Steve Chapman of the Minneapolis Star-Tribune offers a different take on the subprime crisis in his column "The First Thing We Do, Let's Blame all the Lenders," which appears to oppose government intervention. Some excerpts:
Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.
It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.
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If the government imposes the punitive option, another problem will arise down the road: Lenders will be far less willing to offer credit to people with flawed credit records.
The consequence of this approach is clear. We'd be robbing tomorrow's subprime borrowers for the benefit of today's. Of course, when it comes to proposed solutions, robbery seems to be the order of the day.
Nick Slade of the Caveat Emptor Blog responds here.
Meanwhile, Times columnist Joe Nocera has a piece on the FDIC's chair Sheila Bair, who conceived what became the Bush administration plan for dealing with the mortgage crisis. Here are some excerpts on what led up to the crisis:
Particularly troubling to [Ms. Bair] was a series of popular adjustable-rate mortgages — loans with teaser interest rates of, say, 7 percent that would reset within a year or two at much higher interest rates. “That could often bring a payment shock of 30 to 40 percent,” she said.
The truth is, when these loans were made, nobody ever expected that they would be repaid. Instead, the widespread assumption was that they would be refinanced before the reset ever kicked in. “If you look at the 2003 originations,” she pointed out, “they were almost all refinanced instead of reset.” That was possible of course, because housing prices were still rising at a historic pace —and everyone believed they would keep going up forever.
But of course, the rise in housing prices was unsustainable, and by 2007, the housing bubble was over. Suddenly all those new homeowners with adjustable-rate subprime mortgages poised to reset in 2008 and 2009 were stuck.
The article also describes some of the other events leading up to the Bush plan and offers criticism of the plan. It's worth reading. Another Times columnist, Floyd Norris, compares the Fed's proposed rules to the movie "It's a Wonderful Life" here.
Then there's the litigation. The Times reports here on the Illinois Attorney General's investigation of Countrywide and suit against mortgage broker One Source. An excerpt:
The attorney general’s lawsuit contended that One Source put borrowers into loans with terms they did not understand, especially so-called pay option adjustable-rate mortgages. * * * These Countrywide was One Source’s main provider of pay option loans, documents in that case show.
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Donald Wagner, a professor . . . at North Park University on Chicago’s North Side, is a One Source client who has talked to the attorney general about his troubles with a Countrywide pay option loan. In March 2005, he refinanced his fixed-rate mortgage to help pay for his daughter’s college education. He said the One Source broker did not tell him his low teaser rate — less than 2 percent — would jump after just one month.
“I kept asking them and checking on that,” Mr. Wagner said. “Then it jumped to more than 7 percent and now it’s up to 8 percent plus and it’s going to jump again. I am actually paying out over 60 percent of my monthly income, and it’s only so long that I can do that.”
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One Source also used high-pressure tactics to rush borrowers through their loan closings, according to the suit. Most of the closings took less than 30 minutes, the attorney general said, with some only 10 to 15 minutes. One borrower was told that “it would take two days to explain everything,” and that the closing had to take place before that.
Some borrowers told Illinois investigators that they did not know One Source brokers had inflated their incomes to get them a larger mortgage. One consumer provided pay stubs and tax returns to One Source showing her income to be $2,200 a month, the suit said. Only later did she discover that One Source had listed her monthly income as $9,000.
Is this a case of dueling stories? It seems more likely that different borrowers had different reasons for taking out their loans.
What about mediation? They're trying that in Iowa, as discussed here.
Oh, and want to find out the real cost of mortgages but don't trust (or can't decipher) the TILA and RESPA disclosures? Try http://www.feedisclosure.com/, as discussed here.
And here is another story on the impact of the crisis and foreclosure on a family.