Beating Up the Bankers

In many parts of the country the housing boom is over, or at least severely slowed. I'm seeing that where I live, though homes still seem to be selling. They're just not selling as quickly or for as much as the seller might have liked.

As we did in the 80's, we're going to start seeing more foreclosures as people who bought or refinanced their homes with low rate adjustable loans start feeling the effects of higher rates as those loans hit their adjustment period. Although I can sympathize with buyers who are so desperate to buy something that they bet their financial status on future interest rates, and the borrower is ultimately responsible for the mess they find themselves in, the bankers have to take some of the blame as well. The Dems are trying to place the blame fully at the feet of the bankers (from OpinionJournal.com):

Mortgage delinquencies are rising, subprime lenders are going belly-up--another company filed for bankruptcy Monday--and the Senate Banking Committee is holding hearings today on "predatory lending." All of this can only mean one thing: Congress is looking for someone to blame now that the housing boom is over.

The noted banking expert Jesse Jackson is scheduled to be a featured witness at today's hearing, along with a couple of unfortunate consumers who were sold mortgages they couldn't afford to repay. Senator Chris Dodd, Chairman of the Banking Committee, is in high dudgeon, threatening legislation and talking about the American dream becoming a nightmare for those who can't make their mortgage payments. It's time for a reality check.

No one likes to see anyone lose his home to foreclosure--and that includes the banks. Banks make money by lending to people who can repay their loans with interest. Lending people money they can't pay back is a lousy business, as the many recent headlines about subprime lenders going bankrupt demonstrate. If rapacious banks really had a goal of lending people more than they could afford to pay back, they wouldn't be swimming in red ink.

Related to this is the contention, made by the same populists on the current "predatory lending" rampage, that banks make money by charging them "excessive" interest. But, if anything, the recent spate of bankruptcy among subprime lenders suggests that they were charging too little interest to compensate for the credit risk they were taking by lending to people with bad credit histories.

Certainly some lenders have contributed to this problem by making loans to people who were not likely to be able to afford them in a rising rate market. Right now there are ads running on local radio for a loan program which promises a payment of only $20 per $100,000 borrowed. That's nuts! It means the thousands of dollars in interest that you're not paying each month are being added to the loan balance. Depending on your loan-to-value ratio, you could end up wiping out the equity on your home in a few years and owing more than the home is worth. This type of lending shouldn't be allowed because it's just tailor-made to create foreclosures.

The market goes through these booms and corrections every few years, and some of the weak links need to be removed from the system, but unfortunately many homeowners will pay for the predatory lending practices of the sub-prime lenders.