Word To The Wise: And Let The Banking Games Begin

bankingBy E. Roberts Musser

The Justice Department just announced a $335 billion settlement with Countrywide Financial, now part of Bank of America.  It is the largest fair lending suit ever, and includes allegations that qualified black and Hispanic borrowers were systematically discriminated against.  Supposedly these folks were charged higher fees and interest rates than other borrowers in retail and wholesale lending. This is a practice known as “reverse redlining”.  The higher fees charged were based not on creditworthiness, but on the person’s race or national origin.

These homeowners were steered into much riskier subprime loans (option pay adjustable rate mortgages), even though they qualified for prime loans (fixed rate mortgages).  U.S. Assistant Attorney General Thomas Perez of the Civil Rights Division strongly criticized the practice by saying, “[The banks] understood marketing.  They understood how to build trust… This is discrimination with a smile.”  However, Perez conceded that the settlement was more about the principle than the money, since effected homeowners stand to only receive somewhere between several hundred to several thousand dollars each.  The legal community is particularly critical of the settlement, noting it is an “agreement in principle”, but not in any way a final agreement.  Critics believe the announcement of the settlement was nothing more than acceding to the Administration’s wish to build on its State of the Union PR.  More importantly, the settlement would give up any bargaining leverage the state Attorneys General have over how this deal turns out.

Countrywide already agreed to a settlement with the former New York Attorney General Eliot Spitzer, to compensate black and Hispanic borrowers improperly steered to higher cost loans.  Countrywide documents also show a policy of lending to borrowers with as little as $1000 in disposable income.  Nevertheless, the Fannie Mae Foundation labeled Countrywide Financial a “paragon” nondiscriminatory lender.  The CEO of Countrywide bragged that in order to approve minority applications, “lenders have had to stretch the rules a bit”.  Some customers complained that after hurricanes Katrina, Gustav, and Rita, Countrywide advised customers in the affected areas they could take a break on payments without any late fees, and payments would be added back to the end of the loan.  Instead loan customers were forced to pay missed payments in a lump sum along with late fees, within 30 days, or face foreclosure.

Yet in an investigation in 2008, it was revealed Washington, D.C. politicians received mortgage financing from Countrywide at noncompetitive rates.  Favored politicians included none other than Christopher Dodd, Chair of the U.S. Senate’s Banking Committee; Kent Conrad, the Chair of the U.S. Senate’s Budget Committee; James Johnson, former CEO of Fannie Mae and campaign advisor to Barack Obama; and Franklin Raines, former CEO of Fannie Mae, as he took calls from Barack Obama’s campaign seeking advice on mortgage and housing policy.

Also in that year, the Attorney Generals of Illinois and California filed suit against Countrywide, alleging: unfair and deceptive practices in getting homeowners to apply for risky mortgages far beyond their means; false advertising; predatory lending; misinforming consumers how certain mortgage products worked such as adjustable rate mortgages, interest-only loans, low-documentation loans, and home equity loans.  Despite all the negative publicity and lawsuits, Countrywide and then its successor Bank of America were awarded the Property Management contract with the Veteran’s Administration.

Fast forward to the present day and more bank irregularities – New York Attorney General Eric Schneiderman just sued some of the biggest banks in the nation for setting up a private electronic registry to track mortgages.  The private system was supposedly an attempt to make an end-run around the public property recording system, to assist banks in more quickly buying and selling portions of mortgages.  This private system helped banks create “deceptive and fraudulent court submissions” to improperly foreclose on homeowners, according to Schneiderman.  The lawsuit alleges that this was a scheme to avoid both government registration fees and properly recording the transactions.  The system also concealed identities of the holders of the mortgage debt from borrowers.  Schneiderman said it resulted in “undermining the integrity of the judicial process, created confusion and uncertainty concerning property ownership interests, and potentially clouded titles on properties throughout the state of New York”.

Ultimately the $335 billion settlement with the Justice Dept. is being touted as an aim to “provide substantial relief to homeowners and establish significant new homeowner protections for the future”.  How will a few thousand dollars to a foreclosed homeowner provide substantial relief?  What significant new homeowner protections have been put in place?  The practice of robo-signing (a single bank employee signing thousands of official documents without verifying their accuracy) is still going on to this day.  Is this settlement all about creating great headlines for an upcoming election season? Or is it about actually providing much needed relief to defrauded homeowners, not to mention preventing future wrongdoing?

The Dodd-Frank Wall Street Reform and Consumer Protection Act introduces a new nebulous standard regarding “abusive” practices.  It gives the authority to the newly formed Consumer Financial Protection Bureau (CFPB) to prohibit financial institutions from engaging in such behaviors.  According to the FSA Times, “Critics [of financial institutions] have questioned the clarity of advertisements, disclosure of loan terms and conditions, and the complexity of the loan modification and foreclosure processes. They argue that consumers may not have been, nor are they currently, equipped to understand the risks associated with financial products and services. Questions have arisen regarding not just whether products, services, and practices are unfair or deceptive, but whether they are fair or abusive. This is, in part, the genesis of the CFPB, and its regulatory powers to prevent unfair, deceptive, or abusive acts or practices (UDAAP).”

But the FSA Times also concedes, “In the absence of rules or other guidance from the CFPB, however, it would seem that there is no clear path for institutions to address the abusive standard in their day-to-day operations. Fundamental questions remain regarding materiality and reasonableness, and how far institutions should go in their assessment of what is in the interests of the consumer, which sounds like, but stops short of, imposing a fiduciary responsibility or duty of care on the institutions.”  In other words the term “abusive” has as yet to be defined by the federal government, which makes this standard almost meaningless, in my opinion.

Furthermore, many citizens mistakenly believe robo-signing is a victimless crime, but nothing could be further from the truth.  Neil Garfield of the LivingLies blog sums it up nicely by saying, “Because so many people wish to gloss over the niceties of proper documentation, the banks are being permitted to claim losses they never endured, claim ownership of loans they never funded or bought, claim lien foreclosure, evict millions from their homes, take title to property, create blighted cities that once thrived, abandon the property they foreclosed, and all without taking an ounce of responsibility for the effect on investors who advanced all the money, the homeowners who advanced their lives and all the property, the taxpayers who have paid the defaulted loans repeatedly to banks that did not own the loans, and the nation’s prospect as the leader of the free world.”

As an attorney practicing in the area of elder financial abuse, I have seen the ravages of bank fraud hit the local senior community very hard.  One couple that came to see me had lived in their home for over 30 years before it was foreclosed on.  They had been misled by the lending institution,  converting an uncollateralized loan on farming debt – that could have been discharged in bankruptcy – into a collateralized one with their home as the collateral.  Additionally, the monthly interest rate of the adjustable rate mortgage was listed as monthly rather than yearly, @ 1.5%, which equates to 18% per year.  Yet the font size labeling the interest as a monthly rate was so small that it required a magnifying glass to read.  In another case I worked on, the elderly homeowner who was being foreclosed on complained, “I should have known it was too good to be true, but I trusted my bank to be straight with me.

Lesson to be learned: Caveat emptor – buyer beware!  If it sounds too good to be true, it probably is.

Elaine Roberts  Musser is an attorney who concentrates her efforts on elder law and aging issues, especially in regard to consumer affairs.  If you have a comment or particular question or topic you would like to see addressed in this column, please make your observations at the end of this article in the comment section.

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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21 thoughts on “Word To The Wise: And Let The Banking Games Begin”

  1. Dr. Wu

    Its clear that the Federal government’s policy continues to be to prop up banks.

    “Too big to fail” has lead to further concentration in the banking industry (such as B of A buying countrywide). Worse this kind of policy creates “moral hazard” where banks are continually lead to believe that they will get bailed out regardless of how fraudulent or illegal their behavior.

    This is crony capitalism at its worst. WE are setting ourselves up for another financial crisis 5-10 years down the road. After the savings and loan debacle 25 years (roughly) ago, the govt set up an authority which effectively took over bad savings and loans and fired most of the people engaging in fraud. the swedes did much the same thing during their banking crisis, also over a decade ago.

    What we have done instead is to allow the people who engaged in this fraudulent behavior to keep their jobs. Not only is this morally reprehensible its bad economics. The Chinese are watching–maybe their version of state capitalism is better than our crony capitalism?

  2. Frankly

    Elaine: Nice job on the article in general. However, I thnk it is lacking some balance viewing it from the banking side. It also fails to sufficiently address immoral and unethical borrower practices.

    [i]Is this settlement all about creating great headlines for an upcoming election season?[/i]

    Absolutely. So were the legal actions taken against these banks. Freddie Mac was supposed to be overseeing the eligibility and credit practices. However, as a GSE its failures implicate the government. So much of the government’s actions against the banks are meant to deflect attention and demonize private corporations (part of the Democrats winning class warfare strategy). However, it is done with a wink and a nod. Basically, the big banks know if they play the PR game helping the politicians save face, the government will respond favorably with legislative and executive goodies down the road.

    [i]”and includes allegations that qualified black and Hispanic borrowers were systematically discriminated against.”[/i]

    -and-

    [i]”getting homeowners to apply for risky mortgages far beyond their means; false advertising; predatory lending; misinforming consumers how certain mortgage products worked such as adjustable rate mortgages, interest-only loans, low-documentation loans, and home equity loans.”[/i]

    Get the circular, and conflicting, argument here? Banks create new products and aggressively go after minority borrowers and they are predators. However, if they don’t do this they are guilty of discrimination.

    [i]”Lesson to be learned: Caveat emptor – buyer beware! If it sounds too good to be true, it probably is.”[/i]

    Bingo! Ding, Ding, Ding, Ding!

    There should be a clear line between supplier fraud and buyer confusion. We confuse these two things at our own peril.

    One last point to ponder… It is so interesting for me to hear the claims of both excessive greed and discrimination in arguments demonizing banks. If banks are just greedy, then why would they care about the race of the borrower? That is the thing about pure capitalism and the free pursuit of profit… it is the least biased about factors that are not purely economic. It is this jump to a claim of racism that frosts me. Working in banking, I can tell you that the race of the borrower is never an issue. Certainly it can be in some communities where the bank is a small community bank. Credit determination includes an assessment of borrower character. The measures can be subjective and so stupid people can allow inappropriate biases as rating criteria. However, if these loans are to be pooled and sold to Freddie Mac, the rating criteria have to be qualified and standardized. Also, random loans should be audited and lenders that break the rules should be fined.

    The bottom line is that today there is very little pure racial discrimination in the practices of bank lending. The main problem is that territories where minorities are over-represented tend to be more economically depressed and with a lower concentration of high-quality borrowers. Banks tend to lose money in these areas and so they don’t open up shop. If they do go there, they have to resort to using lower-paid lower-qualified employees and/or more creative products to make it work.

    Going forward, the Internet is going to change the face of banking more than anything government can do. As the use of cash and face-to-face banking practices continue to decline being replaced by electronic transactions, the cries of racial-bias in banking will be more easily identified as what they really are… the failed attempts of the left to engineer society in their screwed-up worldview.

  3. Problem Is

    Thanks for bringing a detailed post to local readers on a critical issue.

    Mr. Boone may find the following links written by respected banking analysts, securitization and MBS experts, and a law professor and former federal banking regulator [i]”a more balanced view from the banking side.”[/i]

    [b]Janet Travakoli:[/b]

    December 8, 2010: Powerpoint presentation and analysis to the Federal Housing Finance Agency (FHFA) in Washington D.C. of key causes of our current financial crisis.

    [i][b]Repairing the Damage of “Fraud as a Business Model”[/b][/i]

    [b]William K. Black:[/b]

    [i][b]The Four Levels of (Banker) Control Fraud Involving Mortgages:[/b][/i]

    [quote]1. Loan Origination Fraud.
    2. The Fraudulent Sale of Fraudulent Loans.
    3. Pooling Fraudulent Loans to Create and Sell Fraudulent CDOs.
    4. Foreclosure Fraud.[/quote]

    [b]Yves Smith:[/b]

    [i][b]Quelle Surprise! San Francisco Assessor Finds Pervasive Fraud in Foreclosure Exam[/b][/i]

    [quote]One of our big beefs about the pending mortgage settlement has been the failure of prosecutors and regulators to do anything remotely resembling serious investigations.

    We’ve seen repeatedly that small scale investigations in the servicing and foreclosure arena have found widespread problems… So the latest report from San Francisco county should come as no surprise. From Gretchen Morgenson of the New York Times…[/quote]

    [i][b]NYT: Audit Uncovers Extensive Flaws in Foreclosures[/b][/i]

    The evidence of Wall Street securitization fraud driving “liar’s loans” and other institutional mortgage fraud is overwhelming and pervasive.

    The MERS system was in and of itself a vehicle to lower securitization costs by not properly registering the deeds at the county level throughout the nation defrauding local recording offices of billions of dollars in fees. Each mortgage has to be assigned to several parties to be validly placed in the trust. One recording fee for each party, millions of times.

    The fact that a proper chain of title does not exist from originator to the trust that holds the mortgages for the bonds to be issued is securities fraud under NY state trust law. The lack of a chain of title instigated the robo-signing scandal… a euphemism for perjury and fraud upon the court by submitting knowingly false documents where judicial foreclosures are required.

    I am sure an attorney like ERM can explain it better than I…

  4. Problem Is

    I guess David’s website doesn’t support links. Sorry:

    [i][b]Repairing the Damage of “Fraud as a Business Model”[/b][/i]
    http://www.tavakolistructuredfinance.com/TSF100.html

    [i][b]The Four Levels of (Banker) Control Fraud Involving Mortgages:[/b][/i]
    http://www.neweconomicperspectives.org/2011/12/president-obama-negotiates-our-formal.html

    [i][b]Quelle Surprise! San Francisco Assessor Finds Pervasive Fraud in Foreclosure Exam[/b][/i]
    http://www.nakedcapitalism.com/2012/02/quelle-surprise-san-francisco-assessor-finds-pervasive-fraud-in-foreclosure-exam-and-paul-jackson-defends-his-meal-tickets-yet-again.html

    [i][b]NYT: Audit Uncovers Extensive Flaws in Foreclosures[/b][/i]
    http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html?_r=2&hp

  5. Frankly

    Problem Is, you need to put the link in between the following tags:

    [url][/url]

    [url]http://www.tavakolistructuredfinance.com/TSF100.html
    [/url]

    [url]http://www.nakedcapitalism.com/2012/02/quelle-surprise-san-francisco-assessor-finds-pervasive-fraud-in-foreclosure-exam-and-paul-jackson-defends-his-meal-tickets-yet-again.html[/url]

    [url]http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html?_r=2&hp
    [/url]

    I will check them out.

    Note, I manage a company that does commerical real estate mortgage lending in California. I am not a residential lending expert, but I know a quite bit about banking in general. I discount most “analyses” coming from politicos or anyone with a connection to government because current govenment is controlled by liberal democrats with a anti-business, anti-bank agenda. The spin never stops.

  6. E Roberts Musser

    [quote]Elaine: Nice job on the article in general. However, I thnk it is lacking some balance viewing it from the banking side. It also fails to sufficiently address immoral and unethical borrower practices. [/quote]

    I’m not convinced the banks have a legitimate side here. Let’s take the example I spoke about. My clients were an elderly couple in the market for a nice home. They doubted they qualified for the type of house the bank was advocating they could afford, but what the heck? The bank said they could afford the house, and they trusted the bank would not put them in a house they could not afford. After all, why would a bank do such a thing?

    But that is precisely what the bank did – put this couple in a house they really did not have the means to support, with a pay option adjustable rate mortgage. Who is to blame here, in your opinion, for putting this couple in a house that they really could not afford? The bank or this couple? Remember, a bank has a fiduciary duty to make sure that anyone they lend money to has the means and can afford to pay the loan back…

    You talk about immoral/unethical behavior of the borrower. From where I sit, unless the borrower lied on the application about their income, I don’t see that the borrower is in any way to blame. They are trusting the bank to know what is an appropriate sized loan and what is not. As far as misrepresenting income, that is almost impossible, as the bank requires verification of income. And in the mortgage meltdown, it is the bank officers themselves who actually illegally inflated the income of the borrowers, often unbeknownst to the borrower.

    Most people are purchasing a home to live in long term, not as some sort of investment. They are not likely to purchase a home if they think they cannot possibly make mortgage payments down the road. Banks on the other hand, did not give a d_mn. As long as they could bundle bad loans with the good, slice and dice the bundled product, then sell all the pieces of the bundled product off quickly, they could care less if the borrower defaulted. They would not be left holding the bag. The real problem lies with not holding the originator of a bad loan accountable, when the loan is defaulted on.

  7. E Roberts Musser

    [quote]Absolutely. So were the legal actions taken against these banks. Freddie Mac was supposed to be overseeing the eligibility and credit practices. However, as a GSE its failures implicate the government. [/quote]

    Fannie Mae and Freddie Mac were just as guilty of bad banking practices as the rest of the large private banks. As such, they deserve as much censure as the rest…

    [quote]Get the circular, and conflicting, argument here? Banks create new products and aggressively go after minority borrowers and they are predators. However, if they don’t do this they are guilty of discrimination. [/quote]

    How do you justify a bank selling unsophisticated minority homeowners adjustable rate mortgages when these same homeowners could have qualified for a fixed rate mortgage? The banks sent in representatives to neighborhoods full of lonely widowed seniors, and those that spoke English as a second language, and completely took advantage of these naive folks. The bank has a fiduciary duty not to do such a despicable thing. I don’t deny that Barney Frank and company insisted that the banks stop “redlining” minority neighborhoods and make loans accessible to these folks – which was a colossally stupid move and incredibly wrong. But I very much doubt Barney Frank told the banks to cheat minorities to get the job done!

  8. E Roberts Musser

    [quote]There should be a clear line between supplier fraud and buyer confusion. We confuse these two things at our own peril. [/quote]

    Supplier fraud is supplier fraud. Lying about the borrower’s income is blatant fraud. Buyer confusion, on the other hand, is created by the banks themselves. The banks need to be sure that their financial products are fully understood by consumers. I can almost guarantee you that if most buyers were fully aware of the full ramifications of an adjustable rate mortgage, they wouldn’t touch these things with a ten foot pole. In my opinion these things are an abomination. An option pay adjustable rate mortgage should be outlawed altogether as an irresponsible product designed to bilk the consumer.

  9. E Roberts Musser

    [quote]Working in banking, I can tell you that the race of the borrower is never an issue.[/quote]

    This is just not correct. Barney Frank & Co. insisted banks lend money to more minorities. It is my understanding that Frank made threats against the banks if they didn’t do what they were told. The banks then turned around and targeted minority communities, particularly ones where English was spoken as a second language, or senior communities where the residents would tend to be naive and alone. The banks then misled these customers into borrowing under the terms of an adjustable rate mortgage, when many qualified for a much cheaper fixed rate mortgage. The bank reps themselves often inflated the income of borrowers, entering false figures on the paperwork, frequently without the borrower even knowing of the misrepresentation. Why? Because the banks could now bundle good loans w bad as a new investment product, slice and dice the bundle, and sell off all the pieces to unsuspecting hedge funds and the like. When the “fit hit the shan” and the borrower defaulted on the bad loan, there was almost no way of telling who had originated that bad loan. Had the banks not been able to get out from liability for bad loans they originated, they never would have engaged in such shady practices…

  10. E Roberts Musser

    [quote]Note, I manage a company that does commerical real estate mortgage lending in California. I am not a residential lending expert, but I know a quite bit about banking in general. I discount most “analyses” coming from politicos or anyone with a connection to government because current govenment is controlled by liberal democrats with a anti-business, anti-bank agenda. The spin never stops.[/quote]

    There is a big difference between a company that does commercial real estate mortgage lending, and one that does residential lending – the customer. Commercial customers are sophisticated consumers and probably are not easily bamboozled. Most laypersons buying a home are extremely naive and can easily be led down the garden path…

  11. E Roberts Musser

    From investopedia.com:
    [quote]Definition of ‘Liar Loan’
    A category of mortgages known as low-documentation or no-documentation mortgages that have been abused to the point where the loans are sometimes referred to as liar loans. On certain low-documentation loan programs, such as stated income/stated asset (SISA) loans, income and assets are simply stated on the loan application. On other loan programs, such as no income/no asset (NINA) loans, no income and assets are given on the loan application form. These loan programs open the door for unethical behavior by unscrupulous borrowers and lenders.

    Investopedia explains ‘Liar Loan’
    These loan programs are designed for borrowers who have a hard time producing income and asset verifying documents, such as prior tax returns, or who have untraditional sources of income, such as tips, or a personal business. These loans are called liar loans because the SISA or NINA features open the door for abuse when borrowers or their mortgage brokers or loan officers overstate income and/or assets in order to qualify the borrower for a larger mortgage.

    Low-documentation mortgages usually fall into the Alt-A category of mortgage lending. Alt-A lending depends heavily on a borrower’s credit score (FICO score) and the mortgage’s loan-to-value ratio (LTV) as tools to determine the borrower’s ability to repay the mortgage.

    Read more: http://www.investopedia.com/terms/l/liar_loan.asp#ixzz1mc2l51Li%5B/quote%5D

  12. Adam Smith

    ERM

    Many of the products that you are “blaming” as bank fraud and misrepresentation were developed in order help solve the “barney frank” problem, which developed because he and other Congressional representatives were concerned that low income persons were not being afforded a chance at the “American Dream” of home ownership. Many of the complex documents that you point out as causing confusion were the result of federal and state government mandated disclosure requirements meant to fully inform borrowers, but instead caused the documents to be so long and complex that the readers didn’t understand them (several of these documents are actually “government approved and mandated” as to form and content). And, in the end, if borrowers didn’t understand what they were signing or were confused, they should have just refused. But instead, they knew that these types of loans was all that was was available to them, and that walking away meant that they couldn’t buy that “nice house” that you referenced in one of your examples.

    All that said, the banks are not blameless, – they too needed to exercise restraint, just like borrowers. But many, many banks have paid a terrible price. Many of them, like countrywide, bear stearns, golden west, wachovia and countless others filed bankruptcy or were purchased at very distressed prices. Many of their employees have lost their jobs. Investors lost billions of dollars. In the end, I doubt those banks feel like they came out ahead in this mess, and neither do very many borrowers.

    Finally, you cited the instances of lenders inflating incomes etc. I don’t doubt that there are examples of that. But there are plenty of examples of borrower fraud as well. There were internet based companies that provided false w-2 forms, and provided false job verifications. There were misrepresentations of assets, liabilities and cash equity.n this scheme as well.

    On balance, the leverage became toxic for everyone – borrowers, lenders, and bystanders who never participated in the loans or home ownership – they’ve all suffered.

  13. Frankly

    Adam Smith – Very well done. I could not have written it better myself (obviously, because I didn’t).

    Elaine, I don’t mean to come off like I see banks as blameless in this. I agree with Adam that many banks did not demonstrate adequate restraint. However, how many people and businesses got swept up into this wild housing market enthusiasm? It was a bit of a ponzi scheme in retrospect, but at the time almost nobody could muster enough common sense. I have one dear friend that I argued with because he rejected debt and said everyone was stupid paying so much for inflated home prices. Turns out he was correct and I was wrong. Unfortunately the economy took down his business at the very time he and his family could have leveraged his wisdom and purchased a home priced back down to earth. Lucky me, I live in Davis and have been in the same house for 22 years.

    One profession that seems to get off Scott free, but one that I think deserves some scorn, is that of realtors. They morphed from being expert property advisors to one selling investments. Even back in the mid 1980s when I purchased my first home, I was sort of dumbstruck by the talk of “how much equity I would earn” by buying this or that home. You really have to include realtors if you include banks in this claim of taking advantage of uninformed buyers. Just like bankers, I think most realtors are consummate professionals. However, the chance to make a lot of money attracted a lot of less ethical types that would just hunt for warm bodies to make a sale. How could an unsophisticated, low income borrower resist a pitch that they could make tens of thousands of dollars in just a few years? Frankly, after the realtor/broker got done exploding the vision of riches to be had, I think many otherwise more careful people would have signed anything.

    [i]”There is a big difference between a company that does commercial real estate mortgage lending, and one that does residential lending – the customer. Commercial customers are sophisticated consumers and probably are not easily bamboozled. Most laypersons buying a home are extremely naive and can easily be led down the garden path… “[/i]

    Well, I can understand why you might think that, but let me introduce you to the average small business owner in California. There are many more residential borrowers than commercial property borrowers, but I don’t think the distribution of sophistication is much different.

    I’ve been thinking about your post today in the broader context of supplier versus buyer responsibility. Of course there is always a need for balance; but I guess I tend to tilt more toward the “buyers beware” principle. I signed a couple of contracts early in my career that came back to bite me because I didn’t read or understand something. I ended up in small claims court both times and lost both. It seems that being ignorant about what I signed was not a good defense strategy.

    Of course I reserve this principle for adults… not older seniors or children; but as long as the business transaction did not include any fraud (and “Liar Loans” are certainly fraud), I cannot hold any party as being responsible other than the borrower. Frankly, I squirm a bit over the inference that minority buyers are that much in need of hand-holding. I know quite a few uneducated minorities that are much better at buying and negotiating than I am.

    However, assuming this is a problem… one last related question… why – with all these dreams of engineering society so more minorities could own a home – didn’t politicians require government to offer and require some borrower training on real estate and mortgages? As Adam points out, it is all the government mandated disclosures and the terminology derived by them that can cause so much confusion. Maybe if this had been done more would have been able to understand the offers made to them, and fewer people would have signed away.

    This is the approach I prefer to address more of our social and economic challenges… enable the end user instead of trying to control the supplier and then demonizing him when the control inevitably fails.

  14. jimt

    I think the first post by Dr. Wu is worth copying:

    “Its clear that the Federal government’s policy continues to be to prop up banks.

    “Too big to fail” has lead to further concentration in the banking industry (such as B of A buying countrywide). Worse this kind of policy creates “moral hazard” where banks are continually lead to believe that they will get bailed out regardless of how fraudulent or illegal their behavior.

    This is crony capitalism at its worst. WE are setting ourselves up for another financial crisis 5-10 years down the road. After the savings and loan debacle 25 years (roughly) ago, the govt set up an authority which effectively took over bad savings and loans and fired most of the people engaging in fraud. the swedes did much the same thing during their banking crisis, also over a decade ago.

    What we have done instead is to allow the people who engaged in this fraudulent behavior to keep their jobs. Not only is this morally reprehensible its bad economics. The Chinese are watching–maybe their version of state capitalism is better than our crony capitalism?”

    Spot on, Dr. Wu!
    Notice that none of the feds in the executive or legislative branch or other influential offices has come out with any serious proposal to correct this larger situation. Maybe you can argue the feds are not guilty of actively enabling gigantic financial fraud; but they have certainly demonstrated that they passively let it happen, and let the taxpayers bail them out; works out fine for the wall street boys, its not likely they will have to give up the 3rd or 4th or 5th home if the financial system comes crashing down (not many did after the previous crash). I agree with Dr. Wu that we are setting up for another fall (a bigger one); before this happens a number of additional people on Wall Street will make fortunes; many on a dynastic scale–they would be remiss if they did not advantage of the opportunity (e.g ‘If I don’t take this opportunity, the guy next door will, so it may as well be me instead of that other schmuck that gets rich”)

  15. E Roberts Musser

    [quote]Many of the complex documents that you point out as causing confusion were the result of federal and state government mandated disclosure requirements meant to fully inform borrowers, but instead caused the documents to be so long and complex that the readers didn’t understand them (several of these documents are actually “government approved and mandated” as to form and content). And, in the end, if borrowers didn’t understand what they were signing or were confused, they should have just refused. [/quote]

    [quote]However, assuming this is a problem… one last related question… why – with all these dreams of engineering society so more minorities could own a home – didn’t politicians require government to offer and require some borrower training on real estate and mortgages? As Adam points out, it is all the government mandated disclosures and the terminology derived by them that can cause so much confusion. Maybe if this had been done more would have been able to understand the offers made to them, and fewer people would have signed away. [/quote]

    I am in complete agreement with both of you here. At one time the gov’t talked about pushing for all contracts involving the sale of homes/cars/leases to be put in plain English rather than legalese, so that the average person could understand what they were signing. It never happened (gee, I wonder why?). It is unconscionable to me that contracts to make the biggest purchase of one’s life should be so convoluted even a lawyer would have trouble understanding them. Jeff’s idea of independent mandatory borrower training is a good one. It certainly couldn’t hurt. The bottom line is that most folks TRUST their banks implicitly, and should be able to trust their banks. Banks are the ones who have broken the faith w the public by their unsavory practices (driven by Barney Frank & Co)…

  16. E Roberts Musser

    By the way, have either of you purchased a car lately? Ever seen a contract to purchase a car? It is literally (no joking) a number of feet long – about 2 yards. Now how ridiculous is that?

  17. E Roberts Musser

    And just as an aside, I hold banks to a higher fiduciary standard (thus do not ascribe to the bankrupt notion (pardon the pun) of caveat emptor) because banks are in a far better position to know right from wrong than the average consumer. For instance, the average consumer is not necessarily going to know how much of a loan they can afford on their income – but the bank knows full well. The bank knows full well if the consumer would qualify for a fixed rate loan versus an adjustable rate one. A consumer should be able to trust that the bank is going to tell them the truth, no?

  18. Adam Smith

    [i]And just as an aside, I hold banks to a higher fiduciary standard (thus do not ascribe to the bankrupt notion (pardon the pun) of caveat emptor) because banks are in a far better position to know right from wrong than the average consumer. [/i]

    This may be a departure point for me. The lenders and borrowers are each seeking the best deal they can achieve – they are in an adversarial relationship, not an advisory one. Borrowers, as they should, routinely shopped lenders against each other, seeking the very best deal they could get. Lenders were not hired financial advisors for the borrower, nor should they have represented themselves as such. I agree that many of the borrowers signed on to loans they could not afford, and that the banks should have had the restraint not to have made those loans. But the bank, in its role, was not an advisor, and had only a duty to make sure the deals it was offering were accurately disclosed, lawful and not mispresented.

    Now, this does not excuse deception or purposeful misrepresentation by the banks. I know there were borrowers who were duped and misled – that is inappropriate behavior for the bank. But many borrowers knew what they were getting into, some thought it too good to be true, but they went ahead because of the opportunity they saw – either home ownership or the opportunity to make some money speculating on the residential housing market. Like the banks, many of these borrowers should have exercised restraint, but they didn’t.

  19. Frankly

    Everyone that cares to understand the real source of the banking and mortgage meltdown, should read this…

    [url]http://tjhancock.wordpress.com/housing-bubble-financial-crisis-detailed-comprehensive-assessment/[/url]

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