Monday, March 17, 2008

Who is to blame? The consumer?

We all know what's up with the sub-prime mortgage crisis, right? A bunch of stupid people bought houses they couldn't afford on mortgages that they should have read and understood better, right?


I have to say, I am pretty impressed at how well that meme plays out in the press, but it ignores basic history. There was a time in this country when a mortgage was hard to get, and the most important part of getting a mortgage was convincing a bank that you could pay for it. If you got the mortgage at all, it was because the bank's prognosticators had looked into their ten-year crystal balls, and decided they saw little chance of a foreclosure. Because, after all, a foreclosure is a disaster for the lender as well as the borrower. Banks don't want to sell houses! Banks want to take in and lend out money; that's what they do.

At least, that's how it used to be. Nowadays, a bank makes a loan, and then sells the loan to someone else, to reacquire the principle to make another loan, and pick up all the fees and a profit on the principle, and hand all the risk of foreclosure off to someone else. Why would they care if you can pay it back?

Now, wouldn't it be great if consumers could read through a mortgage contract and understand exactly what they were facing under what circumstances? Sure, it'd be great. It'd also be great if citizens could all read the tax code and understand all of the various implications of having a deduction for this, a credit for that, and not just for individuals, but for corporations, and for certain business sectors. But they can't. Not even individual tax accountants and attorneys can do that; they all specialize to the extent that they can(/must!) to help their specific clients.

We've all grown up in an area where a certain set of expectations existed, where it was understood that, sure, a bank was looking out for itself, but it also had - for its own protection! - to look out for the borrower to some degree as well. We've all grown up in a world where, if you couldn't afford a mortgage, for the life of the mortgage (or at least the first five years), you would be refused the mortgage. The rules changed on the consumer; now, if you are offered a mortgage, you should be suspicious before you are glad.

Blaming the consumers for failing to understand a completely changed landscape, when the financial big brains of the country were talking about how easy, and wonderful, it was to own your own house, is blaming the wrong set of people.

Blame the people who said that housing prices would keep rising, and that refinancing (or flipping), a home were trivially easy. Blame the people who cared only about the short term profits, and tried to get people into houses regardless of their ability to pay. And, if the allegations are true - they may not be, but please do not forget them, so you don't think it's a new acussation - send all of your outrage towards those who channeled certain minorities, including many who qualified for standard mortgages, into the sub-prime market.

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