Thursday, February 28, 2008

Predatory Lending

Dr. Asher Meir, the "Jewish Ethicist", writes about the Subprime Mortgage Crisis* (link):

Q: I've heard the great sub-prime crisis was caused by predatory lending practices. Is it wrong for banks to lend to high credit-risk homebuyers?

A. Some accusations have been made that the banks gave credit on terms that were likely to lead to default and repossession. I can't comment on these accusations, and I have seen no convincing evidence so far. But it is worthwhile to see how Jewish tradition deals with the ethical dilemma involved in the decision to extend credit when there is a good chance that it will result in repossession...

Click here to read moreAsmachta is a legal expression meaning that a person doesn't have true "informed consent" to an agreement, because he doesn't properly understand the risks involved. For example, a hustler's gambling winnings may be considered asmachta...

To sum up: I have seen no evidence that sub-prime lenders were in any way scheming to foreclose. However, the whole crisis has brought public attention to the foreclosure process and possible inequities in it. Jewish law includes a number of safeguards against predatory lending practices, including a demand for truly informed consent to lopsided foreclosure conditions, and a right of redemption for someone who has lost his house.
Let me state my somewhat informed opinion that it is incorrect to suggest that the crisis in general was based on banks lending on terms that they intended to lead to foreclosure. While you can't rule out anything in isolated cases, this was not at all the general attitude. Banks did not (and do not) want to foreclose. They want people to pay them lots of money.

However, that does not mean that there was not a problem of predatory lending. There is ample evidence that mortgage brokers sometimes improperly steared borrowers to more expensive mortgages when they could qualify for cheaper loans. And there is also ample evidence that the complex terms of loans were not adequately explained to borrowers.

However, there was also predatory borrowing that has been a large cause of the current problems. Fraud has been rampant in mortgages for the past few years, which led to borrowers receiving loans on false pretenses that they could not afford. Banks should not have made those loans without proof of ability to repay, but borrowers who lie to obtain a loan are taking advantage of their lenders.

Unfortunately, the current crisis has been caused by widespread wrongdoing on many levels of the financial system--albeit some wrongdoings being explicitly fraudulent and others being less severe. But, sadly, there is plenty of blame to go around. No one party has caused it individually.
* I hate to call this a Subprime Mortgage Crisis because it impacts more than just subprime and has led to problems well beyond mortgages. Now we are starting to hear people talk about a Credit Crunch, which is probably more accurate--particularly about the next stages of developments--although less informative.

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