Friday, December 16, 2011

A book: All The Devils Are Here

Back in 2007 while waves of defaults occurred after sub-prime loans "reset" (an adjustable rate mortgage payment that increases after the interest rate increases) I asked one loan officer,  "Why did lenders write variable rate notes when they knew these borrowers had little or no capacity to make higher payments down the road?"

What I heard in reply was that risky as these credit bets were, if conventional, higher fixed-interest rates were used, the borrower could not have qualified for as much of a loan.   My reaction?  Exactly!

I'm reading a book by Bethany McLean and Joe Nocera - All The Devils Are Here - The Hidden Story Of The Financial Crisis (Portfolio/Penguin).  I'm learning more about the origin of sub-prime lending and the players behind it but I'm struck by a rhetorical question the authors pose in Chapter Six, concerning the line between predatory lending and what I have called predatory borrowing:

"But in the larger scheme of things, did it really matter who was at fault?"

Yes.  It matters now more than ever.  Attention to causality (i.e. fault) is important because sweeping policies are being hatched to curb systemic risks for the future.  If they get it wrong, we'll over-regulate mortgage originators -- possibly choking off  liquidity for many qualified, low income borrowers.  My biggest fear is that we'll fail to transfer liability from the American taxpayer to future borrowers-lenders-investors (where it belongs).