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Paul Kiesel
Paul Kiesel
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Foreclosure Misconceptions

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Since news broke yesterday that the FDIC plans on modifying existing IndyMac borrowers’ loans that are at risk of defaulting, I’ve noticed on several news sites (comments section), blogs, and chatboards, people are outraged over what they allege is the FDIC irresponsibly rewarding “liar loans” and “poor decision making” by these troubled borrowers.

I’ve heard this argument several times since the subprime fallout began, continues and is about to evolve into the option ARM explosion (very soon): It was the borrowers’ fault.

I’m sure there were instances where a borrower made false income claims, however, in those situations another question should be asked: Why wouldn’t the mortgage broker or lender verify that information? If it’s the borrowers’ fault, isn’t also the lenders fault, shareholders fault, government’s fault too. I think you have to look in ascending order to see where dubious lending was enabled.

It seems like the easiest thing to do lately, in regards to the housing/mortgage crisis, is to point the finger at someone or some act in particular, and troubled borrowers have been taking the brunt of that finger-pointing over the last year. But the problem is deeper and bigger than that. Regulators and some lawmakers, in the late 90s and early 2000s (i.e. Phil Gramm), loosened lending laws to allow the subprime boom to begin and eventually grow out of control. Lenders didn’t know how to say no to the government or shareholders when prodded to issue more subprime mortgages, and some CEOs were just plain greedy.

Again, a minority of borrowers got in on the avarice that trickled down from the perch where CEOs were raking in millions and politicians were receiving grandiose campaign contributions, all while paving the path to the hundreds of bank failures and buyouts we’ve seen over the last 18 months. But, and this is more important and more damaging to the mortgage crisis, there were also many borrowers who got tricked into taking out subprime loans or option ARM loans, and there were more who were victims of this than the former, smaller borrowers comprising the group of “liar loans.” Because there was such an urgency to issue as many alternative paper loans (i.e. Alt-A loans; loans that were unconventionally written in comparison to prime paper loans), lenders and mortgage brokers would lie, either verbally or on Truth in Lending disclosure forms, and use manipulative language in both cases to get borrowers, some who already had excellent fixed rate mortgages, into these adjustable/teaser rate mortgage payments that have crushed the mortgage market.

Loan terms weren’t transparent, borrowers, who are typically not going to have the edge when it comes to comprehension of “loan jargon” and are at a disadvantage when a trusted lender is giving them misinformation (sometimes fraudulent information) about the potential loan they’re going to take out, weren’t able to see the danger of option ARM loans because it wasn’t disclosed on Truth in Lending forms.

Long story short: There should have been more oversight. TILA violations would not have proliferated as they have during the last three years. Lending practices became disgustingly insidious, where certain lenders ignored responsible lending practices in order to make as much money as they could (breaking the piggy bank, running off with the money, and leaving the broken pieces/mess behind for someone else to clean and fix) and while ignoring the consequences of those actions (mortgage crisis turing into an overall credit crisis; student loan lenders have felt the crunch tremendously, as well).

It’s interesting that people were outraged to hear or read that the FDIC plans on modifying mortgages (mainly to give the troubled borrowers a better rate, and only if they meet the FDIC’s criteria), but not many people were jumping on the chatboards or their blogs to complain about Fannie Mae and Freddie Mac: Both mortgage giants will soon receive over $40 billion in bailout money.