Blame the Home Buyers

I've heard a couple of broadcast pieces lately that note how many of the problems with the sub-prime market meltdown started with home buyers lying about their incomes on the mortgage applications. Although I haven't yet heard anyone come out and say, "It's all their fault," there's an undertone in the reporting and in the remarks from experts.

It's total bunk, in my opinion. The responsibilty for prudent lending isn't the customer's. Risk management is clearly the duty of the lender. Why did the people lie? Because they had poor credit and yet desperately wanted to own their own home instead of continuingly putting money into a landlord's pocket. That's not a hard psychology to predict. No one goes into this type of financial obligation consciously thinking that they are going to fail. They tell themselves that it will be tough, but that they'll be able to do it. And then they don't read the fine print of how rates can suddenly jump.

These were people motivated by the desire to get out from under. Why did lenders grant lans? Becasue they figured they could squeeze out that much more profit. It's a classic credit strategy: you get more return for risk that is greater. I can understand that, but you have a problem when the money you want cranks the risk up to a much higher degree. They lenders should have done projections to see how much danger loans were in from potential default at different levels of interest - not from a lack of inherent trustworthiness of the borrowers, but because they changed the economic conditions to make payback virtually impossible.

"But that's why we wanted a high enough income in the first place," they will claim. Oh, please, don't make me laugh. They wanted higher income and yet wouldn't verify? The only reason they did verify - or check enough - is because they wanted to do the business too badly. You'd think that a mortgage company would have all the power in a negotiation, but, ironically, they didn't. This is a perfect example of neediness in a negotiation (see my review of Jim Camp's book, No).

The entire credit industry wanted every penny it thought was out there, and so completely dropped all the barriers of logic, reason, and prudence. Last week, the Financial Times had a story about web sites that would charge people to act as income verification, even though the people had never worked for them. Yup, that would be financial fraud. But to trust the word of a phone call? Not to check what business the company was in? How long does it take to run a standard credit check on a company and how much does it cost? The answers are not long and not much. If the borrowers were literally criminal in their misrepresentations, the lenders were figuratively criminally stupid.

Although it will be painful for the global economy, I do hope that governments don't drop interest rates to effectively bail out the lenders. It's not as if they haven't seen the potential consequences of foolish risk taking in the past. How many lessons does someone need before having to pay for their actions? We expect poor individuals to pay at the first mistake. Perhaps it's time that business leaders do their own hard times.