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Blame the Borrower

posted by Angie Littwin

These days, smart opponents of regulating controversial lending practices talk in terms of consumer choice. They portray people like me who often think regulation is a good idea as the ones hurting consumers by limiting their options. So it's a rare occasion to come across someone who is willing to blame the borrower as thoroughly and openly as Kris Frieswick does in her piece "Here Comes the Repo Man" in this week’s Boston Globe Magazine (free registration required).

The article's subtitle: "It's easy to scold sub-prime lenders for the glut of home foreclosures. It's also wrong. Blame the buyers." Her take on current proposals to regulate subprime mortgage lenders and brokers in Massachusetts: "I applaud the licensing and counseling concepts, but legislators must accept that home buyers deserve the bulk of the blame for the foreclosure crisis." And her solution for halting the rise in home foreclosures: "We don't. Time does."

Frieswick's main point appears to be that most borrowers who end up in foreclosure should have known they couldn't afford the house in the first place: "Brokers and lenders sold a boatload of usurious loans, but they couldn’t have moved a single one without the full cooperation of buyers who didn't read or understand the fine print, didn’t do the math, or gambled wrongly that tomorrow would be a better day."  She's absolutely right that it takes two to tango all the way to signing a bad loan. But lenders and brokers know that consumers don’t read or understand the fine print, don't always correctly do the math, and systematically overestimate the likelihood that their finances will improve – and the consumers who make these mistakes don’t know that lenders know this. 

It's a question of who’s in a better position to prevent the harm. I spent several months last year interviewing low-income women, many of whom were on fixed incomes, about how they use credit cards. Some of those who had gotten in trouble with debt asked me why the companies would have let them borrow more money than they could pay back. They thought that if the company gave them a certain credit limit, that meant they could afford to borrow at that limit. Whether the borrower is rich or poor, I can only imagine how much more persuasive that thinking must be when you have an actual person, in the form of a loan officer or a broker, whose job it is to tell you that you can afford the loan.

Twice, Frieswick asks variations on the question, "How, exactly, did they think this was going to end?" First of all, I'm sure that none of the borrowers thought it was going to end in foreclosure. More specifically, many of them – I would bet – thought that they were going to end up with the house, the picket fence, and the American Dream precisely because their lender or broker told them they would. Consumers are still operating on the assumption that qualifying for the loan is the hard part, that banks refuse to give you loans you can’t afford. But the rules have changed, and the price for not having caught up yet can be your home.


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This says much more about the abysmal state of the public educational system than it does about mortgage lending. The real culprits, or, as Ms. Littwin puts it, the ones "in a better position to prevent the harm", are those who continue to support a system of education that turns out a significant segment of the populace too ignorant, or too complacent that they will be "rescued" from their mistakes by Big Government, that they "didn’t read or understand the fine print, didn’t do the math, or gambled wrongly that tomorrow would be a better day."

Of course, she has a point. One of the problems is that we, as a society, are so accustomed to government regulation aimed at protecting every aspect of our life that we have forgotten what used ot be a fundamental rule of everyday life - buyer beware. Distrust of those with whom you do business is healthy. The concept has deserted most Americans. The idea that someone else will look after us - in this case, the lender - is not conducive to sound decision-making.

I agree with you that lenders need to be spanked for bad conduct, but the consumers play a huge role in the problem by virtue of their poor decisions.

It is, for instance, clearly a poor decision to buy a home, which (I have been told time and again) is a way to Build Equity and Improve your Credit.

Shame on those who would do such a thing solely because they were told they could.

It's way too Bushian to blame the borrower, that game has been so overplayed it's boring. Today's more appropriate question is, who were the first buyers of those highly toxic no-doc, 100% financed mortgages sellable only because of the teaser & neg-am characteristics? (You know, the ones who repackaged these toxic mtgs. into highly camoflaged higher yielding "securities" to HELP pension asset managers meet unrealistic return objectives.)
An even better question is, why did so many voters reelect so many Congressmen who refused for years to publicly rant and scream as Government enterprises nurtured & fed this growing monster that now threatens our way of life?
Want to blame someone? I say blame sophomoric writers who sell their souls to be cute - for what & for whom?

I take issue with the notion that it is Americans grown accustomed to Government regulation that makes them vulnerable to unwise mortgages. It is Americans grown accustomed to the notion that private business people know more than they do, are wiser in the ways of the world (that must be why they are so well off), and so must be giving good advice.

Perhaps people should be chary of such advice. Perhaps they should consider the source. That's the message, right? But look who takes advice from people who seem to know better, but whose motives are obviously mixed. Doctors, who take advice from drug salespeople. Congresspeople, who take advice from lobbyists. Is it so clear that the foolish consumer is any greater fool than these more enlightened members of our society? And do these enlightened members follow the tainted advice their given because they have been trained to as a result of Government regulation?

The question, of course, is its own answer.

A very libertarian argument (and I consider myself libertarian).

So "pushing" loans on an unsophisticated public is fundamentally different than pushing drugs or sex? Consenting acts between informed adults?

There are some people who cannot manage money. They can be induced to sign almost anything by an appropriately uncaring loan officer.

Ken - I believe that it is a poor decision to purchase a home which you cannot afford. Or do you disagree with that assessment? But you yourself fell into the trap in your comment. You rely on the statements of others (or so I've been told) without making a reasoned decision. And you suggest that it is okay for home purchasers to do the same.

Bailey - Did you say something? Your knee-jerk liberal bias is showing. It is, of course, your right to substitute labels for thought, but for the sake of those who try to read your comment, it would really be nice if you could actually communicate your point without the hyperbole. It seems as though you suggest that borrowers are in no way responsible for the transactions into which they enter. So if a person walks into a convenience store to spend his last five bucks on milk and bread, but isntead buys a lottery ticket, is it your position that he bears no responsibility for that purchase decision? I jsut don't understand your point.

lmclark - I agree with part of what you say, but I think you misinterpret my point. I agree that many members of our society blindly follow the advice of others. Unlike you, however, I do not see doctors and members of Congress as being "enlightened." Do not confuse education or position with the ability to reason. I think it is equally sinful for a doctor to push a drug based on the salesperson's puffery or a Senator to sponsor a bill because of a lobbyist's pitch. My point is that we have come to have the general view that someone else, be it the government or the salesman, will look out for our best interests. I think that is a dangerous assumption.

Andrew, I took you at your word. You complained about reliance on the Government. Now you talk about reliance on anyone. Surely you do not think all reliance can be boiled down to caveat emptor, especially in a world in which information disparity is the rule not the exception. Not even a card carrying libertarian would go quite that far -- or would they?

Andrew, Talk about knee-jerk reaction, wow! Sounds to me like you're obsessing about Gov't "regulations" and ignoring Gov't. giveaways. It's a given for me that the borrower is & should be TOTALLY responsible for his/her actions & should NOT in any way be bailed out (or further subsidized). But, should that be the end of the story?
Shouldn't the person (agency) who made the scam possible also be held accountable for his/her/its actions?
Shouldn't the Administration fostering an "ownership society" submit a plan up front designating who the bailer of last resort will be when the absurd policies they forward fail (as they knew they MUST)? I don't believe the Bushies were providing an opportunity for new buyers, it's not an opportunity when you KNOW the outcome will fail! They were providing a boondoggle for their supporters.
Beyond questioning the very existence of our GSEs in a grossly inflated r.e. market & why Congress further incentivizes r.e. activity in a grossly inflated r.e. market, shouldn't the Chairman of the FRB be demanded to explain his "message" repeated as late as 2006 that housing price increases were "driven by fundamentals"? Half the residential sales in CA in 2006 were teasers in one fashion or another.
But, that's all old news. The better question is, why shouldn't SOMEONE in Gov't. (Congress, the Pres. (Clinton was Pres. then, & the FRB (Greenspan who front ran the act)) be asked why we were in such a hurry to deregulate our financial sector (repeal of Glass-Steagall) WITHOUT at the same time bringing regulatory oversight into the 21st century?

Andrew Engel, Gone mute? So Bushian, it's just another sign of the times.

It seems appropriate to post a reminder here about the policies on comments:

"Comments are open. Individual blog authors may decide not to allow comments for all or some of their posts. Readers are welcome to post their comments, and we welcome open debate. We will remove comments that we find inappopriate such as comments that are profane or vulgar, commercial marketing, ad hominem attacks, or nothing but inflammatory rhetoric. We get very few such comments."

Let's please keep the discussion on the issues.

bailey - I'm sorry if I don't hover over this thread as much as you would like. I'm trying to decipher what you are trying to say. The only thing that I can actually discern is that you hate the President. I'm not quite sure what he has to do with the discussion. What policies enacted by the Administration do you think caused the subprime problem? If you are familiar with the issue, you know that the subprime market developed in the 1990s, not since Bush was elected.

Yes, there is and should be regulation of the market. But why do you think that the government should bail out individuals who make bad decisions? If an actor in the market defrauds a borrower, I'm all for knocking the hell out of the bad actor. That's what I do for a living. By the same token, I have seen many of these loans which were bad (i.e. a loan which a prudent person would not accept), BUT in which the lender/broker actually disclosed everything correctly and did nothing wrong. The question is, do you think that, in this latter scenario, the government should bail out the borrower who closes the loan with full knowledge of its terms?

I'm greatly concerned about government giveaways. That's why I don't want to spend money on people who refuse to think for themselves.

lmclark - In my initial post I referenced both government regulation and reliance on the opinions of others. I think they are twin sins. Under one you act on the assurance of the opposing party that this is a good deal. Under the other, you act assuming the government has done everything necesary to protect you. I think they are both really bad ideas.

With respect to you point on disparity of information, I think an argument can be made that the exact opposite is true. In this age of information, individuals can far more easily educate themselves on loan products and finance options. This begs the question, of course, of whether the people at the bottom of the economy can readily access and understand that information.

Caveat emptor is a concept which addresses risk allocation. You're entitled to rely on anything you want, but you bear that risk. What it does is force individual actors to become active participants in the process, not merely bumps on a log who allow things to happen to them. I advocate reasoned decision making, not passive acceptance of the decisions of others. In this regard, many borrowers are, at least partially, to blame for their predicament. That is not to say that should be left without recourse. The market cannot correct fraud. And it is the fraud where the govenment should be most active. I have welcomed regulation in some states which permit greater recourse by consumers against lenders and brokers in cases of fraud.

This post started as a discussion as to whether the consumers share blame for bad loans. Does anyone really suggest they shouldn't?

You win Andrew, I certainly can't argue with you.

I wrote: "It's a given for me that the borrower is & should be TOTALLY responsible for his/her actions & should NOT in any way be bailed out (or further subsidized)."
You responded: "why do you think that the government should bail out individuals who make bad decisions?"

bailey - I noted that comment, but the rest of your post is so nonsensical that I do not understand it. You need to make your writing more understandable. If, as you say, the person is totally responsible for his decisions, why do you then argue that "the person (agency)" should be accountable also? Which is it? You obviously don't actually believe that the individual is completely responsible if you also want to blame someone else. Please spend some time on your post before you post so that others stand a chance of understanding you.

Andrew, Are you honestly arguing that if the mortgage borrower is 100% responsible for meeting the terms of his contract, the GSE who agreed in advance to buy the loan assumes NO responsibility for the buying criteria he set? No wonder Gov't. doesn't work!

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