There’s no question there has been an uptick in foreclosures because of bad business decisions – primary the so-called NINJA (No income, no job or assets) loans made by some mortgage lenders. And there’s plenty of blame to go around.
But Barbara Kiviat, a Denver-based reporter for Time Magazine, blamed lenders. Kiviat, in the August 27 issue of Time [1], suggested there was a predatory element involved meant to lure the unsuspecting borrower to get in over his head.
“Still, the EZ Credit addiction is tough to cure,” wrote Kiviat. “Drive through Green Valley Ranch, and you still see signs for 0 DOWN PAYMENT, 100% FINANCING.”
So how did Colorado handle this? By taking regulatory action, a move that was touted by Kiviat.
“This summer, three laws went into effect that, among other things, require anyone selling a home loan to make a reasonable inquiry into the buyer's ability to repay it,” wrote Kiviat. She didn’t address any additional costs businesses might bear thanks to the new laws.
She also ignored the borrower’s liability in the subprime lending equation. There’s been little attention paid to borrowers who bought houses without understanding the potential risks, such as the possibility of higher rates with an adjustable-rate mortgage.
“As traders, we are unquestionably comfortable with this sort of personal responsibility,” wrote J onathan Hoenig, an author and hedge fund manager [2], in SmartMoney.com on August 13. “If we make poor investments and lose money, we certainly don't expect the government or anybody else to bail us out.”
However some see things differently, said Hoenig.
“But Americans, especially many populist politicians, believe that individuals deserve to have their mortgage paid simply because they can no longer afford to pay it themselves,” wrote Hoenig. “Forgetting the fact that these individuals willingly took out loans well beyond their means or didn't plan for a rainy day in which the real estate market wasn't soaring, politicians on both sides of the aisle say they are entitled to keep their home.”
Time’s article blamed Wall Street, however.
“Blame it on one of the Street's recent innovations, the collateralized debt obligation, or CDO,” wrote Kiviat. “The recipe: buy home loans, blend them, then slice up the result into different securities (reflecting different levels of risk) to sell to investors.”
Kiviat failed to include one ingredient in her recipe: borrowers who took out the home loans in the first place, agreeing to obligations they were unable to meet.
It’s not likely the lender is going to catch any breaks on the regulatory side or in the court of public opinion, said one expert.
“Just think about it – if it is a giant mortgage banker versus a family being put out of their home – no matter what the fact pattern may be after that, who wants to take those odds?” said Jerry Bowyer, author of “The Bush Boom [3],” to the Business & Media Institute.
In fact, despite the congressional recess until after Labor Day, there’s already rhetoric about enacting more regulation. Chairman of the House Financial Services Committee Barney Frank, a Democrat from Massachusetts, was very open. In an editorial published in the August 20 Financial Times, Frank said these loans “were accompanied by fraud, inadequate information and other failures of responsible marketing.”
“In the debate between those who believe in essentially unregulated markets and others who hold that reasonable regulation diminishes market excesses without inhibiting their basic function, the subprime situation unfortunately provides ammunition for the latter view,” wrote Frank.
Home lenders have taken the brunt of the negative press [4] in the past – being portrayed as predatory and greedy, as was the case in the Sept. 11, 2006, issue of BusinessWeek.