Banking Law

I'm just getting around to reading a nifty blog post by Conde Nast Portfolio.com blogger Felix Salmon (h/t Housing Wire), who jumps into a hissy fit between New York Times columnist Tyler Cowen and blogger Barry Ritholtz. Cowen alleged that "predatory borrowing" (fraud by borrowers) may have been a bigger problem in the residential mortgage mess than "predatory lending." Ritholtz took strong issue with Cowen, calling his statement "utterly silly." among other derogatory characterizations. That's tough talk from an economist.

Salmon disagrees with Ritholtz, and while I don't have access to the data to know whether one form of fraud was more prevalent than the other, I agree with Salmon's analysis. There's no question that there was predatory lending in the subprime market. The media has been pulling out the human interest aspects of poor people confuzzled and discombobulated by shady originators.

But most subprime lending was not predatory. In many cases where a genuinely subprime borrower took out a mortgage on a house he couldn't afford with little or no money down, it is the borrower who is coming out ahead: consuming much more in the way of housing services than he will end up paying for. The lender, meanwhile, gets left with an enormous loss - which is not what normally happens in cases of predatory lending.

So, was "predatory borrowing" - ie, fraud by borrowers - more widespread than "predatory lending", where borrowers were fleeced by dodgy mortgage originators? It's entirely possible. Says Cowen: 

I think the lenders are greatly at fault, as does anyone else with a fair mind. Pointing out additional faults elsewhere doesn't (and should not be understand as) subtracting from those faults. More generally, the point of my column was... not to provide a comprehensive survey of who was at fault in the mortgage crisis. I didn't even mention the regulators but clearly they are at fault too and of course you could lengthen the list of people at fault.

Southern California is full of borrowers who tried to get rich quick flipping property. It is they who helped fuel the speculative bubble, and they deserve their fair share of blame. I think that Cowen's right, on this one, and Ritholtz, although he has a fair point, is a little too shrill.