Apparently lenders are leaving the low-doc loan market in droves. Hurrah for that! As someone who worked for lenders and repossessed houses on their behalf, I saw loans that should never have been made in the first place. Low-doc loans are irresponsible: by the very nature of the beast, the borrower is likely to have difficulty repaying.
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29 Comments
Low-doc loans are irresponsible: by the very nature of the beast, the borrower is likely to have difficulty repaying.
But that precisely the point. It ensure one can acquire realty at the lowest possible price and indulge one’s predicilations for ‘causing immense suffering to those inferior to one at the same time.
I believe you must come down to BeezlBank sometime next week to meet the partners from Schlocky, Schlocky and Wampeer representing the Secret Society of Forthright Evil Arseholes.
We should like to reimburse you for keeping this matter under wraps. And get you to sign several documents giving us control over the lives of yourself and your family just in case.
Thank you. Now off for a bit of hunting with the hounds. Apparently Jonesy’s supplying some of the slackers from the mail room to be the goats this afternoon.
And to think that I thought all the fun was over when they started protecting the damn foxes.
Cheerio.
There is a valid place for low-doc loans. New immigrants to a country and small business proprietors cannot furnish the types of doco that Australian banks have traditionally required, such as pay slips, annual tax returns showing stable income and the like.
Many of these are potentially valuable customers but a bank credit department needs some discression in how to judge whether such a person is a good credit risk. There have also been tax cheats who can produce evidence to show that their real income is far more than their tax return shows.
But when low-doc degenerates into essentially no-doc loand to NINJA borrowers (No Income, No Job, no Assets) there are obviously going to be tears.
Blend NINJA borrowers with the Wall Street geniuses who showed how to perform a miracle and supposedly turn this junk into investment-class securities and you have what the market got.
I think it’s pretty much up to lender and lendee. If you take a loan out you can’t repay you’re a dickhead. Same if you lend money to someone who can’t repay.
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Just be nice if we didn’t have to bail you out.
Mike, yes, there is some place for low-doc loans in precisely the circumstances which you cite above, but I think it should be limited. The problem is when mortgage brokers and bankers have an incentive to persuade people to enter into such loans because they get a fat commission if they do so. It tends to relax one’s scruples about to whom you give a mortgage.
I remember repossessing a house where not one of the three inhabitants had any income or job. The value of the house was well over what I could afford (and I was a commercial litigator at the time). Really the best option for these poor people was to sell the property, but they were stubbornly hanging on to the house, saying “we have a right to somewhere to live”. Yes, they did have a right to somewhere to live, but wake up and smell the roses - not in a luxury house which they couldn’t afford. They should never have been given a loan in the first place.
I’m sad to see low doc loans go. Seems to me that they are a better option for the consumer than a credit card or bunch of CCs @ 10K limits. And CCs are almost no docs loans but at high rates of interest.
FXH, I really hate the bloody credit cards too. I would always advise someone to take out a personal loan rather than a $10K limit credit card. Interest rates are much lower for a personal loan or a drawdown on a home loan.
Basically, I think some banks and lenders are irresponsible with the credit they offer people. I’ve known a friend who maxed every credit card she had. She shouldn’t have had any. She had a gambling problem.
One thing I really really hate is those letters they send you saying “You have a good repayment record, we offer to raise your limit by $2000.” Quick way to ensure that the consumer DOESN’T have a good repayment record any more….
With bailout mark #1 now history, I’m starting to become even more irritated than usual with irresponsible lending. I can feel a post brewing but I’ve only just got the internet working again and the second abortion post (which LE has no doubt seen sitting in the ‘drafts’ tray) is still unfinished. Part of me wants to see the bailout stay dead so that we stop this bullshit round of stupid credit extension. I’m thinking of your friend with her maxed out credit cards, or three jobless people in a great barn of a house.
Maybe I’m just an oldschool ’save 20% deposit and kiss the bank manager’s butt to get a mortgage’ type, but some people shouldn’t be able to get credit. That’s how a normal market works. One of the law/econ people here thinks the current mess started with this piece of legislation.
Once the banks made the bad loans in vast numbers, they then securitized them, so Joe Six-Pack really is paying for (a) people getting loans that should never have got them in the first place [a problem created by government regulation] and (b) banks calling shit ’sugar’ and then selling it [a problem created by Wall Street ninnies and exacerbated in the US by the fact that Fannie and Freddie were government-backed].
“(a) people getting loans that should never have got them in the first place [a problem created by government regulation] ”
Wrong. http://johnquiggin.com/index.php/archives/2008/09/29/republican-talking-point-whack-a-mole-yet-again/
That’s right Mel, a smart business person makes a loan on the basis on the security and ability to repay the loan, not on the availability of easy credit. I too am sick to death of people trying to blameshift the problem here. I know people who work in finance and they told me years ago there were too many lenders making reckless loans. At the end of the day, what matters is the decisions made at the coalface. Sure easy credit encourages bad lending, just as lack of regulation encourages criminality.
In part, I think people getting loans who should never have gotten them in the first place was a result of greed and stupidity on both sides of the equation, although it may be that government policy in the US was the stone that started the avalanche rolling.
I think we had the same kind of practices in Australia despite the lack of a CRA equivalent. When I first looked into buying a house about 5 years ago, a certain bank was prepared to loan me an amazing amount of money (I was a banking solicitor at the time). However, shortly after that I fell pregnant with my daughter and would not have been able to service the loan once I was off work. It was hard enough affording the rent as it was. I had to go back to work when my daughter was 5 months old. Lucky that I was wise enough not to be taken in by the bank’s willingness to offer me money. I guess when your job is repossessing houses, you feel a bit nervous about the whole thing.
The sad thing is when I saw mortgagors move from banks to second, third and fourth string mortgagees out of desperation. I was prepared to bet that I’d see them back again in a few months time for one of the non-bank lenders I did work for. If these people couldn’t afford to repay the arrears (sometimes as little as $200), they really shouldn’t have a loan at all. But people get into a strange kind of desperation at the prospect of losing their house (understandably).
Article in today’s Age looks back on the Saving and Loan crisis in the ’80s. Someone on the Donahue Show resenting the bail-out asked: Why do we have to pay? The government should pay. There was applause.
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Jay-sus!
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We deserve to be extinct.
I don’t think it’s all the fault of the CRA, but wearing my lawyer’s hat, I can tell you (and LE will no doubt have some beautiful case studies from her banking litigation days) that legislation like that is supremely stupid. I like JQ’s stuff even though I often disagree with him, but there is a danger right now of thinking (and this is understandably commoner on the left - they’ve been out of office for 8 years) that Obama is going to be able to ‘fix’ this.
Not going to happen. If a bailout proceeds, neither an Obama nor a McCain administration will have any money in the kitty. If a bailout fails, then both administrations will be so busy picking up the pieces (unemployment, homelessness etc) that planned policy won’t even come into it, apart from free stuff like decoupling health insurance from state providers and making them compete across the whole country. At the moment you have to get health insurance from a company within your home state in the US - bizarre, but true. Fortunately both Obama and McCain are planning to scrap this anomaly.
The CRA was followed up, of course, but the banks slicing all the crappy debt up in the form of securitization (which was all the banks’ fault - no-one was forcing them to do that part), but ‘encouraging’ banks to loan by legislative means to people who couldn’t afford to repay was an incredibly stupid thing to do.
All the people in whatever body (banks, legislators, brokers, whatevs) who encouraged this really do deserve to crash and burn.
SL, I agree with you - legislation like that is not a good idea. It’s not a good idea to have ghettos where no one can afford to own their own house, but encouraging banks to lend people money when they have low or uncertain income sources is not the answer. It just leads to further misery and disappointment. You’ve got to deal with the root causes (lack of education, lack of employment opportunities, etc).
It just leads to further misery and disappointment. You’ve got to deal with the root causes (lack of education, lack of employment opportunities, etc).
Recently I read the infamous The Bell Curve. One thing I found very interesting in that is while Affirmative Action did help a great many(and also caused some problems), by the 1970’s the improvements had largely vanished. It was disturbing, the implication was that no matter what you do there will always be some “in the ghettos”. Broadly speaking I’m inclined to think this is inevitable. There will always be high achievers and there will always be Null achievers. No matter what sort of society exists there will always be those who don’t quite fit.
John, unfortunately I suspect you are right. I remember my dad explaining communism to me when I was about 8, and I said, “But there’s always some people who are on top and some people who are on the bottom. How can everyone be equal? It wouldn’t work.” Wisdom of the playground…
All you can do is try to minimise those who are on the bottom and try to give them a chance in life.
“The CRA was followed up, of course, but the banks slicing all the crappy debt up in the form of securitization (which was all the banks’ fault - no-one was forcing them to do that part), but ‘encouraging’ banks to loan by legislative means to people who couldn’t afford to repay was an incredibly stupid thing to do.”
You conveniently ignore the fact that most predatory lending had nothing whatsoever to do with the CRA- it was done by folk like Ameriquest Mortgage Co : http://online.wsj.com/article/SB119906606162358773.html
It’s hilarious to watch libertarian truthers pointing the finger at Ol’ Nanny State and saying “she made us do it!”.
John G - Broadly speaking I’m inclined to think this is inevitable. There will always be high achievers and there will always be Null achievers.
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True but are we talking about high achievers or those priveleged unfailry somehow? I’m not resolutely opposed to AA (affirmative action not Alcoholics Anonymous) but I think it can promote mediocrities and do more harm then good. I’ve also seen it used for dodgy purposes with my own eyes.
Was it Tim Hardford or Stephen Levitt who outlined research that showed there was still a prejudice against Afro-Americans? Whoever did it the solution wasn’t so much AA as practised but a review of CV process designed to eliminate any social prejusdice - like a review of a candidates qualification without name or address for example.
I am opposed to Alchoholics Anonymous.
Not going to happen. If a bailout proceeds, neither an Obama nor a McCain administration will have any money in the kitty. If a bailout fails, then both administrations will be so busy picking up the pieces
Acording to the scuttlebutt this morning most economists seem to agree that Paulson’s plan was the wrong one. However the ‘bail-out’ level is, funnilly enough Average in terms of such bail-outs in the past. And they’re astoundingly common.
One criticism that I suppose libertraians will disagree with is Jospeh Stigliz’s take on the plan which he says saves Wall Street and assumes that Wall Street will pass it on to Main St. His phrase: ‘trickle-down economics alomst never works’. The IPA dude of course didn’t say that but he seemed to agree that the plan was a bad one.
There’s been a suggestion that its been in the pipes for quite some time and only ‘looks’ knocked together. The main trouble is that it rewards bad behaviour. We need simple clear rules, tough penalties and more of these people going to jail. Or we’re going to see more of this.
I think the CRA thing is nonsense, but I don’t think Mels narrative of predatory lending is much better. According to this: http://rismedia.com/wp/2008-07-23/report-shows-subprime-rate-lending-dominant-with-non-hispanic-whites-and-upper-income-borrowers/ the top quartile of income earners took out ~40% of the subprime loans, the top 2 quartiles account for ~70%, and the bottom quartile accounts > 8%.
This meshes pretty well with my experience. The less well off people that I have known may not have been experts with money (very few of them knew why, or how to invest), but they were all expert budgeters, for the simple reason that they had to be. They would know if they couldn’t afford a loan. (Note: I am not saying all poor people are like this -one just has to go down to the local RSL pokie lounge to see the counter example- just the ones I have known)
On the other hand, the only two people who I know who have taken out what may be risky loans are both solicitors (i.e. the only deposits that they placed down on their large loans, were their first homeowners grant). They didn’t have a deposit because they have only been working for a couple of years, and they both spend like drunken sailors. I assume they did it because rent prices are reaching parity with home repayments, and the colloquial wisdom that property prices only ever increase.
People like this will to be effected when the property prices dive bomb, like they did in the US. Obviously the poor will be more affected, but the McMansion exurb estates that they are bull dozing in California weren’t filled with illegal Guatemalan immigrants
AJ - You’re entitled to express your view but please watch the defamatory statements. Sailors are models of sobriety next to lawyers.
You’re right. I’d like to amend that to: spend like drunken investment bankers.
People in my trade of course never get drunk. We have entirely other inebriant.
AJ, most of the houses I repossessed in Victoria were in areas where lower socio-economic groups tend to live. Many of the people with whom I had dealings were not well-educated. Many did not have English as a first language.
I never repossessed a house owned by a lawyer, although I did repossess one owned by a medical doctor once.
Still, it’s dangerous to draw generalisations. As I once discussed in an earlier post here, just because you are intelligent, have a good job or are well-paid doesn’t mean you are good with money.
One of my theories is that it all depends on how realistic you are, not on your socio-economic group, intelligence or anything else.
Personally, I tend to always think of worst case scenarios, and if something goes wrong, I generally move quickly to remedy it. But I’ve known people from all walks of life who just don’t think about the ramifications of spending huge amounts of money or getting into debt, and then when they get into trouble they ignore it in the hope it will go away. I’m fascinated by this. I’d love to know if there were psychological studies on people who avoid problems and the prevalence of debt amongst such people.
I’d love to know if there were psychological studies on people who avoid problems and the prevalence of debt amongst such people.
Problem Consumers: The Psychology of Those who Won’t Accept an Increased Credit Card Limit- Strategies to Make Them Change Their Stupid Minds. Economics Monthly, Greed, I.M, et al.
Seriously LE, there are such studies, you might have to go to Behavioral Economics but there must be studies on it. I mean, in psychology there are so many graduates so they have studied so many things so many times …. .
Journal of Applied Social Psychology
Volume 36 Issue 6, Pages 1395 - 1413
Published Online: 25 May 2006
Personality Factors, Money Attitudes, Financial Knowledge, and Credit-Card Debt in College Students1
Jill M. Norvilitis a 2 , Michelle M. Merwin b , Timothy M. Osberg c , Patricia V. Roehling d , Paul Young e and Michele M. Kamas f
a SUNY College at Buffalo
b University of Tennessee at Martin
c Niagara University
d Hope College
e Houghton College
f Niagara University
1The authors thank Carrie Bork for her assistance in data collection.
2Correspondence concerning this article should be addressed to Jill M. Norvilitis, Department of Psychology, SUNY College at Buffalo, 1300 Elmwood Avenue, Buffalo, NY 14222. E-mail: norviljm@buffalostate.edu
Copyright © 2006 Blackwell Publishing, Inc.
ABSTRACT
The issue of credit-card debt among college students has received increasing attention. This study explored factors hypothesized to be causes and effects of credit-card debt in 448 students on five college campuses. Students reported an average of $1,035 (SD=$1,849) in debt, including students without credit cards or credit-card debt. Lack of financial knowledge, age, number of credit cards, delay of gratification, and attitudes toward credit-card use were related to debt. Sensation seeking, materialism, the Student Attitude Toward Debt scale, gender, and grade point average were not unique predictors of debt. Students reporting greater debt reported greater stress and decreased financial well being. Results highlight the need for comprehensive financial literacy education among college students.
DIGITAL OBJECT IDENTIFIER (DOI)
10.1111/j.0021-9029.2006.00065.x About DOI
OSTRICH OR OPPORTUNIST - CREDIT CRUNCH PERSONALITY TYPES REVEALED
02 June 2008
http://www.freeview.co.uk/press/pr020608
Interesting, John. I’ll have to have a look.
Sorry to burst everyones bubble but low doc loans are not dead. Aussie John is just looking at the % of loans being written by Aussie that are low doc loans.
Lenders as yet have not withdrawn low doc home loans. All four major banks still offer low doc loans.
Maybe they will stop financing low docs in the future? Who knows?
http://www.homeloanexperts.com.au/articles/sub_prime_crisis_loans.php