Arnold Kling  

The Predatory Lending Fallacy

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Matthew O'Brien writes,


I think we owe Greenspan a happy (belated) birthday. He's gotten a bad rap the past few years for his failings as a central banker, and that's just unfair. It should be about his failings as a regulator.

Pointer from Scott Sumner, who is grateful that O'Brien understands the subtleties involved in evaluating whether monetary policy is loose or tight.

We may cheer O'Brien for taking on a mistaken narrative of recent monetary policy history. However, in the process he reinforces a mistaken narrative of recent mortgage history, blaming Greenspan for failing to stop predatory lending.

Consider the following problems:

1. Qualified borrowers getting bad deals.
2. Unqualified borrowers getting good deals.

(1) is predatory lending. (2) is what caused the housing bubble and crash. Getting that story straight would be a major accomplishment for the media.


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COMMENTS (11 to date)
Mark writes:

There was quite a bit of #1 taking place by unscrupulous mortgage brokers. According to Nocera and McLean, these lenders convinced some prime borrowers to take out exotic mortgages with low teaser rates that would increase substantially in the not-so-distant future rather than fixed-rate loans for which they qualified.

This does not negate your point, but we should acknowledge that there was some predatory lending as well as irresponsible risky lending.

Publius The Lesser writes:

There's also (3) unqualified borrowers getting bad deals. I suspect that the media see (3) as the cause of the housing bubble and crash, and that what you're calling a "good deal" for the borrower (unqualified borrowers getting loans at rates far below what they should be), the media calls a "bad deal" (greedy banks making a quick buck by lending money to naive borrowers they know can't be paid back once the bubble bursts). Since "it's their fault" always plays better than "it's our fault," and there are more borrowers than lenders, the latter narrative wins out over the former.

mark writes:

There is a particular type of predatory lending that is real and outside of your two prongs. It is getting people who already own a home to mortgage it on a loan that is impossible to service. If you read up on Ameriquest, you'll see IIRC that 90%+ of their loans were to people who already owned a home, not loans to buy a home. Usually to minorities and senior citizens. And there was signficant fraud perpetrated by that lender including changing pages after loan documents were signed.

Floccina writes:

If there was predatory lending and it began in 2001, were there many victims looking for justice before the crash? And where were local officials, attorney generals and police? Where they, all used to only middle class people getting loans, thinking buyer beware?

Did the idea that came along that poor people needed access to loans(an idea I am doubtful of) cause us to let our guards down. Again if there was all this predatory lending were where the Government anti-fraud people before the crash?

mark writes:

@Floccina,
certainly Ameriquest was the target of substantial government investigation. 30-49, depending on which source you find, Attorney Generals had a hand in a settlement with Ameriquest in 06.

But the questions you ask, I am not sure where you are going. States did investigate but they often do not have the resources to go up against a large businesses and also have to devote a lot of those resources to coordination with other states. The lack of Federal investigation is something that has drawn a good deal of criticism and was one of the arguments driving the CPFB legislation.

Martin writes:

Arnold,

You say "(1) is predatory lending"

Would you call (2) "predatory borrowing" ?

Just wondering. Might make it more catchy and thus suitable for media narratives.

Glen Smith writes:

Martin,

Predatory borrowing is when one borrows with the intent to not pay (or pay only part) of the debt while still enjoying the asset. Whether the borrower is actually qualified or not doesn't really have much to do with it. In fact, predatory borrowing is usually done by the most qualified. Selling unqualified borrower loans without proper risk management techniques is the lenders fault.

Steve Sailer writes:

Add in "predatory securitizing."

Don't, however, underestimate the amount of old-fashioned boiler room abusive sales tactics practiced by Ameriquest, Countrywide, and others. They tended to target unsophisticated borrowers, even outright illiterates. Of course that's what the federal government was telling them it wanted to do with things like Bush's 2002 White House Conference on Minority Homeownership, where the President denounced downpayment and documentation requirements as impediments to racial justice.

The states tended to do better than the feds in recognizing old-fashioned boiler room abuse, probably because most of their laws came from Wall Street took over the mindset of regulators.

Shayne Cook writes:

O'Brien has part of his assessment of Alan Greenspan correct. That is, the "housing bubble" was not Greenspan's fault. Where O'Brien gets it wrong is with his criticism of Greenspan - that he failed to regulate. And he still blames Alan Greenspan (the Fed) for the "housing bubble" on that basis.

Understand that the Fed can control interest rates and, as Scott Sumner points out (often), it controls the money supply, thereby affecting NGDP. What the Fed does not control or even influence significantly is how and where the money is applied in the economy - completely irrespective of whether it's "stance" is loose or tight monetary policy. The Fed has no mandate, desire, or regulatory enforcement rights to dictate to anyone that "it's money" (loose or tight) may be applied in the economy solely on capital equipment, or household goods, or energy or whatever - or housing. How then could Greenspan - or the Fed in general - have "regulated" its use to other purposes?

I do have a few criticisms of Alan Greenspan's judgements and actions over the years, but they have nothing directly to do with the "housing bubble" era Fed actions/policies. I remain a Greenspan "fan" for all intents and purposes. However, what annoys me about any criticisms of Greenspan and the Fed related to the "housing Bubble" is that such criticism diverts attention from the real (larger) culprits.

Arnold Kling writes:

Tyler Cowen called it predatory borrowing years ago.

Paul Cline writes:

I think you've left out

3. Unqualified borrowers getting bad deals.

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