people still don't get it.

Reader comment on: Obama on Predatory Lending

Submitted by ben (United States), May 16, 2010 21:20

The person who wrote in is a scary individual, but surely not alone in the way he thinks. The line that most stands out is the "market will sort things out." This line actually makes my stomach turn. This social Darwinist attitude has some scary antecedents. The survival of the fittest attitude quickly leads to a kind of thinking that the rich are rich because they are smarter, black people must be dumber because they are over represented in high interest loans and foreclosures, and the poor deserve to be poor because they are lazy and stupid. After all, the market has sorted things out, so those without are obviously inferior to those who have - right? It doesn't recognize the fact that a free market is not the same as a fair market. Having no rules privileges those who already have power and capital over those who don't. (as much as people on the right like to think everyone starts from a clean slate, this is obviously not the case).

Predatory lending is a good example of this attitude at work. The New York fed has a pretty straightforward definition - "We define predatory lending as a welfare-reducing provision of credit. Using a textbook model, we show that lenders profit if they can tempt households into "debt traps," that is, overborrowing and delinquency." When a person enters into a relationship with the bank, they do not have as much information as the bank. The average person is not an expert on variable rate mortgages, option ARMs, floating interest rates and the general housing market. Many mortgage originators and the banks that underwrote loans took advantage of this dynamic, and the lack of regulation allowed this predatory lending to take place. Many people were given loans by banks which could reap the fees, repackage the loans and sell them off. It didn't matter to the mortgage broker or bank if the person could repay the loan. Contrary to the example the person in your post cites, the mortgage brokers were not taking risks. They got paid when the mortgage was made. These are predatory loans. These loans were disproportionately targeted at communities (African-American and Latino) of people who have historically not had access to credit. In fact, in many cases, testers have shown that African-Americans and whites with the same credit histories and incomes (in these studies, the African American or Latino tester is given slightly better credit than the white tester) received far different interest rates. Those in "the know" were profiting off the hopes of those who knew less. This is predatory lending.

So, back to the original point of the post. What does Obama want to stop? Hopefully, he wants to stop banks and mortgage originators from giving loans to people for whom the loans will harm their welfare. Is this a nanny state? No more than having an FDA insure that our food isn't going to kill us. People should not be expected to be experts on every aspect of their daily lives, including issues of finances. Setting rules of the road that make it difficult (or preferably criminal) to take advantage of the powerless would make our society more just.

The last point (surely there are more) to make is this person's assertion that by restricting predatory lending we are limiting the ability of the market to "solve. . the problems real people have." This is such a comically ridiculous statement I don't know where to start. I guess I would point out that predatory lending has resulted in hundreds of thousands of foreclosures of "real peoples'" houses. These real people would be far better off if they had received a prime loan (which many, had they been white, would have gotten) or been told by the bank that they could not get a loan at all. Please let me know how many peoples' problems were solved by adjustable rate, interest-only, option ARM, or balloon mortgages? Please, tell me how many "real" people are better off now because the market invented synthetic CDOs.

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