I listened this morning to yet another news program going round and round about the real estate market and the “predatory lending” practices that led to the stalling of the market and the demise of yet another sub-prime lender. It made me realize that there are a lot of folks throwing around the term “predatory lending” to describe the sub-prime mortgage issue.
I have to disagree with the use of the term to describe all of what has happened in the mortgage industry in the last few months. When I bought my first house the average interest rates were topping 15%. If you were lucky and had cash you could assume a mortgage (how about bringing those back to the table), if you didn’t have cash you could “wrap” the old loan with new cash and get a lower combined interest rate of 12%.”
Now politicians are screaming because borrowers with low credit scores were charged 9% or 10% to get a home loan. What is predatory about that? If a borrower took out a 1, 3 or 5 year Adjustable Rate Mortgage (ARM) with a percentage cap per year of 2% what is predatory about that? Borrowers who took out these loans knew they would adjust; they even knew what the percentage these adjustments would be. Borrowers were told all of this upfront before they finalized their loans. Why is it a surprise now when the rates have adjusted?
Don’t get me wrong I do feel badly for homeowners that HAVE to sell their homes in this market. It isn’t the first time in our area that homeowners have been facing short sales. Remember the 1990’s? Homeowners had interest rates in the 9% -10% range with balloon payments at the end of 7 years and no one said those rates were predatory.
I think we have to look at the terms that we are throwing around and make sure that we don’t get sucked into lumping everything into the phrase, “predatory lending” and making it a mantra. When I see a TV commercial endorsed by a “celebrity” that suggests if you are short on cash you can get a loan with a simple application and when you read the small print you discover the interest rate ranges from 24% to 89%. That my folks is PREDATORY LENDING!