest-only loan with a teaser interest rate and not ask, "What will I have to pay when the teaser period ends - and can I afford it?" But I'm not going to join Will's insipid pretense that lenders thought that these were all good loans, or that nobody had an incentive to steer borrowers into mortgages for amounts beyond what they should reasonably borrow, or on terms which created significant risk of default, as it's patently untrue.

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