Subprime loans: Where greed and financial ignorance collide

money.jpgSubprime loan: “A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders due their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.”

Stupid greed: Making huge loans with little or no collateral to people who have no history of paying bills on time . . . or at all.  But housing prices have been going up for a while so they’ll go up forever and provide a cushion for the lender in the event of default, right? 

Financial ignorance: Not understanding the basic terms of the largest financial transaction you’ve ever made.

Looks like a bad marriage to me.   Subprime loans typically required sizable down payments, which reduced the risks for everyone involved.  But then the lenders relaxed their standards.

If the government wants to tighten some regulations for future transactions I could understand that. 

But politicians had better not dive in and help either party in this case (Hillary is just buying votes with her promises on this topic).  Otherwise they’ll just be reinforcing two sets of bad behavior.  The lenders deserve no sympathy at all.  They took foolish risks and should pay the price.  I feel more for the borrowers, but citizens need to understand that if they make bad financial decisions that other taxpayers are not obligated to bail them out. 

I’m all for home ownership, but many people need some basic finance and life lessons first.  Even if they can afford it they may not know how to maintain it.  I’m a big fan of Junior Achievement (12 years of teaching classes for various grades) and other financial programs that help people understand basic finance and budgeting concepts. 

12 thoughts on “Subprime loans: Where greed and financial ignorance collide”

  1. I don’t mind these loans, they make home ownership possible for those who otherwise couldn’t obtains traditional mortgages. Plus, these folks have plenty of opportunity, after making on time payments after a year or two to refinance with a better lender- now that their credit has been cleane dup a bit.

    I would hate to see these lenders go. It would mean less homeownership and less opportunity for those among us who have made credit mistakes in the past.

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  2. My wife and I have a word for those “Cash Advance” places. The ANTICHRIST. Okay, so don’t REALLY think they’re the antichrist, but I do think they should be regulated.

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  3. Yeah, those Cash Advance places are awful. Amazingly, some people don’t trust banks and would rather let someone take a big chunk of their check so they can have cash.

    And some people don’t want their spouses to know how much money they have, so they don’t want to go through the bank and/or direct deposit.

    You learn all kinds of interesting things talking to Human Resources personnel!

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  4. Oh yeah. Nevada has little or no usury laws. I have a couple guys who work for us who still go to the payday loan places to cash checks. They charge twenty percent!!!
    There are at least a dozen casinos in town who will cash their checks for free and even give them a coupon for a free drink. What we see here in Clark county are two things: some of the highest foreclosure rates in the nation, and payday loan centers which prey on our less-than-documented residents.

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  5. This is an horrible practice and needs to be stopped. Where I live, LI, NY, housing costs have gotten so out of control that this has become a common practice. Sadly, those suckers, myself included who pay a mortgage and have nothing left to spend will likely be holding the bags when the whole industry falls out of the bag!

    Of course the grossly inflated rate of housing is also a prime factor leading to this practice. It seems that at some point real estate literally went through the roof. What I want to know is “Why” and who profitted. I don’t trust markets that act so crazily. Maybe I’m a bit paranoid, but I have little problem believing that there was some collusion between certain elements of real estate, banking and government.

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  6. If anything, I am for disclosure and making sure the terms are known. In my view, the terms of any financial agreement should be between the two parties, with little government involvement as possible when it comes to negotiating the terms. However, I do think maybe certain terms should be in place to ensure openness of exactly what these terms are.

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  7. I have no problem with the government getting its nose out of NEGOTIATED contracts; however, very few lending contracts are truly negotiated, if you will. They are largely adhesion contracts – and if the government wants to regulate those, fine.

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  8. As usual I agree with “theobromophile”.

    I think there are some other problems involved here too. Where I live, schools have pretty much eliminated all courses that teach practical life skills like budgeting and understanding common transcactions.

    On the lending side, we have just finished moving all of our business loans and accounts from a financial institution that has handled our business for over 30 years. During that time, the bank has sold four times to increasingly larger institutions. This past year the people assigned to our business were totally incabable of handling it. I would not be surprised to learn that many of the people selling and closing these loans for the financial instututions did not understand them any better than the customers did.

    I have to also admit my own ignorance, when I read the title of this post I assumed that a subprime loan was a loan with an interest rate below prime.

    Another practice being used in our area is making loans with payments based on interest only for a fixed period of time. Whether they are being misled or just don’t understand, an alarmingly large number of people are losing their homes when they can’t make the increased payments that result when principle starts being added.

    To add to that problem some subdivisions were being built by contractors who took a load of materials home with them every night. Now the lenders are forclosing on 5 year old houses in need of major renovation before they can be resold.

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  9. I hate government interference but this has some pretty serious implications including furthering the deflation of property values. A bunch of loans more than the value of homes and more defaults on loans has the potential to shake our entire economy a good one. Delany

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  10. Delany,

    There’s also the fact that bad sub-prime loans have artificially inflated the housing market. People who really cannot afford, say, a $600,000 house get loans for them, which drives up market prices (artificially increased demand) and, of course, increases foreclosures.

    To the extent that the foreclosures harm the companies who engaged in bad lending practices, I’m not sure that the government should bail them out; after all, it’s the free market/economic Darwinism at work. I do, though, feel quite badly for the people who have their homes foreclosed upon and are worse off for having taken out the loans.

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  11. Hi Theobromophile:

    Thanks for the comments and from what I know (which isn’t much 🙂 ) I agree. I am not an economic expert. I’m not sure about bailing out the corps, but I’m thinking of preventing this scenario again. We cannot afford to create false economies /market forces because it seems that everyone is touched by such actions.

    BTW, what’s a Theobromophile?

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  12. I don’t know much, either. 🙂 I read a few articles about the problems in San Fran that resulted from lenders approving loans that families could not afford.

    Yes, everyone is touched – you’re completely right. Perhaps some form of ethics regulations, with associated penalties, might make sense?

    BTW, what’s a Theobromophile?
    Bromos = Greek word for food;
    Theo = god or godly;
    ergo, theobromide = food of the gods (most specifically, a chemical in chocolate);
    theobromophile = chocolate lover. 🙂

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