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Suprime Woes – Who’s to Blame?
By JLP | April 15, 2007
This was the Question of the Day a few weeks ago. Today I found this article by Les Christie over on the Yahoo! Personal Finance website that listed several culprits of the subprime lending woes:
Mortgage Brokers
Appraisers
Regulators
Lenders
Wall Street
Real Estate Agents
Here’s what’s interesting: the orginal article only mentioned borrowers in passing, which provoked a lot of readers to write in. Read the article to see what I mean. There’s NO DOUBT in my mind that the borrowers must hold MOST of the blame. Why? Because THEY signed on the dotted line. All the hype doesn’t matter. Unless they were lied to or had a gun pointed to their head when signing the papers, they have to accept the blame.
Topics: Credit, Housing Market, Mortgages | 15 Comments »
April 15th, 2007 at 10:47 am
Borrowers are not without guilt, but I also blame our culture of consumption.
April 15th, 2007 at 3:12 pm
I’m confused. How exactly is it the borrowers fault that these businesses made bad loans and as a result of poor decisions are now failing?
Without a doubt, borrowers must smarten up. I’m just not sure why any business should be allowed to present data in a clearly misleading way, or to take advantage of people who are clearly mentally disabled. (A minority of cases to be sure, but they are out there.)
An Option ARM or any sort of negative amortization loan is clearly not an appropriate loan for someone makes $30k a year, and it should not be permitted to be sold as such. Plain Language disclosures should be required of all lenders. Criminal and civil penalties should be enforced for lenders who break the law. I really don’t think its too much to ask of lenders to be honest.
And while we are at it, how about helping people help themselves? Lets expand funding for programs to better educate consumers. Between classes, government sponsored websites and pamphlets, perhaps coupled with federally sponsored advertising to let people know of what help is available to them would go a long way to preventing such a disaster from ever happening again.
April 15th, 2007 at 3:39 pm
Tom,
I think the borrowers must share a huge portion of blame because they were the ones who agreed to the terms. They may not have fully understood the terms at the time of the signing, but that’s really not an excuse. I mean really, we’re not talking about a small purchase here.
I’m not trying to say that banks, lenders, mortgage brokers, etc., are not to blame. I’m just saying that too many people do whatever their heart tells them to do and then point the blame at someone else when they figure out that they’ve made a mistake.
April 15th, 2007 at 3:48 pm
Unfortunately, the average person is not able to understand the typical mortgage or credit card terms, or even their cell phone contract. (PF Bloggers, and readers of PF Blogs are mostly not in that group.) Now I’ll certainly agree with you that they should have gotten help, but its not easy to admit that you don’t understand something, especially when you don’t have anywhere to turn to. And the people interested in making a buck off of these consumers have little incentive in helping them to make sense of it all. They’ll just smile and show you where to sign. If these people were not lied to, many of them were at least misled.
Personally, I have a hard time assigning them a majority of the blame when the tools they need to help themselves are not available.
April 15th, 2007 at 4:41 pm
Tom,
I hear ya. Unfortunately, who’s fault is it that the average person doesn’t understand a mortgage?
“Personally, I have a hard time assigning them a majority of the blame when the tools they need to help themselves are not available.”
I’m not buying this. I bet most of these same people who don’t understand mortgages are the same people who have cell phones and know how to instant message. What do you bet? It’s not that the tools aren’t available, it’s that people DON’T CARE. The tools are available. There’s libraries, the internet, personal finance blogs, newspapers, websites, magazines, books,… How many tools do we need?
April 15th, 2007 at 7:23 pm
I blame the the borrowers and the culture of consumption as well as our culture’s disdain for education which breeds ignorance in every aspect of life including finances. Lenders are also to blame, but to a lesser degree, because they became over-zealous in looking to make a buck and mislead people. On the other hand, people would be outraged if they didn’t lend to people with poor credit or low net income.
I still believe it is on people to become educated about what they’re getting into especially when you’re spending several times your annual income on a purchase. And don’t say the tools are available to these people either; they’re able to walk into a public library and hop on the internet any time to research the terms of their mortgages.
Ignorance as a touchstone of American culture is the real problem.
April 15th, 2007 at 7:26 pm
JLP,
I hear ya. Unfortunately, who’s fault is it that the average person doesn’t understand a mortgage?
I think you could make a very strong case that it is the fault of the banks and brokers. Do they really need to make the documents dozens of pages long and all written in technical language that is not very accessible to those outside the industry?
And I don’t think that the information to help consumers is very accessible. I don’t even know what reputable website I would send someone to for information about ARMs. Where in the library is someone supposed to look to see if they are getting screwed? With all due respect to you and other bloggers, you guys should not be, and simply are not a very good first line of defense for consumers in this case.
As one simple example of how the government could help disclosure, look at what is done for home equity lines of credit. When applying for a HELOC, applicants must be given a handout from the federal reserve which explains how it works in plain language. (This is a regulatory requirement.) It spells out very clearly that interest rates can and will change, and what the historic averages have been among other important points. If a similar disclosure were given to consumers applying for an option ARM I’m willing to bet a large number of people would not go through with the loan. Those who don’t, well then I can say they were adequately warned and they get what they deserve.
April 16th, 2007 at 6:55 am
Ignorance is bliss – and most people are making that claim.
They choose not to read into the terms, they choose not to understand, and they choose to believe that their lender/Realtor are working in their interests (I know – some are, but the point is some *are not*).
People are only interested in the immediate – what I have to pay right now – and not in the future (they said I could refinance for lower payments, plus.. equity! better credit for me to max out!)
It’s one of those things that’s lead me to heavily weigh my house buying options (and continues to do so).
April 16th, 2007 at 8:20 am
It’s up to the consumer to be educated. If you don’t understand what’s going on, you shouldn’t be making the purchase.
Hand-holding and spoon-feeding stops at 18; unfortunately, most Americans have a hard time getting this.
Go read a book, a few Google’s and looking around on Amazon and Barnes and Noble reveals several sources that can aide the consumer in being knowledgeable.
April 16th, 2007 at 8:44 am
I’ve been buying foreclosures for the last few months and after speaking with the borrowers, I’m convinced every one of them knew that they made a foolish decision to get the loan they did. They had unrealistic expectations and were unprepared for any blip in their finances. None had an emergency fund. Yep ,they often had sob stories but it wasn’t the banks fault.
April 16th, 2007 at 9:29 am
I agree with you, Paul. I think the percentage of lenders who actually deceived their clients is very small, compared to those who just fell for the ’sale’ knowing full well what the terms were. Owning a home is the American dream, I would dare say we see it as an American entitlement. Buying on time is the new family budget, and how many of these people buying into teaser-rate loans said “sure, I’m working at McDonald’s now and have $20k in credit card debt, but in 5 years when this ARM adjusts I’ll have a better job, have the debt paid off, and can refinance into a better loan.”
And it didn’t happen, or they failed to adjust their budget in preparation for the upcoming rate hike – something they should have started from year 1, or their debt increased!
Or worse they were already deep in debt with a nice mortgage and mountains of equity, and fell for the ‘refinance and consolidate’ loans, dumped their unsecured debt into their house (with poor terms due to their now poor credit) and fell back into the debt trap years later – leaving them with a bad loan, more debt, and a mortgage payment that suddenly jumps a quarter.
A CNN article recently said that the most common subprime at risk of default was a refi. If you’re refinancing with bad credit, this makes me think other problems exist driving you into the bad loan, the last card before the whole thing collapses.
I put borrowers at the top of that list (and am shocked and disappointed that they aren’t even on the list at all!) and blame lenders, brokers, etc for only a small percentage of these loans. An even smaller percentage warrant investigation.
However I will admit that when purchasing my house, even after doing exhaustive research in books and the internet regarding purchasing a home, mortgages, loan terms, rates, taxes, escrows, insurance, etc…the final loan documents were still a struggle to read and understand.
April 16th, 2007 at 12:34 pm
You’re not comparing apples to apples when you say that “the average person is not able to understand the typical mortgage.” Subprime borrowers are not “average” which is why they need a subprime mortgage in the first place.
April 16th, 2007 at 1:20 pm
Of course the borrowers made bad decisions, but they’re not really the ones holding the power in this situation. People are going to make dumb decisions. It happens all the time. It’s in the best interest of those holding the cash (lenders, brokers, agents, wall street, etc) to make sure that their industry has safeguards against things that could be easily predicted, ie, that some people are going to take out loans inapprpriate for them. It’s institutionally short-sighted.
April 16th, 2007 at 3:15 pm
Just wondering if you saw the lengthy post I wrote about this on my blog….
April 20th, 2007 at 7:33 pm
Oh no! Personal responsibility and accountability? What next – letting the average person vote!
What’s the world coming to?
-Frank