Sunday, February 11, 2007

Cavalcade of Capitalists: Mortgage Brokers and the Broker-Friendly Economists Who Excuse Greed

Home mortgages are not what they used to be. According to an NPR report, lenders no longer assume some of the risk for borrowers thanks to volume loan sales. And there are no regulations in place to make sure that mortgage brokers act in the best interests of their clients. It is all money driven. An official with the Center of Responsible Lending addressed the "perverse incentives" of mortgage brokers:

Financial incentives are to close as many loans as possible as fast as possible regard of risk. Whether the borrower can repay the loan is really not of their financial concern.
The result is "artificially low teaser payments" that hook borrowers whose credit is rocky; after a while those payments stop teasing and realty sets in when interest rates make mortgage payments impossible for those "sub-prime" borrowers.

An economist with the Mortgage Bankers Association told NPR that regulations are not needed because mortgage defaults do not threaten the economy. He argued that investors are in the "learning phase," which should be allowed to run its course.

My question would be: what can this learning phase teach us that centuries of observation of human behavior have not taught us? There is nothing novel about the mortgage broker equation: it involves one group of people marketing their product at artificial rates in order to take advantage of weaker, at-risk groups. Taking advantage of the weaker parts of the herd has been the standard procedure for human beings from day one. Predatory lending is no different than other predatory behavior.

We do not need to let this learning phase run its course. We already know what is happening and what is going to continue to happen until a force stronger than money forces mortgage brokers to assume responsibility for the long-term well-being of borrowers. This is not a new problem; it is ages old. While the Mortgage Bankers Association may feel perfectly fine watching borrowers go over the default cliff to their ruin, the rest of us should not be, and we should demand that Congress formulate regulations to stop predatory lending and to reign in predatory entrepreneurs.


  1. THe Mortgage Bankers made the comments, yet you are blaming the Mortgage Brokers. You need to realize that the mortgage brokers are working under the laws set by the consumer groups and the democratic state legislatures, these laws are working, but the competition for the consumer group financing arms isn't getting a big enough piece of the pie.So they are trying to put their competition out of business. The self produced study by the "consumer group" is a subsidiary of a "credit union", who does do mortgages and wants to eliminate all the competition. They pay service release just like the banks do. They are no different than the banks and their default rate is about the same as the subprime companies going out of business, yet they work off grants so they don't have to report to stock holders about profit.

  2. If you really want ot be objective about this issue then you should rant about predatory borrowers. Yes, those evil scum that take out loans without any intention of ever actually parying them off. Banks MUST charge enough interest on high risk loans to pay for these deadbeats.