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Wednesday, June 01, 2005

More from Edwards


First, we need to help families fight financial rip-offs. Low-income households sometimes pay thousands of dollars more for the same mortgage. The head of Fannie Mae once said that as many as half of families who are getting subprime mortgages could actually qualify for prime mortgages-they're steered to where they have to pay more. The Center for Responsible Lending, based in Durham, North Carolina, finds that predatory lending costs families $9.1 billion per year.
Fair enough Senator, I agree that teaching people how to find the best rates is probably a good idea. Now, the very fact that Low-income households have a mortgage is encouraging though.
We need a strong national law to stop predatory lending
Woah, slow down a minute here. I'm not convinced we need a new law for this. It is one thing to worry about poor people paying more than they need to because of better choices in credit, it is another thing entirely to lower the amount lenders can charge poor credit risks. That seems more likely to keep potential home owners in a rental situation than to help them out of poverty.
Paul Sarbanes has an excellent proposal to go in the right direction
I admit I haven't studied the bill in question, but given my experience with the Sarbanes-Oxley regulations, I am more then a little leery of anything out of Sarbanes office.
We also need to crack down on abusive payday lending, which costs families another $3.4 billion. There is no reason that a company should be allowed to squeeze huge profits from a family by making loan after loan at an effective interest rate of 400 percent or higher.
I'm not one of the poor bring it all on themselves sort of people, but lets be honest and acknowledge that at least some do. Anyone who is going to a payday lender for loan after loan needs some serious help with financial management. These companies also serve a useful purpose, for those who don't make them a habit, the short term loans (at yes, horrible rates) can help out greatly with an unexpected emergency. Getting rid of them probably won't help any poor people not be poor any longer, but it might force people into even less desirable alternatives. Payday lenders are not a great option, but they are better than mafia loan sharks.
We need to encourage low-income families to get better access to credit by encouraging banks to go into underserved areas.
I don't follow exactly how we will do this. Banks are happy to go anywhere they can make money. Encouraging them doesn't seem likely to change their bottom line, and the bottom line is what makes this decision. I suppose we could 'encourage' them by some sort of subsidy, but giving money to banks to do things that would otherwise cost them money doesn't seem very bright to me.
And finally;and this issue touches all American families;we need to crack down on the abuses by those credit card companies: their ability to raise your interest rate on money you'vve already borrowed, even though you haven't missed a single payment; those advertisements that promise you one thing but then deliver another; and their refusal to disclose even the most basic information to borrowers, like how much it will cost to repay your loan if you make only minimum payments.
This, I agree with. Changing the rates without notification, and an including an option to cut off any further credit and keep the original rate on the balance seems only fair. The advertising could, and should be clearer as well. I don't know about requiring them to disclose how much you will have to pay if you only make minimum payments however. I would prefer we teach math in schools so that people can figure this out themselves. For all those people who claimed they would never need algebra in 'real life' here is one reason that you do. For those who lack these skills, technology can help. Edwards does go on to talk briefly about the importance of financial education. He clearly believes that laws are the panacea here, and education is just a nice after thought to take care of places that the law misses. I believe the reverse. Education is the true panacea, and the laws should deal primarily with areas where education isn't enough to make things work. The difference I think, is that I believe poor people have the ability to learn how to manage their money. Some will doubtless choose not to, and they will probably remain poor no matter what we do. For the rest, they can learn to take care of themselves. I guess the bottom line, is I believe we have one America, where even the son of a poor mill worker can become a wealthy man. Strangely, Edwards does not seem to believe this.


Blogger Greg said...

Great comments. I do want to point out that those payday lenders are charging fees, not interest, although if you treated all moneys paid above the loan amount like interest, you get those high effective rates.

Let's put it this way: if there were ways to make money in these fields better than now, someone would be there to take the profits.

6/01/2005 10:37:00 PM  
Blogger honestpartisan said...

Even though we frequently disagree, I appreciate the attention that you're paying to these issues. OK, now on to the nits I want to pick:

My understanding of "predatory lending" is slightly different than poor people getting bad mortgage rates. It's the conversion of unsecured debt (like credit card debt) into debt collateralized by real property. In other words, if you own a home with a lot of equity in it and have credit card debt, the credit card companies usually can't seize your home to satisfy a judgment because of state homestead exemptions. But if you borrow against the equity you've built up in home to pay off the credit cards, you have essentially a new mortgage which creditors can use to seize your house if you default on payments.

Even worse are businesses that get people to pay for home improvements by preying on long-time homeowners with a lot of equity built up in their home; these aren't people moving unsecured debt to secured debt, these are people who don't have a lot of debt in the first place!

How would you get someone to sign their rights away like that? You snow them with a blizzard of misleading terms and obscure fees. I closed on real property for the first time in my life about six months ago. I'm an attorney and a policy geek, and I didn't understand what the fuck the bank was talking about. I had an attorney who was terrific who guided us through the process and protected our interests, but most of the victims of predatory lending don't have attorneys when they sign the contracts.

Mortgage brokers, for example, ostensibly try to get you the best mortgage on the market. A lot of people don't realize that mortgage brokers don't owe you a fiduciary duty, so there's stopping them from steering you to a bank with a higher mortgage rate that gives the broker a kickback. Not only is this legal, the bank even charges the kickback they have to pay to the lender!

Under free-market theory as I remember it from college, high prices are a signal to the supply side of the market to increase suppliers until the high prices get bargained down. When the high prices that people pay for these schemes persist, it makes me think that's not happening because that market mechanism is not working for some reason. If that's the case, then high prices do not have the salutary effect they're supposed to have in a functioning marketplace, but rather just represent a windfall, a transfer of wealth, or "economic rents", as they're called. When that happens, I think that regulation is appropriate and won't be economically harmful.

I'm saying this without knowing the specifics of Sarbanes' bill either, and I wonder if John Edwards is conflating the "predatory lending" problem I'm identifying with people just getting charged higher rates than they should pay. Or maybe I'm confusing the issues. Anyway, I think a lot of the principles are the same.

6/02/2005 12:52:00 PM  
Blogger Dave Justus said...

HP: Some of what you say is true. It is confusing sometimes, and you should always get a lawyer for this sort of thing. While that may be expensive, if you are considering something like this the cost is well worth it. You, have enough education to understand that, and that is something we can teach people who don't know.

The blanket idea that you seem to have that any second mortgage or taking out a mortgage on a paid for property is 'predatory' is something I flatly disagree with. Generally speaking, most people get good value for this, and there are very good reasons to do so. Getting a second mortgage is in effect, converting assets into cash for other purposes. Like any exchange of this, it can be wise or foolish, mostly depending on the purpose for one has for that cash. In addition, moving from high interest credit card dept to a lower interest mortgage for dept consolidation usually makes sense as well, as long as you change you habits that got you the high amount of dept in the first place.

I believe your understanding of markets is a bit rudimentary. Just because a price is something you consider 'high' does not mean that it is not a fair value for what you recieve. Certainly one would expect a high price for credit to people with a poor credit history, due to the increased risk of default.

There are market failures in lending, mostly as a result of people not understanding how to shop around and knowing what questions to ask and how to get good advice. I say we work on this problem, and not try and legislate it away, any legislation of this sort seems extremely likely to be 'throwing the baby out with the bath water' to me.

And yes, I would fully support tax dollars being spent on this education, both in public schools and as some sort of 'seminar', especially in disadvantaged areas.

6/02/2005 01:20:00 PM  

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