Sen. Obama was prescient in the current mortgage problem. I’d be more impressed if it had happened in March 2005, or even 2006. But it’s still worth noting.
Also worth noting is what he leaves out of his assessment of the problem. In filling out a standard critique against lenders, he can’t find a single word against borrowers. Sen. Obama does not suggest that borrowers might lie. He does not suggest that they had a duty to understand the terms of their mortgage contracts before signing. Any looming crisis would arise only from insufficient due diligence or outright deception by the lender.
He didn’t really leave out the borrower, he said the banks held some of the responsibility.
Ultimately it is the lender than knows best who can and can’t afford a loan. It is the lender taking a risk. The borrower risks nothing more than a credit score. Many people are talked into buying more than they need because they can get a “low monthly payment”. Sure, a handful of scumbags probably gamed the system but most of it is just people being convinced they could chew what the bank bit off for them.
I have applied for many a loan in my life and denied for more than I was accepted. This is because the banks knew I couldn’t really afford what I thought I could. Banks have had the ability to check your financial records and ID since the patriot act was signed. That was long before the mortgage crisis hit.
Of course, in a perfect world where all borrowers provide complete, accurate information, lenders know best. My point was that we don’t live in a perfect world. Just as there are unscrupulous lenders and mortgage brokers, there are unscrupulous borrowers.
Sen. Obama very much ignored this. He diagnosed the problem by pointing out predatory lending practices. Predatory borrowing is a part of the current mess. I do not make any claim as to how significant any one particular cause is in the cumulative mess. Sen. Obama does, if only through exclusion.
One of his points in that letter:
The Community Reinvestment Act also contributes to the current mess. Again, I make no claim as to the extent of that cause, but it contributes. Yet, Sen. Obama’s solution to resolve the problem of predatory lending essentially endorses the CRA and the problems that come with it because of what he omits from his letter.
Unless you can provide data demonstrating intent to screw borrowers, it’s much more logical to assume incompetence in judging and pricing risk with the various mortgage products being sold. Also, data corroborating that only a “handful” of borrowers gamed the system would help.
He was not ignoring the borrowers. Again, as Lee mentioned, he said banks share part of the blame. Exclusion of other causes is not saying they do not exist. If you want a full list of causes it would take pages.
But beside that point is the fact that the mortgage crisis was indeed largely brought on because of new loaning practices such as the notorious sub-prime loans, that banks began pushing out because they gave them a way to reach new borrowers that were impossible to reach under previous loans, actively pursuing those customers who did not qualify under classical mortgage requirements precisely because they were risky investments. There weren’t really any more unscrupulous borrowers than before, but this new lending strategy that the banks competed in was an economic game-changer.
Again, when the choice is between assuming nefarious intent or incompetence, default to incompetence.
Also, do borrowers share no blame in taking on the loans being pushed to them? When I bought my house in 2005, my mortgage broker offered me various mortgage possibilities, including an ARM and interest-only loan. I refused everything in favor of a conventional 30-year fixed. I took the time to educate myself. I did not fit the sub-prime category, but I do not assume my responsibility is exclusive to people with my credit score.
Clearly both lenders and borrowers are responsible in part for the mortgage crisis, the real issue is not who is responsible, but should/how can government be involved in solving it. It is difficult for me to imagine a way that government could regulate borrowers effectively without some sort of massive invasion of privacy, whereas changing the regulation of lenders is just an extension of existing regulation activities. Should Obama have mentioned borrowers as holding part of the blame, perhaps, but the letter still clearly indicates that he had a solid grasp of the danger we were plunging into, and if he had been empowered to act (as I hope he will be soon) he could have taken steps to at least alleviate the problem if not solve it outright before it happened.
Dylan,
I partially agree with you. To the extent that Sen. Obama raised an alarm, he should be recognized for it. (I don’t think this makes him necessarily more prescient than others.) I even implied that I acknowledged the benefit of the letter, despite diminishing my respect based on the delayed timing of his letter. I’ve also stated that, although I will not be voting for Sen. Obama (or McCain or Clinton), I prefer him more than the other two.
My point was that he excluded part of the problem. That is critical because we have a regulatory scheme in place. How much of the led to, rather than limited, the scope and scale of the current situation? I do not have the answer, but they are valid questions ignored in Sen. Obama’s letter. (In calling for government action on predatory lending, he ignores calling for government action on predatory borrowing.)
Further regulations on borrowers probably would invade privacy. But further regulation would also invade the privacy of lenders. The discussion of “rights” of businesses is beyond the topic here, so I’ll temporarily accept that I’m wrong on that point. Regulations on lenders are still inevitably regulations on borrowers. Is it an invasion of privacy on the borrower if the lender is required to ask for the information regulators would require of borrowers? Seeking a loan is voluntary, but if a person does not wish to give up the required information, regulation is an incentive that skews the borrower’s behavior.
That’s the problem with regulation, in general. I’m not automatically opposed to regulation. But regulation should seek transparency, not outcomes. Requiring audited financial statements is reasonable. Requiring a business to lend under requirements X, Y, and Z has the risk of skewing a business decision away from what it would normally be.
I take your point, that Obama does not address the borrowers’ complicity in the problem, but I also fail to see what the government can do to borrowers to make them less stupid, other than try to regulate away the “attractive traps”.
I think your most important point is made in a comment, “Transparancy”. It is my humble opinion that no one would have bought these MBS’s if they knew they were loaded with crap loans. Who-ever it is that packaged these loans, and sold them as quality products was telling a lie – or so massively incompetent that I can not find the words.
I’d like a lot more, but I’d settle for knowing who packaged these loans and who pretended that a borrower who could barely afford the 4% interest only payment was going to be able to afford the 10% payment plus principal.
Matt:
I don’t think the government should do anything to protect borrowers from themselves. Even if it could stop their “bad” actions, there would be a loss of other, “good” actions because of the blunt nature of regulation.
More importantly, the consequences of mistakes are the best teacher to individuals. The financial mistakes I’ve made have taught me more than I would’ve learned when someone has told me I shouldn’t do something. Those years paying off my credit card from college taught me a great deal, a lesson I have heeded ever since.
I agree that the documentation (and risk-assessment) on MBSs was probably horribly flawed. This is an exceptionally good point. As I mentioned, until shown otherwise, I’m inclined to assume only incompetence. That goes for lenders, investors, and borrowers. I accept that that isn’t the complete answer, but I want to know who to blame, based on evidence. Earlier commenters seem ready to blame based on an ideological bias in favor of consumers and against lenders (business/corporations). That can provide the warm fuzzies. I want more.
Also, I’ve long advocated that economics/personal finance be included in school curricula. It’s clear that too many people do not know enough, even though it’s an essential life skill. The ability of borrowers to understand what an amortization schedule is would help tremendously.
He’s right to point out the “balance” between access to credit and responsible lending. The fact is that one should have certain policies in place to prevent discrimination against minorities, etc. But refusing credit to someone on the basis of their ability to pay a mortgage isn’t discrimination, it’s responsible lending.
The fact is that there is no incentive for a bank to discriminate against somebody on the basis of race. If they think you’re creditworthy, they’ll be willing to make money off you whether you’re white, black or purple.
Be more impressed. The senator did write a letter in 2006. Here is the link:
http://www.humanevents.com/article.php?id=28973
Be even more impressed. The senator cosponsored a bill on the mortgage problem in 2005.
http://www.govtrack.us/congress/bill.xpd?bill=s109-190
Oh, the senator who wrote the letter in 2006, and cosponsored the bill in 2005 was John McCain.
Mark,
Point partially conceded because you found earlier examples. That hardly counts as a victory, though. My main argument clearly stated that Obama saw only one “guilty” party in this. Shockingly, that “guilty” party coincided nicely with his ideological slant.
I don’t have time to look through the cosponsored bill. My quick glance suggests that it’s merely chasing the regulatory system around, thinking that this time they’d get it right, if only they centralize power a little more. If that’s an accurate read, and it might not be, that’s silly because it doesn’t look at the incentives and likely outcomes (i.e. rent seeking) from regulations, both existing and proposed.