There has been a lot of news about the subprime lending problem in the lending community. Ron Shevlin posted his take on a newsletter by Don Peppers and Martha Rogers. I agreed with him until he got to the personal accountability part.
So let’s get this straight: Consumers went looking for loans, lenders paid people to sell these loans, and customers decided on their own free will to take the loans. And now someone wants to come along and blame “short-termism” for the situation? Sorry, I’m not buying it.
We live in a society (here in the US, at least) that places great emphasis on owning your own home. Many people who suffered “subprime woes” were simply trying to get their piece of the American dream. At the time, the lenders were heroes for helping them make it happen — but now they’re the villains, when the situation turns for the worse.
What is being missed, in a lot of cases, is these people weren’t looking for loans. They were being targeted. As Ron said, being a homeowner is part of the American Dream. So imagine, you see all these people buying homes. Your household income is $45,000 a year and you have about $5000 of debt. One day, you open your mail and see a letter that explains that you may be eligible for a loan to buy your first home. There is even a low interest rate. Being somewhat cautious, you call the number and setup an appointment. After meeting with the broker, they explain that yes, with your income and first-time home buyer status, they can set you up with a 100%, no money down loan, for a $150,000 home. They can do this by offering you an adjustable rate. Plus, rates are so low now that if the rate goes up, you can just refinance. Well this just sounds great. Besides, Sharon, your co-worker, got one of these ARM thingies to buy her new house. So this must be on the up and up. And her mortgage is a tad bit more than what her rent was. And you get to build equity for yourself. Sounds like a dream come true to me.
So you sign your name on the dotted line and everything is just great for the first two years. Then, you get a letter saying that your interest rate will adjust because “prime” has gone up. To your horror, you see your new payment is $400 more than what you pay now. You call your broker so that you can refinance but they tell you that you don’t have enough equity in your home. So now you’re stuck, and after six months of delinquent payments, your American Dream is shattered.
This is what has happened in a lot of cases, even more so in minority communities. A couple of months ago, a forum was held in Charleston, SC about the targeting of minorities for subprime loans. This came about because Charleston, SC and Greenville, SC were #1 and #10 in the nation for the differences in what whites and non-whites paid for their mortgage loans. Interesting enough, the Charlotte Observer reported in 2005 that even blacks with incomes above $100,000 a year were charged high rates more often than whites with incomes below $40,000. New analysis found the gap between blacks and whites widened slightly in 2006. Another thing that is being missed is the slow decline of whole neighborhoods. Charlotte, NC and New York are two examples that are seeing the effects of this.
I used to think that mortgage brokers were the primary culprits in this sub-prime fiasco. But have you noticed that some banks have been closing their subprime divisions? Read any news about Countrywide, Wells Fargo, or Washington Mutual lately? The NAACP has even named Citgroup Inc, HSBC Finance Corp., Washington Mutual Inc., and others in a lawsuit about their subprime lending practices.
A few years ago, I also had an ARM on my home. When I sat down to close on my house, no one told me what my mortgage payment could adjust to if the rates went up. And I work for the bank. Fortunately, I read up on ARMs and knew exactly what I was getting into. I bet I’m also one of the few people that actually reads all the documents in a loan closing. I’m willing to bet that if someone, either the broker, lawyer, or real estate agent, told these people that their payment could increase by $400 to $1000 in a worst case scenario, there would be a lot less problems now. Especially since everyone working in the industry knew the rates would go back up eventually. I mean, we did have record lows, and what goes down must come back up. Telling someone that their rate may increase from 5.25% to 11.25% doesn’t mean anything. Telling them that their payment may increase from $1100 to $1950 gets the point across in a hurry.
So, in the end, I agree that there should be some personal responsibility. But a majority of the fault falls on the lenders that purposely put those people into a predicament that they knew was detrimental to their financial health. That act alone puts a black-eye on the lending industry and is completely inexcusable.
