Matthew Yglesias made the claimyesterday that much of the blame heaped on ‘irresponsible borrowers’ is unwarranted. Rightly so he has been taken to the woodshed by dozens of commentors on his blog, not to mention a few bloggers I really respect on financial issues, like Megan McArdle. Here is a selection of his remarks:
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When someone applies for a mortgage, there are two parties to the transaction. On one side of it is a teacher or a blogger or an electrician or a lawyer or a nurse or a guy who manages a Home Depot. On the side is a guy who, for a living, as a professional, works in the “deciding on what terms to offer people mortgages” business who works, for a living, at a financial services business. Businesses like that got in the habit of making loans with little regard to actual prospects for long-term payment on the theory that since house prices were rising, the borrower could always sell or refinance. That, to repeat, wasn’t the judgment of electricians and store managers; it was the judgment of people who were professional mortgage-offerers.
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There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing.
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One of the initial problems realized when the market fell was that it wasn’t teachers, electricians and lawyers who were being foreclosed on. Instead it was the McDonald’s employees, the part-time workers, the low-skilled warehouse employees that never could have afforded a house under normal lending practices. They knew that and so did the banks. Yglesisas apparently discounts the common-sense of borrowers while simultaneously over-hyping the dastardly deeds of lenders. Both sides are equally to blame here. To absolve the borrowers in these cases is to deny personal responsibility and while I know this is a flaw of liberalism…there’s reason to hope it won’t always be.
There’s also the notion that if these people were simply duped by shady loan providers then their loan applications would have been accurate. Since many were *ahem* less-than-truthful my inclination is to think they knew they were taking money they shouldn’t have. My reply to Yglesias’ post was to remind him of this tidbit from Tyler Cowen:
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“As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.
Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.
In other words, many of the people now losing their homes committed fraud.”
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I’m happy to give most of these people the benefit of the doubt and assume they were just trying to live the American Dream of home ownership and had every intention of making good on their loans. But that doesn’t mean what they did was okay and it doesn’t mean they shouldn’t be paying some stupid-tax now. I would hope that any mortgage bailouts make an attempt to determine how they got their loans, even if it proves a logistical headache.
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February 26, 2009 at 12:04 am
Dennis Sanders
I thought you’d want to know that I wrote something on that post as well: http://neomugwump.blogspot.com/2009/02/buck-stopsover-there.html
February 26, 2009 at 9:23 am
Philip H.
Mike,
The problem with your position is that many folks on the conservative side of the aisle are trying to turnthe entire amount of blame towards the people who committed loan fraud, and thus exonherate the bankers and banking industry. Matt’s defense, in part, is trying to stem that tide. There’s nothing wrong with his assertion that there were always two parties inthe transaction, and that the understandable frustration about fraud in mortgage applications also needs to expand to frustration (and I would argue outrage) at those who accepted, failed to verify, processed and granted mortgages on those applications. Too many conservatives are still wedded to the notion that markets ( and by extension businesses within those markets) can do no worng, so it must be only the mortgage holder’s fault. Perhaps Matt went too far, but if we’re going to fall on the sword of personal responsibility, let’s make sure everyone who needs to fall on that sword gets a fair shot.
February 26, 2009 at 10:15 am
Mike
And many of the people on the Left are blaming it all on the banks, as the Yglesias piece points out.
All business deals are a 50/50 proposition. If we try to change that ratio, we are just creating an environment where people don’t learn from their mistakes.
February 27, 2009 at 12:06 pm
Philip H.
hum . . . . people learning from their mistakes . . . sound like something you need to take up with Citigroup since they are back atthe government trough with their management and corporate boards intact . . . . but I digress.
February 27, 2009 at 1:41 pm
Mike
I’m fine with whatever suffering the lenders have to go through. I’m not making excuses for either side.
March 9, 2009 at 8:20 pm
Rational irresponsibility « A Grand Mute Proof
[...] conservative response has been to chide Yglesias for “discounting the common sense of borrowers” and putting it above borrowers’ ability to “understand their own situation”. By [...]