Subprime borrowers shouldn’t get all the blame

In today’s StarTribune there is an opinion piece by Steve Chapman in which he complains that many of the solutions coming out for the subprime mess are misguided because “they punish lenders for the failings of borrowers. Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn’t? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they’d be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.”

Chapman is missing an important detail, as Professor Jeff Sovern, at Consumer Law & Policy Blog, nicely dug out of some old congressional testimony by Sandy Samuels, Executive Managing Director of Countrywide Financial Corporation, “60% of those who qualified for the hybrid ARMs would not be able to qualify for the rate they were to be charged in the relatively near future.” That means the lenders were making the loans knowing that 60% of the people they were making the loans to wouldn’t qualify if the loan was calculated at the future adjusted rate.

Once again for effect: 60 % of ARMs were sold to people knowing that short of a miracle, they wouldn’t be able to afford them when they adjusted. A mortgage broker I have worked with on some of my cases told me essentially the same thing a while back, stating that on adjustable notes the lenders generally looked only at the present ability of a borrower to pay or occasionally a year or two into the future, when calculating whether a person could afford the loan, even if the loan was a 3 or 5 year ARM.

This leads us to another issue that Chapman misses, the problem of “steering.” I was at the barber shop last week, and after the barber told another customer what I do, the customer stated a position similar to Chapman’s, that it was really the borrowers fault. But then he started telling me about his own recent experience buying a condo. He had told the broker that he wanted a 30 year fixed. Well the broker repeatedly tried to steer him into an ARM. The guy said the broker kept after him, telling him how the ARM would be a great thing due to the low payments, yada-yada. The guy said the broker wouldn’t take “no” for answer until he finally told him that he would go to a different broker if he didn’t get him the 30 year fixed. When I pointed out, that not everybody has the wherewithal to resist that kind of a sales onslaught, the guy seemed to see the light.

So maybe some borrowers really understood what they were getting and were gambling on interest rates and the market, but so where the lenders. The thing is the lenders thought they had a sure thing, either the borrower could afford the adjusted rate or they got a couple of years of payments and a house, which had gone up in value. Turns out, instead of red or black, the ball fell on the “Zero” when the housing market fell.

So who should bear the brunt of the blame the home owner who was told they were getting a wonderful deal that they could afford right now (barely) and maybe in the future if the stars aligned or the lender who had a much better understanding of what they were gambling on?