Who's more at fault?

Why should we protect the stupid? If they make poor decisions, #$^$ 'em.

 

I agree that government regulation is partly responsible for the housing crash, however, as stated in one of my previous posts, 94% of the subrime lending was done by lenders not regulated by the CRA. And the GSEs were prohibited from buying subrime loans, they purchased mortgage-backed securities instead, a financial product created by Wall Street Investment firms.

Regulating banks from selling risky subprime loans and regulating Wall Street from creating derivatives and other risky speculative products is the primary motivation behind the financial meltdown. You remove said products and services from the marketplace, you eliminate the main culprit of the problem.

 

If I sell you a faulty appliance, say an oven, that will blow up in your face when you turn in on, even if I have divulged that information in the fine print of the 100+ page User's Manual, would you be 50% responsible because you failed to read the entire Manual before purchasing?

 

Should we protect "stupid" lenders who loaned billions in dollars to borrowers they knew could not be repaid? Or is it always the borrower who is stupid?

 

When I bought my first house many many years ago, my initial lender was trying to push a variable interest rate on me. On the surface, it looked very good. I would have a low interest rate which in turn, reduced my monthly payment and allowed me to purchase a more expensive house.

I decided to check into exactly what the pros and cons of a variable interest mortgage entailed. I quickly decided that it was doubtful that the interest rate would stay low for 30 years and declined that type of mortgage.

Researching the pros and cons of a particular mortgage loan is not even close to fine print buried in a 100+ page user manual.

However, to satisfy your analogy.....I would ask a outside source or 2 about the pros and cons of the particular appliance I was going to buy. Experts in the field of appliances should be aware of the history of that brand exploding. It is called Due Diligence.

 

If the borrower "knows" that they cannot repay it then the borrower. If the lender says that they can afford it then the lender.

 

And if someone doesn't do their due dilligence, too bad for them? No jury in the country would side with a corrupt vendor who sells something he knows beforehand is faulty and dangerous. The case regarding the Ford Pinto is emperical evidence that a market-based solution to weed out dangerous products is not sufficent for protecting the innocent.

Wouldn't a better argument be that we should discourage or prevent dangerous products, whether they be appliances or financial products, from being sold in the marketplace for the simple fact that they are...dangerous?

 

In some cases I would agree....in others, I would not.

The problem wasn't the subprime loan itself. The intention was to refinance at a later date once the borrower's credit score improved in order to get a fixed low rate that wasn't available initially because of their low credit score. However, bank stopped loaning money for the most part because of the economy before most people could get out from under the subprime loans. Interests rates on the subprime went up and people couldn't afford their new monthly rate.

Are you in favor of gun control? (For some reason I think you will say "yes" ) I'm not, because I do not believe the gun is dangerous. It is the hand holding the gun that is dangerous.

 

But the final decision whether a borrower receives a loan is decided by the lender. A borrower cannot simply enter a bank and demand that he/she be given a loan because he/she can afford it. The lender will have sufficient information, provided that they do proper job/income verification, etc., to know the likelihood of the ability of the borrower to repay. Whether the borrower 'says' they can afford the loan or not is a moot point, the lender already knows whether they can or not.

 

Not necessarily. There are many ways a person can "hide" their income/debt ratio from the lender. Some of them are even legal.

 

Under what circumstances would you ever agree to allow someone to knowingly sell a dangerous product?

I agree that it wasn't the subprime loan itself that is/was the problem. It was the lack of prudence and due dilligence by the banks in extending these loans to borrowers. If the borrower is to be punished for not doing their due dilligence, so should the lender.

I do favor some gun control; we need to know whether the 'hand holding the gun' is dangerous. Don't you think?

 

Agreed. However, the number of home buyers who have/had the means and know-how to hide their income is very small. These scenarios hardly contributed to the financial crisis nor compare to the extent of NINJA loans by banks.

 

The one who defaulted? You can't know someone won't be able to do something in the future -- not knowing the future is where the risk comes from. When you enter into a contract you each make forward looking promises. Who is responsible for the contract failing? The one who didn't keep his promise.

 

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If you are dumb enough to give someone a $400,000 mortgage who makes $30,000 a year, it's your fault. Banks didn't leverage themselves against the future because they knew they could package the loans and sell them to investors while getting their cut and smiling all the way to the bank.

 

The bike itself is not dangerous...

 

Well, back many years ago when I worked at a bank, it was the lender for making the bad loan in the first place. They were the ones who ate the loss....what they didn't recover in repossession, etc.

But we also had very strict rules back then. The person you were lending to had to meet the income and employment requirements and have a good credit rating. IOW, they had to be a good credit risk. In recent years, that's been tossed on it's head with this federal gov't anxiousness to get everyone into a home, whether they could afford it or pass the credit rating requirments on its head.

 

94% of subprime, risky loans were given by banks not regulated by the CRA.

 

A car, for instance is a dangerous product. There have been many lawsuits to prove such.....remember Toyota? However, I don't think a law needs to be passed to ban Toyota's just because of mechanical flaws.

In regards to subprimes........sure, regulations are in order and anybody intentionally taken advantage of people because of their position or ignorance should be addressed. However, the borrower seldom has clean hands because they were taken in by a big bad banker.

These borrowers knew the risk. The information is out there to inform oneself....especially in today's internet age. Most people wanted to buy more then they realistically should. They wanted a low payment that the subprime provided in order to "upgrade" to a more expensive house. They just got caught with their hands in the cookie jar when the economy change.

 

Let's not forget that most of these lenders were purposely setting up bad loans, using their investors' money and not their own, so they could bet on the borrowings defaulting, and make millions.

 

The USA government (i.e. Chris Dodd, Barney Frank and Bill Clinton) THREATENED racial discrimination lawsuits against banks that did not lend to borrowers that were not "credit worthy" (i.e. black with a horrible credit score). Blaming A versus B is what fatso Barney Frank would like the discussion to be. Don't believe me? Look it up.

 

And who pushed that? The federal gov't. Federal and Fannie under the Democrat leadership were saying, "package up all you can send us and we'll buy them and guarantee them." They created the pull for this kind of behavior. Banks were also made to believe if they didn't make that bad loan, they'd be sued.

 

That is absolutely 100% correct. I know someone who worked in a bank mortgage dept back then as a loan officer. They would send in a couple from ACORN and the loan officers were actually afraid of a discrimination lawsuit. Laws were bent and turn on their heads in an abuse of the system. Some day I hope there will be a real in-depth investigation as to what went on. And I hope some people go to jail.

 

wouldn't interpret it that way, they weren't forced into taking more risk than they could handle they chose that due to greed

the government merely gave them incentives to help the poor and trusted the banks to manage risk without being abusive

 

Under what Constitutional authority did the "government merely... (give) them incentives to help the poor...?" There is no POWER listed in the Constitution for the Federal Government to manipulate the housing market, or give "incentives" to anyone. Freddie and Fannie were unconstitutionally crated by Democrats to manipulate the housing market. Without Freddie and Fannie skewing the entire market to favor low to moderate income mortgages, and all the liquidity they interdicted into the market to do just that, there would have been no housing bubble, and no collapse.

Democrats don't know how to make a pencil, how can they possible be smart enough to direct, command, and control the economy through their regulations?

http://www.econlib.org/library/Essays/rdPncl1.html