Self-Defense on Predatory Lending
By Arnold Kling
I don’t do well in back-and-forth blog spats, but I want to reply to the anonymous blogger at The Economist, who is jumping to the conclusion that I am ignorant, when I believe I know what I am talking about.
The issue is predatory lending, and he points out that mortgage brokers could make a profit by making risky loans and selling them to investors. But that is not predatory lending, as I would define it. The mortgage broker is taking advantage of the investor in the loan, not the borrower (mortgage brokers try to take advantage of borrowers, too, but that is another story). When I was with Freddie Mac, we assumed that mortgage brokers were scum who would try to pawn off bad loans, and we took all sorts of steps to try to avoid buying such loans. It was not because we felt sorry for the borrowers. It was because we did not want to lose money.
Mortgage brokers always make money by selling loans. They never make money by turning down a borrower. That is why investors have to be wary.
Is it preying on the borrower to make a bad loan? Not so much. The borrower gets a free option. If the house price goes up, it doesn’t matter whether the borrower can make the payments or not–the borrower can sell the house at a profit. If the house price goes down, the borrower loses his down payment, plus moving expenses, plus a ding on his credit rating. As down payments approached zero, the total down side of this was pretty small.
The “prey” of the predatory lending in recent years was not the borrower. It was the investor. Investors turned into suckers. I don’t feel sorry for them. If you want me to feel sorry for the borrowers, you have to convince me that they lost more than I understand they did.