http://www.businessweek.com/ap/financialnews/D8OIL7200.htm
Text of article removed per forum rules. See link above.
This is great, just great! Another step towards a complete welfare society and a classic example of political pandering!! I especially love the irony that the very folks who in the past alleged discriminatory lending practices (known as “redlining” but what I think was simply prudent underwriting), are now whining that lenders are discriminating when the legal right to foreclose is exercised. Go figure…sign a contract and actually be expected to live up to its terms? The horror, the horror!! :banghead
These borrowers are/were high-risk for a reason and the loan products developed for them already pushed the limits on sound lending practices…Now then, you can only do so much in a realistic credit environment to rework a loan, and unless you completely ignore credit risk and/or actually write-off a portion of principal, extending amortization to 40 years does absolutely nothing to alleviate the problem. All it does is reduce the payment by some 5%, to cite the article. Is that reduction really going to make a difference to the borrower or lender? I think not. All it does is drag out the inevitable for people who really had no business owning a home in the first place.
As for the abusive lenders…While they undeniably do exist, they are a fraction of mortgage lenders. And further, an abusive but smart lender would never offer an interest-only teaser loan or an ARM that resets in a very short period because they (baaaaad lender) would be assuming all the risk due to no borrower equity. I’m playing devil’s advocate of course, but if I want a borrower to default so that I can get the house back, I promise you I want them to have a chunk of money paid in up front, as that’s my cushion. So to me, it defies logic that it’s the abusive lenders who are responsible for the sub-prime mess. Instead, it’s a convergence of the markets, political pressure by “civil rights and consumer groups” to lend to objectively credit-impaired people and finally, but I think most importantly, the reluctance of a borrower to face the fact that they’re in no position to take on such a large financial responsibility. Oh no, the dreaded “responsibility” factor!!
Last but not least, if I were a minority or elderly, I believe I would be insulted by the implied notion that any lender, predatory or not, could target and put me in a loan I couldn’t afford to repay. Maybe the article’s author didn’t intend it to be construed in such a way, but I think there’s the implication that an elderly person or a minority has no common sense and/or isn’t capable of understanding basic math and are basically helpless. Now that to me would be the height of condescension, discrimination, and would be morally reprehensible…
Well said, DCS_TX, Dido…
Many of those borrowers "could avoid foreclosure if they were offered (loans) that allow for affordable mortgage payments," Bair testified. Restructuring their expensive adjustable-rate mortgages "into more affordable products, especially 30-year fixed-rate mortgages, would bring them back to good standing, allow them to repair their credit histories and dampen the impact that foreclosures may have on the broader housing market."I don't see any issue with banks giving their borrowers a product that might allow them to keep making payments. In the end its better for the bank because they make a nonperforming loan a performing loan and strengthen their bottom line. It's not cheap to forclose on a property and they'd rather avoid it. Its not as if the gov't is telling them to suck it up and deal with it, they are making the suggestion and the banks would be wise to do it.....[i]for their own good.[/i]
Rich, I respectfully disagree that it’s for a lender’s own good that they offer another product… While doing so may allow for a few months of payments and theoretically remove a loan from being carried as a NPA on the books, the fact is that while you can stick lipstick on a pig, it’s still a pig. Sooner rather than later you’re going to be back at square one, lookin’ the pig in the eye.
The sub-P loans now in default already pushed prudent, objective lending principles. Other than to artificially and fraudulently upgrade a loan’s risk rating, by definition a product whose pricing is now at market is doomed to default. How can a borrower who was objectively a poor credit risk at loan inception now be expected to perform, when they’re switched from an IO loan or an ARM loan that’s jumped 1 or 2 points, to a fixed rate loan at market rates that actually amortizes? They can’t!! The number don’t lie. You’re simply prolonging their agony as well as your own…
There’s a time-honored saying and truism in lending - “Your first loss is your best loss.” I’ve had to accept that reality many times in my career. Other than to acquire additional collateral and additional, verifiably meaningful obligors (guarantors) to shore up a shaky situation, there’s not much you can do unless you’re willing to throw good money after bad. I agree that no bank wants to foreclose, but in the long run, you’re usually better off doing so - and sooner rather than later. You redeploy whatever funds are recovered in a more profitable credit relationship.
Of course, the foregoing is premised upon: not artificially creating a performing loan when the objective and underlying facts argue otherwise; not subsidizing a loser loan to meet someone’s idea that a borrower has a right to own a home; running your bank to make money, not to be a social service.
Sadly, “it is what it is” and unless a lender is willing to employ Enron-like smoke and mirrors, it will remain exactly what it is.