The popular narrative about the financial crisis/ housing bubble is that predatory lending practices tricked unsuspecting consumers into buying homes they couldn't afford, driving up home prices to unsustainable levels in the process. Then when home prices inevitably went down the lenders took homes away from these people, making billions of dollars in exorbitant profits in the process. Oh...and no one went to jail.
If you haven't seen the movie The Big Short I actually highly recommend it. Not only is it highly entertaining but it does a great job of explaining what took place. The movie is best when it's dealing with factual information. It lost me when it started delving into social commentary - like I am right now.
Just to clarify a few aspects of what took place during the bubble years:
- If you buy a home what part of "this is your monthly payment" don't you understand?
- This whole thing was partly driven by the government which wanted to push home ownership rates to levels never seen before - and they succeeded. The whole country was on board with this because home ownership is seen as a universal good in this country.
- So a lot of people who had been renting became homeowners and moved into homes much nicer than what they had been renting
- Some of these people lied about their incomes in order to qualify for mortgages. That would be called mortgage fraud.
- Once they defaulted these people were able to live in these nice homes for up to 2 years for free before they got kicked out. Many people who knew how to play the game made out like bandits.
- Some people used the run up in home prices to refinance their homes, take money out, and finance a "better" lifestyle. They made out like bandits.
- Many people were totally pissed that they were losing these homes so on the way out they trashed them. You would not believe what I've seen.
- The lenders and investors lost their assess. They did not make billions.
So how exactly is it predatory when you fully disclose the monthly payment and give someone a ton of money that you never get back? I never got this. No doubt there were some really bad characters in this whole story. But there was far more stupidity than there was maliciousness. Losing your money to someone is not malicious.
Now, to be fair, there was a ton of collateral damage done to people who did not participate in the madness. They stayed within their means and made their mortgage payments but eventually they lost their jobs and their homes because the global economy went down the toilet. But that is a separate issue related to the fallout of bad economic practices of this magnitude.
Regardless of how you see the past we can probably all agree that loose lending standards are not a good thing for the housing market or the economy. Fortunately, in the aftermath of the meltdown lending standards tightened and loan defaults plummeted. But it didn't take too long for politicians to start decrying the plunge in homeownership rates (back to historic norms I might add). And guess what? There are programs out there once again where you can buy a home with only 3.5% down.
But wait! It gets worse. Yesterday I hear about this bank in New York, Quontic Bank, essentially bringing back the worst of the bad loans - the no-doc/ low-doc/ stated income loan, also known as the liar loan: Bank requires few mortgage documents: Seems like housing deja vu. Except this time it's called the lite doc loan.
According to that CNBC article "It requires only verification of employment and two months worth of bank statements. For self-employed borrowers, it requires documentation of one year of profit and losses. The Lite Doc loans are five-year adjustable-rate mortgages with interest rates in the low- to mid-5 percent range." That compares to fully documented 5 year ARMs that are at around 2.9% today.
The loan also requires the home to be owner occupied and also requires a whopping 40% down payment, which makes total sense because if you are lending money under these terms you want to make absolutely certain that no matter what happens you are going to get your money back. During the bubble years the original liar loans never required down payments that large.
Of course, it's some kind of government program that facilitates this kind of lending. Normally banks would have to make sure that borrowers have the ability to repay the loan. The government requires this because you can't be trusted to figure this out yourself if you are either borrowing the money or lending the money. But this bank is part of a special class of banks that are exempt from this rule because they officially fund economic development in low income communities. They are a Community Development Financial Institution, which apparently also means that they get some kind of government subsidy. In other words, if you operate in a low income community where people might have trouble repaying their loans you don't have to check to see if your borrowers can repay your loans. Your government at work.
The best part of this whole story is that apparently having this special status allows Quontic to make these loans all across the country, and not just to low income people. Your government at work.
So then CNBC gets this Bruce Marks guy on TV. He's the CEO and founder of the non-profit Neighborhood Assistance Corporation of America which makes loans to low income people. You can find his interview at 1:55 in the segment below. It only takes him about 10 seconds to start throwing the P word around - like these borrowers have no choice in getting these loans. I'm thinking that even non-profits don't like competition.
Bruce proceeds to talk out of both sides of his mouth. He's simultaneously angry that these loans are bad for consumers while also lamenting the fact that they will end up helping higher income people rather than lower income people. So which is it Bruce? Do these loans help or not?
Nevertheless, the one thing I can agree with Bruce on is that it seems unwise to lend money to someone without verifying that they are going to be able to pay you back. It's just that I wouldn't call that predatory. I'd call it stupid.
Gary Lucido is the President of Lucid Realty, the Chicago area's full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.