Academic journal article ABA Banking Journal

Subprime, Whose. Responsibility?

Academic journal article ABA Banking Journal

Subprime, Whose. Responsibility?

Article excerpt

DO MORTGAGE LENDERS, BROKERS, and all the other players in the mortgage business have a responsibility to make sure people don't get in over their heads?

Not necessarily. Should they care? Any ethical business person would.

Subprime lending is not the same as predatory lending. "Subprime" refers to a person's credit standing. "Predatory" means deliberately preying on people for one's own gain. It's clearly wrong.

But in the case of someone of sound mind who knowingly agrees to buy something that under certain circumstances may not work out for them as planned, the buyer bears much of the responsibility. With freedom of choice comes freedom of consequences, not all of which are positive.

Society sets fences around certain activities and penalizes behavior outside those boundaries. During the "bust" part of a business cycle there's a great temptation to push out the fences to protect people--often from themselves.

But there is much gray space between the fences. One example being how sellers jump on the bandwagon of a hot market. Yet buyers often are often equally willing. This occurs all the time and we're now seeing the effects of it in the mortgage business. When there's a lot of money to be made, few people in business will say, "I'll forego that business." They might be thrown out if they did. Kudos to those that have the courage to back off in the heat of the moment, but it's rare.

Where this can become problematic is when a boom moves down market, so that, for instance, people who previously gave no thought to owning a home begin to think they can, thanks to relaxed underwriting standards.

Afterward, people castigate such practices as "liar loans"--stated income loans. …

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