Mark Winston Griffith

Babies, Bathwater and Predatory Lending

In a blog written on May 25th I described a model anti-predatory lending bill that represents an effort to halt abusive “exotic” subprime mortgage lending. In response, a reader suggested that one of the provisions, which assigns liability to the entities that eventually purchase the loan through some sort of investment vehicle, is akin to “throwing the baby out with the bathwater” because it discourages Wall Street investments in subprime mortgages.

While the reader expressed a legitimate concern that is shared by many with dogged a faith in the current subprime lending system, it demonstrates, in my opinion, assumptions that, however well intention, are ultimately misguided. In fact, warnings to “not throw out the baby” have become perhaps the most worn refrain of defenders of the status quo.

Let’s examine that status quo for a moment. Unlike in the past when banks would assume the risk of a mortgage over the entire life of a loan, subprime mortgages are now most likely to be bundled up and sold as securities in the secondary market, thus spreading the risk and liability along. Although the players in the secondary market fuel and in many instances actually encourages shady underwriting and unaffordable loan terms, they in most instances are not held legally accountable.

Meanwhile in states like Ohio, entire blocks are crumbling under the weight of subprime loans gone bad. In some areas of the country, as many as one out of every five subprime loan is in default. Some have calculated that subprime lending has actually resulted in a net loss in homeownership over the last few years. If subprime lending is a path to homeownership, it’s leading many off a cliff.

The point is, not only is the bath water fowl, but the baby is a pretty wretched creature too.

Think of it in another way. Saying that regulating the subprime lending market will deny credit to homeowners is like complaining that clamping down on prostitution will put women out of work.

There’s a false choice that the mortgage industry has offered Americans: Either get abusively priced, exploitatively designed mortgage products, or get nothing at all. The bottom line is that if a lending institution and all those investing in its products, can’t make a mortgage that is affordably underwritten, they shouldn’t be making one at all. Period.

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Posted at 9:30 AM, Jun 15, 2007 in Financial Justice
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