Monday, March 24, 2008

Predatory Lending: Why Conservative Economics Doesn't Work

It's immoral to let a sucker keep his money. --Canada Bill Jones

Latina's Loss in Va. Epitomizes Mortgage Crisis
Looking back, Glenda Ortiz can see she did everything wrong when she bought her house in 2005. In fact, to understand the housing crisis that has swept the country, one need only listen to the tale of the Ortiz family.

She looked at only one house and paid too much for it: $430,000 for a run-down, one-story duplex in Alexandria, triple what the house had sold for the year before, and $5,000 more than the asking price, according to real estate records.

She agreed to a high-interest loan that would cost her more than $3,000 a month, more than 70 percent of the $4,200 that she and her husband brought home monthly.

She signed papers in English that she didn't understand. One said she was married to a man she didn't know.

She placed her financial future in the hands of a woman she barely knew who sold cosmetics and jewelry door to door. She sought no one else's advice.

Her loan application sailed through an originator and was accepted by a mortgage company, both specializing in customers with "less than ideal" credit.

And so, in August 2005, Glenda Ortiz, a cook at a Best Western who lived in a cramped apartment in Arlington County, became a homeowner. By last March, the home was in foreclosure. The loan originator and mortgage company had gone out of business. And Ortiz was headed to court.


Now in conservative economics, this is all her fault. Mrs. Ortiz should have been more responsible. She deserves what she got. Now she'll know for the future.

But there are millions of people like Mrs. Ortiz -- people who maybe aren't really smart enough to understand what's going on in financial discussions, people who don't have a good support system to keep them out of trouble, people who are maybe pretty lousy at math, and may not even really understand English. Are we really going to say that it's okay for companies to give such people high-interest loans that they obviously cannot afford? (Her mortgage payments were more than 70% of their combined monthly income!)

"It's immoral to let a sucker keep his money." Is that America's motto now?

Loans need to be regulated. Just because you can find someone stupid enough or ignorant enough or even just irresponsible enough to fall for your predation doesn't mean that you have a right to prey on them.

A perfectly free market is an ugly one, "red in tooth and claw." This kind of predatory lending is just plain immoral, and it should be illegal, too.

34 comments:

G said...

One question: The fault then lies with whom?

Jewish Atheist said...

Well that is the question. The mortgage company is certainly at fault. Mrs. Ortiz is at fault if her ignorance is her own fault, and not if she's simply not smart enough to figure it out or was duped by her neighbor and/or the loan originator. There will always be people like her to take advantage of, so I think the thing to do is to create regulations so that immoral mortgage companies can't take advantage of them. That doesn't mean we shouldn't also try to educate people Mrs. Ortiz, of course.

Lawyer-Wearing-Yarmulka said...

Predatory Lending: Why Conservative Economics Doesn't Work

Unless there was fraud here, the economics here worked just fine.

Glenda Ortiz took out a loan that she obviously could not afford. With only rudimentary math skills to realize that your loan payments are going to take a huge chunk out monthly income. Odds are she bough t the house, thinking that the value would continue to go up, and she'd cash out shortly. She gambled, and she lost.

The bank gambled and lost as well. They've got no interest in lending money to someone who can't afford the payments. They too though prices would continue to go up and and Ms. Ortiz would sell or refinance.

But there are millions of people like Mrs. Ortiz -- people who maybe aren't really smart enough to understand what's going on in financial discussions...

Ah, yes. The old liberal rallying cry. We must protect people from themselves.

There are probably millions of people who aren't smart enough to raise kids. Yet we still let them get pregnant.

American citizens are not wards of the state. That's really the bottom line.

G said...

The mortgage company is certainly at fault.

--Why?

Mrs. Ortiz is at fault if her ignorance is her own fault, and not if she's simply not smart enough to figure it out...

--What???!!! (that's right, 3 of each)

Jewish Atheist said...

LWY:

Glenda Ortiz took out a loan that she obviously could not afford.

It's obvious to me, it's obvious to you, but is there any evidence that it was obvious to her? How do you know she thought it would keep going up? And if it's so obvious to you and me, why wasn't it obvious to the bank?

The bank gambled and lost as well.

Exactly. And if we didn't allow lenders to gamble with people's lives like that, they wouldn't have been able to do it.

Ah, yes. The old liberal rallying cry. We must protect people from themselves.

We must protect people from predators, within reason, even if they don't know any better than to stick their heads into the lion's mouth.

There are probably millions of people who aren't smart enough to raise kids. Yet we still let them get pregnant.

We as a society recognize the right to reproduce as a fundamental right that we are unwilling to take away from anyone.

American citizens are not wards of the state. That's really the bottom line.

I'm not saying the government should give Mrs. Ortiz a house! I'm just saying that there should be regulations to prevent lenders from taking advantage of people.


g:

If she literally could not understand that it was an irresponsible loan, how can it be her fault?

Orthoprax said...

JA,

And if the housing market continued to climb then everyone would be sitting pretty and government regulations only would've kept home ownership from millions of people.

As per the article: "According to the Center for Responsible Lending, 40 percent of loans to Latinos are subprime, and it projects that one out of five of these loans made in 2005 and 2006 will go into foreclosure."

Does that mean that 80% of those loans are projected to be managed successfully?

I don't know the particulars of this case, but I second Lawyer's post.

Orthoprax said...

JA,

"Exactly. And if we didn't allow lenders to gamble with people's lives like that, they wouldn't have been able to do it."

I think that a lot of these subprime borrowers were knowingly willing to gamble their own financial lives. Should that be impermissible?

Lawyer-Wearing-Yarmulka said...

It's obvious to me, it's obvious to you, but is there any evidence that it was obvious to her? How do you know she thought it would keep going up? And if it's so obvious to you and me, why wasn't it obvious to the bank?

Because even an idiot knows that spending 70% of your income on housing is not maintainable in the long run. But maybe in the short run it is. It was obvious to the bank. Like I said before, they probably though she would flip the property or refinance.

Exactly. And if we didn't allow lenders to gamble with people's lives like that, they wouldn't have been able to do it.

They weren't gambling with anyone's lives here, it's just money. Odds are Ms. Ortiz put little or no money down on this house. Whatever payments he made were basically rent.

We must protect people from predators, within reason, even if they don't know any better than to stick their heads into the lion's mouth.

I don't see any predators here. There's nothing predatory about charging high interest rates to someone with poor or no credit.

We as a society recognize the right to reproduce as a fundamental right that we are unwilling to take away from anyone.

And I and many other people see the right to contract as just a much a fundamental right.

I'm not saying the government should give Mrs. Ortiz a house!

That's not what wards of the state mean.

G said...

If she literally could not understand that it was an irresponsible loan, how can it be her fault?

--It can be her fault because ignorance, in this sense, is not a defense.

--Please answer as to how the mortgage company is at "fault".

Tigerboy said...

ortho says:

-And if the housing market continued to climb then everyone would be sitting pretty and government regulations only would've kept home ownership from millions of people.

Well, of course.

If the housing market, and all the other markets, continued to rise and rise and rise forever . . . everyone would be sitting very pretty, indeed.

Intelligent, educated, financially savvy people know that this cannot happen. Financially savvy people know that there must always be ups and downs in any market.

But millions of young (or otherwise inexperienced)
people DID NOT realize that.

Just a few short years ago, it was nearly impossible to find a first-time home buyer who seriously considered that they might lose money on their investment. Or even that they might make less than the appreciation everyone around them was getting.

(Our own brilliant President wanted to put everyone's Social Security into the Stock Market.)

Nobody was talking about the ups and downs of the markets. People were made to feel stupid and irresponsible if they DIDN'T have stocks, if they DIDN'T own their homes!

Add to that the fact that real estate (all business, in fact) has become hugely more complicated in the past decade. Just compare the thickness of a Real Estate licensing text book from ten years ago with a current one. Or the tax codes. Or creative financing. Financial shit gets harder and harder all the time.

And who benefits when financial shit gets more and more and more complicated? Those who understand it.

And who gets burned? The growing number of people who CAN'T understand it. (As someone who wouldn't even consider doing his own taxes, I can sympathize.)

People believe the mortgage brokers who tell them that they can afford this deal. Who's the expert, here?

Financing get more and more "creative" and people like Ms. Ortiz, who are just trying to provide their families with shelter, get talked into things that they increasingly can't understand. Everybody says you are a fool to rent, right?

They certainly used to.

People who prey on others in this way are not good business people. They are vultures.

It is in the best interests of this society to protect its citizens from loan sharks and thieves, including those thieves who are talented at dressing up their thievery in complicated financial tomfoolery.

Orthoprax said...

Tiger,

As was gone into a little earlier, many of these lenders are just as much victims of market circumstances as the borrowers. They gain nothing by giving out loans that won't be repaid. Many of these firms have declared bankruptcy.

In the meantime, however, many of those who took advantage of subprime loans and the historically burgeoning housing market came out as homeowners. It's the people who got on the ride at the wrong time that got the raw end of the deal.

Tigerboy said...

Who presented themselves as the expert in this situation? Ms. Ortiz?

If you go to a doctor who tells you that a certain surgical procedure is just what you need, whom do you blame when the surgery goes horribly wrong, and it turns out that it was ill-advised in the first place?

Certainly, Ms. Ortiz could have taken steps, SHOULD have taken steps to inform and protect herself. But who is pursuing whom? The lady who hopes to buy her first house? Or the guy charging the "loan shark" rates? Who is taking irresponsible chances with the other's money? Well, it can be said that both are being irresponsible with the other's money.

But who should have known better? Whom is society trusting to know better? Who must shoulder the far greater blame for being grossly incompetent with the financial future of the other? Did Ms. Ortiz create the deal that was too difficult for her to understand? People like Ms. Ortiz don't claim any expertise. She is likely to be an individual who is living paycheck to paycheck. She needs a roof over her head. She is on much thinner financial ice than the bank. She was paying them to help her. They told her it was a good idea. It wasn't. And they should have known it wasn't.

Now, who gets the loss if they both go bankrupt? We all do.

There is enough incompetence to go around, but they just grabbed her credit identity and threw the dice. And, they charged her obscene amounts of money for their trouble.

Greedy.

James Pate said...

As orthodprax points out, the loan companies are also hurt when they give out loans that people can't pay back. I mean, they need people to pay back their loans for them to have money to lend so they can stay in business, right? I think that gets missed in the "These loan companies are evil, and we need big daddy savior government to look after us."

Orthoprax said...

Tiger,

A doctor who wrongly tells you that you need a procedure is not at all analogous to these cases where it's all just a matter of business. No one told Ortiz that she needed a home.

Now this article makes it seem that the lenders were doing shady stuff and Ortiz was tricked into signing things she didn't understand, but this is likely not representative of all cases and, in fact, those who successfully managed subprime loans outnumber those who failed.

Tigerboy said...

. . . this is likely not representative of all cases and, in fact, those who successfully managed subprime loans outnumber those who failed.

Oh, so I guess the loaners are doing OK. This should be very reassuring to Ms. Ortiz.

No one told her she needed a home?

How about EVERYONE told her she needed a home. As a renter, do you have any idea how constantly people told me what a fool I was, just a short time ago, because I didn't go out and get a mortgage? Almost daily.

These loaners marketed to people with bad credit. At a time when people like Ms. Ortiz were being made to feel like they were foolish not to jump on the Real Estate ride, these speculators in ill-advised loans preyed on her lack of understanding.

Who has a better understanding that you shouldn't commit 70% of your income to housing costs, a mortgage broker or a motel cook?

No one told her she needed a home. That's rich.

She paid way too much for the home. She committed 70% of her income. She didn't even speak the language that the loan was written in!

Now WE have to pick up the pieces.

Lawyer-Wearing-Yarmulka said...

Now WE have to pick up the pieces

No we don't.

What exactly did she lose in this transaction? Odds are she put little or no money down. Whatever payments she made were basically rent.

Whatever happens is between her and whoever owns the mortgage.

Orthoprax said...

Tiger,

"Oh, so I guess the loaners are doing OK. This should be very reassuring to Ms. Ortiz."

No, the fact that most subprime borrowers came out on top means that there's nothing inherently unethical about these types of loans. Ortiz's episode, being pressured into such a bad deal and being so blind and gullible is not the "epitome" of the mortgage crisis, despite the Post claiming otherwise. Her's is a uniquely bad case.

"How about EVERYONE told her she needed a home. As a renter, do you have any idea how constantly people told me what a fool I was, just a short time ago, because I didn't go out and get a mortgage? Almost daily."

Oh? Are you friends with Ms. Ortiz? Family? Or maybe you're projecting. She clearly states in the article that she was blinded by desire of having a house, not that she thought she needed it for any reason.

tommy said...

For the sake of argument, let us say Ms. Ortiz had Down's Syndrome and simply wasn't capable of comprehending the risks involved. Would the loan still be ethical? If not, where is the borderline between retarded and just plain stupid?

Lawyer-Wearing-Yarmulka said...

For the sake of argument, let us say Ms. Ortiz had Down's Syndrome and simply wasn't capable of comprehending the risks involved. Would the loan still be ethical? If not, where is the borderline between retarded and just plain stupid?

If she had Down's Syndrome, then she lacked the legal capacity to enter into the contract, and the contract is void. Being stupid, or just making poor financial choices doesn't mean you don't have capacity.

Like I said earlier, people are not wards of the state.

tommy said...

Being stupid, or just making poor financial choices doesn't mean you don't have capacity.

OK, but where do you draw the line between stupidity and retardedness? Can such a line even be drawn? Should a Down's Syndrome patient, even a high-functioning one, really be a ward of the state? If so, why not some of the dullards I meet on the street who aren't labeled retards but are probably pretty damn close? Again, where do you draw the line?

After all, no one enters into a risky financial arrangement thinking they will probably lose their money. I suspect very few people enter such arrangements with a realistic expectation of the risks involved.

I might be playing devil's advocate here a bit (or more than a bit), but I'm curious as to what people think about responsibility and stupidity generally.

Lawyer-Wearing-Yarmulka said...

I'm sure your local jurisdiction has either case law or a statute that defines incapacity. Look it up.

tommy said...

I'm sure your local jurisdiction has either case law or a statute that defines incapacity. Look it up.

I'm not talking about the law as it exists but the law as it might exist. Your argument seems to be that the law works well and JA is arguing it doesn't. Simply referring back to the law doesn't lead anywhere. That is even more evident when incapacity can, according to your words, vary by locality. (In that case, which locality has the proper ethical definition of incapacity in your estimation?)

In any event, here is what Wikipedia has to say on the subject of legal incapacity due to mental condition:

Individuals may have an inherent physical condition which prevents them from achieving the normal levels of performance expected from persons of comparable age, or their ability to match current levels of performance may be caused by contracting an illness. Whatever the cause, if the resulting condition is such that individuals cannot care for themselves, or may act in ways that are against their interests, those persons are vulnerable through dependency and deserve the protection of the state against the risks of abuse or exploitation. Hence, any agreements that were made are voidable, and a court may declare that person a ward of the state and grant power of attorney to an appointed legal guardian (in England and Wales, this is a specific function of the Court of Protection).

Isn't having a below average IQ pretty much the definition of "not achieving levels of performance expected from persons of comparable age?"

You're a lawyer, so perhaps you can shed a little more light on this.

Theresa said...

If she and her husband are skilled enough to be making greater than 6000 dollars a month, don't you think they should also be skilled enough to realize they shouldn't be paying 4300 a month in a mortgage? You're making it sound like she is some poor ignorant single woman that doesn't even speak English. She realized what she was getting into "I had such a burning desire to have my own house. I didn't think about anything else". She admits that she didn't think about anything but what she wanted.

I agree the company shouldn't have given them the loan. But I don't think it is the government's place to tell people what percent of their income they should be allowed to spend on their house.

When I applied for a mortgage, they checked over all my money in the bank and I had to show documents showing where it came from and sign about an inch worth of papers and then they only approved me for a mortgage that would have been like 40% of my income.

I'm sure she realized she wasn't going to a reputable bank. But she wanted the house she couldn't afford.

Now, is she even in that bad of a position? doesn't she just have credit that is shot and she moves back into an apartment? She and her husband still have decent jobs and are making a good wage.

Plus, what the people did in her case is already illegal if you read the full article. Do we need more laws or just to enforce the ones we have?

Jewish Atheist said...

LWY:

Like I said earlier, people are not wards of the state.

Aren't we? Doesn't the state attempt to prevent us from assaulting and defrauding each other? By your logic, the state has no business trying to prevent murder and theft.

tommy said...

Aren't we? Doesn't the state attempt to prevent us from assaulting and defrauding each other? By your logic, the state has no business trying to prevent murder and theft.

The state generally tries to prevent bodily harm to its citizens and acts of deception resulting in financial loss for its people, but doesn't attempt to make up adults' minds on which risks they take or how they choose to live their lives. (Of course, there are many exceptions to this. The government criminalizes certain drugs, for example.) Your proposal essentially says that people, even being given complete information on the risks involved, should not be allowed to take those risks. My question for you is this: is there any behavior between consenting adults that you liberals believe should be beyond the purview of law enforcement?

Orthoprax said...

Tommy,

"where is the borderline between retarded and just plain stupid?"

General outlines already exist but I think it's impossible to make a hard line that works for all cases and situations. There's a gray area for which the court system is the proper destination. Is the individual capable of entering a legal agreement? Let a judge decide.

JA,

"Aren't we? Doesn't the state attempt to prevent us from assaulting and defrauding each other? By your logic, the state has no business trying to prevent murder and theft."

There's a line between protecting the people and protecting a free society. Seeing things on this "freedom scale" makes it clear how a society that condoned assault and fraud would reduce the general confidence in just walking about and in business and would effectively reduce our freedom.

This subprime lending issue is a little trickier and some regulation may be warranted since a bust like this effects the whole economy, but I don't believe the state ought to be dictating the terms of private agreements. Mandating simplified contracts is not unreasonable.

Lawyer-Wearing-Yarmulka said...

Aren't we? Doesn't the state attempt to prevent us from assaulting and defrauding each other? By your logic, the state has no business trying to prevent murder and theft.

Huh?

Being a ward of the state means that the government is protecting you from yourself.

Laws against fraud and murder are there to protect you against other people, which is one of the core functions of a government.

Tigerboy said...
This comment has been removed by the author.
Tigerboy said...

Today on CNN Money:

"The federal government is keeping Bear Stearns out of bankruptcy. Are you next?"

Like I said, we pick up the pieces.

Ezzie said...

Of course you post this when I'm too busy to go after it. ARGH!!! :P

What LWY and G and Orthoprax are saying, mostly.

I can't believe nobody said simply: Okay, so anyone who feels bad can feel free to pay out of their own pockets. I'm not willing to make the rest of the country [including myself] pay for Ms. Ortiz's stupidity.

...though we already are.

Tigerboy said...

All of us are paying for Ms. Ortiz's stupidity

AND

for the lender's greedy stupidity.

Again, who should have known better, a motel cook or a mortgage broker?

Anonymous said...

Conservative economics doesn't work because some people are unscrupulous?

Actually, it works fine. The problem is that leftist economics doesn't work because people who insist on tinkering with the market do a lousy job.

Tigerboy said...

These greedy, incompetent businesses are getting bailed out!

Conservative economics works great, if you're rich.

Not Ms. Fiedler said...

You know, there are alternatives other than "conservative economics" and "liberal economics." I oppose both almost equally - if I have to choose, I prefer "liberal economics." In fact, though, there is only one field of economics - there are conservative and liberal policies, but both come up against (and fail against) the same economic reality.

In this case, the "conservative" POV that the bankers have done nothing wrong by making these risky loans while socializing the cost (but private benefit, of course) is dead wrong, but so is the liberal reaction. I agree with you that lending must be regulated, but strongly disagree that it should, or even can, be done by government. If men are imperfect, why does giving some of them fancy titles fix the problem?

The fact is, there is natural regulation for cases like this. Regulation like the inevitable competition faced by a bank which fraudulenty extends loans - it will be ruined on the market. So how does it happen? Because 20 large banks formed a cartel, with government approval. What the government does in economics is to remove these regulations and allow people to behave badly with no consequences. They prop up failing corporate structures, and call it something nice sounding, like welfare.

Why would someone believe that giving the same people who required banks to demonstrate loans to "underprivileged" people, who socialized the cost of banker's criminal activity, and who cheered on fraud from bankers - giving these same people the power to be more active in the economy will fix these problems?